The International Accounting Standards Board has introduced a new standard to give investors more readily comparable information about companies' operating profits in one of the biggest changes to International Financial Reporting Standards in decades, making it harder for businesses to manipulate their financial results.
The new standard,
"IFRS 18 represents the most significant change to companies' presentation of financial performance since IFRS accounting standards were introduced more than 20 years ago," said IASB chair Andreas Barckow in a statement Tuesday. "It will give investors better information about companies' financial performance and consistent anchor points for their analysis."
The new standard introduces three sets of new requirements to improve companies' reporting of financial performance and give investors a better way to analyze and compare companies and how they're doing. It's seen as an alternative to metrics such as earnings before interest, taxes, depreciation and amortization, which can be prone to manipulation when reporting on profit and loss.
The changes won't necessarily affect U.S. companies, which mainly use U.S. GAAP, but multinationals that have operations abroad could be required to report their financial results using the new standard, especially if their shares trade on foreign exchanges. They will still be able to report on EBITDA, but only in the footnotes, according to
The new standard aims to improve comparability in the statement of profit or loss on the income statement. The IASB noted that currently there's no specified structure for the income statement, so companies can just pick their own subtotals to include. Companies will often report that they have an operating profit, but the way operating profit is calculated varies from company to company, and that reduces comparability. '
IFRS 18 introduces three defined categories for income and expenses — operating, investing and financing — with the goal of improving the structure of the income statement and requiring all companies to provide new defined subtotals, including operating profit. The improved structure and new subtotals aim to give investors a consistent starting point for analyzing corporate performance and make it simpler to compare one company to another.
The new standard also aims to improve the transparency of management-defined performance measures. Many companies report company-specific measures, which are often referred to as alternative performance measures (similar to non-GAAP metrics in the U.S.). Investors can find such information useful, but most companies don't currently offer enough information to allow investors to understand how those measures are calculated and how they relate to the required measures in the income statement. IFRS 18 will require companies to disclose explanations of those company-specific measures that are related to the income statement. The new requirements aim to improve the discipline and transparency of management-defined performance measures, and make them subject to audit.
The new standard will also require a different kind of grouping of information within the financial statements. IFRS 18 includes enhanced guidance on how to organize information and whether to provide it in the primary financial statements or in the notes. The changes are expected to supply more detailed, useful information to investors. IFRS 18 also requires companies to offer more transparency about their operating expenses to help investors find and understand the needed information.
IFRS 18 takes effect for annual reporting periods starting on or after Jan. 1, 2027, although companies can apply it earlier. The IASB noted that changes in companies' reporting resulting from the new standard will depend on their current reporting practices and IT systems.
The board has posted a
