IAS 1 financial statements: preparing for IFRS 18 in 2027

What makes a complete set of financial statements?

A complete set includes more than a balance sheet and income statement. Readers need to understand financial position, performance, cash flows and changes in equity.

Profit or loss and other comprehensive income may be presented using the permitted combined or separate formats. Omitting other comprehensive income when transactions generate it would leave the picture incomplete.

Comparatives also apply to the notes. An additional opening statement of financial position may be required when retrospective restatement or reclassification materially affects the opening comparative position. Our balance sheet explanation introduces the underlying categories; IFRS accounts must then meet their own requirements.

Going concern, materiality and fair presentation

Accounts are prepared on a going concern basis when that basis is appropriate. Management must examine available evidence, financing prospects and material uncertainties.

Using the going concern basis does not remove the need to disclose a material uncertainty. Where another basis is necessary, explain it. The notes should be consistent with budgets and discussions with lenders.

Materiality helps determine which information matters and how to organise it. It does not justify hiding an uncomfortable issue. An item can be material because of its nature even when the amount is relatively small.

Presentation example: combining routine expenditure and a significant acquisition-related cost under “other expenses” may conceal information needed to understand performance. The appropriate detail depends on context and materiality, rather than a template copied from another company.

Classify assets and liabilities correctly

Current and non-current classifications are generally used, unless presentation by liquidity provides reliable and more relevant information. An operating cycle can explain why some items remain current even beyond twelve months.

For liabilities, assess whether the entity has a right at the reporting date to defer settlement for at least twelve months. An intention to refinance is not always sufficient: the contractual rights in place matter.

Read financial covenants carefully. A condition that must be met at year-end differs from one applying only afterwards. Certain future covenants require disclosures about the risk of repayment within twelve months.

Illustrative example: a loan repayable in three years may require a classification review if a breach at year-end makes it repayable on demand. An agreement obtained only after year-end does not automatically change the rights that existed at that date.

Our article on liabilities and equity introduces the main categories. IFRS classification then requires an assessment of the contracts.

What changes under IFRS 18 from 2027?

IFRS 18 retains some IAS 1 requirements and transfers others to different standards, notably IAS 8. The principal changes concern the presentation of financial performance.

The standard introduces defined income statement categories, including operating, investing and financing, together with defined subtotals. Special requirements reflect certain businesses' main activities, so assess the business model before classifying financial income.

IFRS 18 also addresses management-defined performance measures within its scope. These are certain subtotals of income and expenses used in public communications to convey management's view of the financial performance of the entity as a whole.

Not every business metric qualifies. User numbers or a purely balance-sheet measure do not become management-defined performance measures simply because management uses them. For qualifying measures, disclosures include an explanation and a reconciliation to the relevant IFRS total or subtotal.

Inventory the EBITDA measures and adjusted results used in your communications, then assess their definitions. An indicator's label alone cannot determine its treatment.

Prepare comparative figures and disclosures

Start by mapping your accounts to the new categories. Identify information that cannot be recovered from an overly aggregated trial balance, and adapt data collection before the first publication.

Suppose a company combines interest received, interest paid and foreign exchange differences in one reporting account. Applying the new categories may require additional detail about the underlying transactions.

Next, review investor communications, including presentations, reports and other relevant public materials. Reconcile the measures used there with the financial statements. Definitions that change quietly between documents will complicate the reconciliation.

Prepare the notes alongside the figures. Our article on financial statement notes explains why they are part of the accounts' explanation, rather than a final administrative formality.

A practical checklist for the finance team

1. Confirm the framework and adoption date. Record whether IFRS 18 is being applied early or from its mandatory effective date.
2. Reconcile the statements. Check consistency between net profit, comprehensive income, changes in equity and the cash flow statement.
3. Review sensitive judgements. Check debt classifications against contracts, together with going concern and other material judgement disclosures.
4. Check aggregation and comparatives. Ensure the detail remains useful and comparisons are consistent.
5. Assign ownership of the transition. Set a timetable for data collection and approval. Include the work from the outset if an IFRS conversion is also planned.

Frequently asked questions