Insights on Ind AS 118 Understanding the Framework for Presentation and Disclosure of Financial Statements
CA Bhawna Grover
CA Prajwal Jha
Manager - Research and Advisory, Taxmann
Associate - Research and Advisory, Taxmann
Insights on Ind AS 118 Understanding the Framework for Presentation and Disclosure of Financial Statements
CA Bhawna Grover
CA Prajwal Jha
Manager - Research and Advisory, Taxmann
Associate - Research and Advisory, Taxmann
Contents 1.
Introduction
5
2.
Ind AS 118 at a Glance
5
3.
A More Structured Statement of Profit and Loss
6
4.
Management-Defined Performance Measures
6
5.
Aggregation and Disaggregation
7
6.
Consequential Changes to Other Ind ASs
8
7.
What Should Preparers and Auditors Start Thinking About?
8
8.
What to Expect in This Series?
8
9.
Conclusion
9
1. Introduction Financial statements are not merely a compilation of numbers; the manner in which those numbers are presented and the information provided alongside them significantly influences how users understand an entity’s financial performance. Recognising the need to improve the communication of financial performance, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) has issued the Exposure Draft of Ind AS 118, Presentation and Disclosure in Financial Statements. The proposed Standard is intended to replace Ind AS 1, Presentation of Financial Statements, and introduces significant changes in the presentation and disclosure of information, particularly in the statement of profit and loss. Importantly, Ind AS 118 does not change the manner in which an entity measures its financial performance; rather, it focuses on how financial performance is presented and disclosed to users of financial statements. The proposed Standard is therefore not simply a renumbering or rearrangement of the existing requirements of Ind AS 1. It seeks to establish a more structured approach to the presentation of income and expenses and to provide users with information that enables better comparison of entities’ financial performance. For this purpose, Ind AS 118 introduces defined subtotals in the statement of profit and loss, establishes specified categories for classifying income and expenses, introduces disclosure requirements for management-defined performance measures and strengthens the principles governing aggregation and disaggregation of information.
2. Ind AS 118 at a Glance Ind AS 118 is proposed as a comprehensive Standard dealing with the presentation and disclosure of information in financial statements. It replaces Ind AS 1, with the existing requirements being dealt with in different ways. Certain requirements of Ind AS 1 are replaced by new requirements in Ind AS 118, some are transferred to Ind AS 118 with limited wording changes, while certain requirements are moved to amended Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, or Ind AS 107, Financial Instruments: Disclosures. The Exposure Draft also contains consequential amendments to various other Ind ASs. The proposed Exposure Draft would be effective on or after April 1, 2027. Globally, the corresponding IFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027. For preparers and auditors, the significance of Ind AS 118 extends beyond the presentation of a few additional line items. Its requirements may affect how entities organise information in the statement of profit and loss and the notes, how certain performance measures are communicated and how income and expenses are classified and aggregated. Consequently, understanding the underlying principles of the proposed Standard will be important before considering its individual requirements.
Insights on Ind AS 118 Understanding the Framework for Presentation and Disclosure of Financial Statements
5
3. A More Structured Statement of Profit and Loss One of the most visible changes proposed by Ind AS 118 relates to the statement of profit and loss. The Exposure Draft proposes two additional defined subtotals: operating profit or loss and profit or loss before financing and income taxes, unless presentation of the latter is prohibited in specified circumstances. These subtotals are intended to provide a consistent structure to the statement of profit and loss and thereby improve comparability between entities. Importantly, the introduction of these subtotals does not change the entity’s overall profit figure or the manner in which financial performance is measured. Ind AS 118 also proposes that income and expenses included in the profit or loss section be classified into five categories: operating, investing, financing, income taxes and discontinued operations. The operating category is particularly important because it operates as the default category. It includes income and expenses that are not classified in the investing, financing, income taxes or discontinued operations categories. The Exposure Draft explains that this category is intended to provide a complete picture of an entity’s operations and includes income and expenses arising from its operations even where those items may be volatile or unusual. The classification exercise may, however, require considerable judgement in certain cases. For example, an entity may have investing in assets or providing financing to customers as a main business activity. The Exposure Draft specifically provides guidance for determining whether either or both of these activities constitute a main business activity, and states that the assessment is a matter of fact rather than merely an assertion by management. Thus, the classification of income and expenses under Ind AS 118 will be an important area of analysis, particularly for entities having multiple business activities or significant investing or financing activities.
4. Management-Defined Performance Measures Another significant feature of Ind AS 118 is the introduction of specific disclosure requirements for management-defined performance measures (MPMs). A managementdefined performance measure is a subtotal of income and expenses other than those specifically excluded by the Standard or required to be disclosed or presented by Ind ASs, that a company uses in public communications outside financial statements to communicate to investors management’s view of an aspect of the financial performance of the company as a whole.
6
Insights on Ind AS 118 Understanding the Framework for Presentation and Disclosure of Financial Statements
Ind AS 118 seeks to bring greater transparency to such measures where they fall within the definition of MPMs. The Exposure Draft requires disclosures for all MPMs in a single note, including a reconciliation between the MPM and the most directly comparable subtotal specified by Ind AS 118 or another total or subtotal specifically required by Ind ASs. The reconciliation is also required to reflect the income tax effect and the effect on non-controlling interests for each item disclosed. The entity will also be required to explain how the MPM communicates management’s view of an aspect of financial performance and how the measure is calculated. Any changes in the MPM or in the method used to calculate it will also require explanation. Further, the entity will state that the measure reflects management’s view of an aspect of the financial performance of the entity as a whole and may not be comparable with similarly labelled measures presented by other entities. This represents an important shift in the disclosure framework because it seeks to connect measures communicated by management with the information presented under the financial reporting Standards, thereby giving users a clearer basis for understanding such measures.
5. Aggregation and Disaggregation Ind AS 118 also strengthens the principles governing aggregation and disaggregation of information. Financial statements are ultimately prepared by processing a large number of individual transactions and events. The challenge is to determine which items should be combined and which should be separately presented or disclosed so that material information is not lost within broad categories. The proposed Standard requires entities to aggregate items based on shared characteristics and disaggregate items based on characteristics that are not shared. The objective is to ensure that the primary financial statements provide useful structured summaries while the notes provide material information necessary to understand those statements. The entity must also ensure that aggregation and disaggregation do not obscure material information. Where disaggregation results in material information, the entity will be required to disaggregate the information. If such material information is not presented in the primary financial statements, it is to be disclosed in the notes. This principle is closely connected with the proposed distinction between the role of primary financial statements and the role of notes. Primary financial statements are intended to provide structured summaries of recognised assets, liabilities, equity, income, expenses and cash flows, whereas the notes provide further information necessary to understand the items presented and supplement the primary financial statements with other information. The Exposure Draft also proposes a more disciplined approach to the use of the label “other”. An entity is required to use this label only when it cannot identify a more informative
Insights on Ind AS 118 Understanding the Framework for Presentation and Disclosure of Financial Statements
7
description, and where “other” is used, the entity should describe the aggregated item as precisely as possible, for example, “other operating expenses” or “other finance expenses”.
6. Consequential Changes to Other Ind ASs The introduction of Ind AS 118 also has implications beyond the Standard itself. The Exposure Draft contains consequential amendments to other Ind ASs to align their requirements with the proposed new presentation framework. For example, amendments have been proposed to Ind AS 7, Statement of Cash Flows Ind AS 33, Earnings per Share, and Ind AS 34, Interim Financial Reporting, among other Standards. The consequential amendments are an important part of understanding the overall impact of Ind AS 118. Accordingly, implementation cannot be considered solely by reading the main text of Ind AS 118; entities will also need to consider the amendments proposed to other Standards and the resulting changes in terminology and presentation requirements.
7. What Should Preparers and Auditors Start Thinking About? Although the proposed effective date is April 1, 2027, the breadth of the proposed changes makes early understanding relevant. Entities may need to evaluate how their existing statement of profit and loss is structured, how income and expenses are currently classified, which subtotals are used internally and externally, what performance measures are communicated outside the financial statements and whether information currently aggregated into broad line items may require further disaggregation. For auditors, the changes are equally significant from a presentation and disclosure perspective. The application of the new classification principles, assessment of main business activities, identification of management-defined performance measures and judgements surrounding aggregation and disaggregation are areas that may require particular attention.
8. What to Expect in This Series? Ind AS 118 introduces several interconnected concepts, and understanding them in isolation may make the Standard appear more complex than it is. This series, “Ind AS 118 – A Weekly Series on Ind AS 18”, will therefore examine the proposed requirements progressively, moving from the fundamental principles to their practical application. The forthcoming articles will explore the structure of the statement of profit and loss and the five categories of income and expenses, followed by the requirements relating to
8
Insights on Ind AS 118 Understanding the Framework for Presentation and Disclosure of Financial Statements
operating profit and other defined subtotals. The series will then examine the classification of income and expenses, including the significance of an entity’s main business activities, followed by the presentation of expenses, management-defined performance measures, and the enhanced principles of aggregation and disaggregation. The consequential amendments to other Ind ASs and other significant implementation aspects will also be considered. The objective will be to go beyond reproducing the requirements of the Exposure Draft and examine how the proposed principles may operate in practice, using relevant examples and illustrations wherever appropriate.
9. Conclusion Ind AS 118 represents a significant development in the presentation and disclosure of financial performance under the Ind AS framework. While it does not change the measurement of financial performance, it seeks to change the way that performance is communicated to users by introducing a more structured statement of profit and loss, defined subtotals, specified categories of income and expenses, greater transparency around management-defined performance measures and stronger principles for aggregation and disaggregation. For preparers, the proposed Standard may require a reassessment of existing presentation and disclosure practices and for auditors, it introduces several areas where judgement and scrutiny will be important. As the proposed requirements are interconnected, developing a sound understanding of their underlying principles is the first step towards assessing their practical implications. The articles that follow in this weekly series will take up these individual aspects of Ind AS 118 and examine them in greater depth.
Insights on Ind AS 118 Understanding the Framework for Presentation and Disclosure of Financial Statements
9
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