Ind AS 118: Presentation and Disclosure in Financial Statements

Background

The International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements in April 2024. As part of IFRS convergence, ASB issued an exposure draft of Ind AS 118 in January 2025 for public comments.

The proposed Ind AS 118 aims to improve how companies communicate in their financial statements, with a focus on information about financial performance in the statement of profit or loss.

While proposed Ind AS 118 will not alter how companies measure financial performance, it will standardise the presentation and disclosure requirements, aiming to achieve better communication with users of financial statements. The proposed Ind AS 118 aims to improve financial reporting by requiring:

• Introduction of new defined subtotals in profit or loss.
• Enhanced disclosures on management-defined performance measures.
• Stronger requirements for aggregation and disaggregation.

Considering the above background, we shall now attempt to dissect the changes brought in by proposed Ind AS 118 and evaluate the impact that it is likely to have.

Components of Financial Statements

Proposed Ind AS 118 provides: Complete set of Financial Statements = Primary Financial Statements + Notes + Comparative Information + Balance sheet for the beginning of the earliest period if required. A summarisation of the role and purpose of the two is highlighted below:

Proposed Ind AS 118 is not applicable to condensed Interim Financial Statements, except for the following:

1. Principles of aggregation and disaggregation (Para 41 to 43 of Ind AS 118)
2. Requirements relating to MPMs (Para 117 to 125 of Ind AS 118)

Aggregation and Disaggregation

1. Paragraph 41 of Ind AS 118 lays down the principles of aggregation and disaggregation.
2. Aggregation, Classification, and Disaggregation are defined in Ind AS 118 as under:
   1. Aggregation: The adding together of assets, liabilities, equity, income, expenses, or cash flows that share characteristics and are included in the same classification.
   2. Classification: The sorting of assets, liabilities, equity, income, expenses, and cash flows based on shared characteristics.
   3. Disaggregation: The separation of an item into component parts that have characteristics that are not shared.
3. Item vs. Line item
   1. Item: an item is an asset, liability, equity instrument, or reserve, income, expense, or cash flow, or any aggregation or disaggregation of such assets, liabilities, equity, income, expenses, or cash flows.
   2. Line item: A line item is an item that is presented separately in the primary financial statements.
   3. Presenting additional line items vs. disaggregating items: An entity uses its judgment to make this determination to present additional line items or to disaggregate items to disclose material information in the notes.
4. General guidance on aggregation and disaggregation:
   1. Aggregation: aggregate assets, liabilities, equity, income, expenses, or cash flows into items based on shared characteristics
   2. Disaggregation: disaggregate items based on characteristics that are not shared
   3. Common for aggregation and disaggregation:
      1. Fulfils the role of the primary financial statements in providing useful, structured summaries
      2. Fulfils the role of the notes in providing material information
      3. Does not obscure material information
5. Examples for shared characteristics:
   1. Nature
   2. Function (role) within the entity's business activities
   3. Persistence (including the frequency of the item of income or expense, or whether it is recurring or non-recurring)
   4. Size
   5. Geographical location or regulatory environment
6. Examples of providing useful structured summary or disclosure in the notes necessary to provide material information:

For Statement of profit and loss:

1. Write-downs of inventories, as well as reversals of such write-downs
2. Impairment losses for property, plant and equipment, as well as reversals of such impairment losses
3. Income and expenses from restructurings of an entity's activities and reversals of any provisions for restructuring
4. Income and expenses from litigation settlements
5. Reversals of provisions
6. Property, plant and equipment disaggregated into classes in accordance with Ind AS 16
7. Receivables disaggregated into amounts receivable from trade customers, amounts receivable from related parties, prepayments, and other amounts
8. Inventories disaggregated, applying Ind AS 2, into items such as merchandise, production supplies, materials, work in progress, and finished goods
9. Equity capital and reserves disaggregated into various classes, such as paid-in capital, share premium, and reserves.
10. Examples of circumstances that may result in material information being obscured:
    1. Material information about an item, transaction, or other event is disclosed in the financial statements, but the language used is vague or unclear
    2. Material information about an item, transaction, or other event is scattered throughout the financial statements
    3. Dissimilar items, transactions, or other events are inappropriately aggregated
    4. Similar items, transactions, or other events are inappropriately disaggregated
    5. The financial statements become less understandable when immaterial information obscures material information, preventing primary users from determining what is material

1. Aggregation and Disaggregation to follow faithful representation of an item.
2. Guidance on circumstances around material items:
   1. When an entity chooses to aggregate two material items for summarising material information, an entity would also be required to disclose information about each item.
   2. When an entity chooses to aggregate a material item with an immaterial item, an entity would provide information about disaggregated items only if immaterial information obscured the material information.
   3. When an entity chooses to aggregate immaterial items, unless the aggregated amount is sufficiently large that users of financial statements might reasonably question whether it includes items for which information could be material, no additional disclosure about such aggregated item shall be required.

Statement of Profit or Loss

An illustrative presentation of the statement of profit or loss, as modified by proposed Ind AS 118, is provided below for companies other than Insurance Company and Banking Company:

Subtotals in bold reflect the new subtotals as per the requirements of proposed Ind AS 118. The subtotals in italics are the additional subtotals. An entity presents additional subtotals if necessary to provide a useful structured summary of the income and expenses.

a. Categories in the statement of profit or loss

b. Totals and subtotals to be presented in the statement of profit or loss

Proposed Ind AS 118 now mandates the following totals/subtotals to be presented in the statement of profit or loss:

1. operating profit or loss;
2. profit or loss before financing and income taxes; and
3. profit or loss.

Management-defined Performance Measure

A management-defined performance measure (“MPM”) is a subtotal of income and expenses that:

1. an entity uses in public communications outside financial statements;
2. an entity uses to communicate to users of financial statements, management's view of an aspect of the financial performance of the entity as a whole; and
3. Except the following:
   1. gross profit or loss (revenue minus cost of sales) and similar subtotals;
   2. operating profit or loss before depreciation, amortisation, and impairments within the scope of Ind AS 36;
   3. operating profit or loss and income and expenses from all investments accounted for using the equity method;
   4. profit or loss before income taxes;
   5. profit or loss from continuing operations.

A. Subtotal vs. management-defined performance measure

B. Disclosure of MPM

An entity shall disclose information about all measures that meet the definition of management-defined performance measures in a single note. The disclosures shall include, at a minimum, the following:

1. A description of the aspect of financial performance that, in management's view, is communicated by the MPM.
2. How the MPM is calculated.
3. A reconciliation between the MPM and the most directly comparable subtotal in financial statements.
4. Income Tax effect and effect on non-controlling interest for each item of reconciliation.
5. Description of how the entity determines the Income Tax effect.

C. What does not constitute MPM?

1. Subtotals of only income or only expenses (for example, a stand-alone measure of adjusted revenue that is not part of a subtotal that also includes expenses);
2. Assets, liabilities, equity, or combinations of these elements;
3. Financial ratios (for example, return on assets) (see paragraph B117);
4. Measures of liquidity or cash flows (for example, free cash flow); or
5. Non-financial performance measures.

Old vs. New (Ind AS 1 vs. proposed Ind AS 118) — Some other changes

The Road ahead for Ind AS 118

1. These new subtotals in the statement of profit and loss will require companies to reassess their reporting structure, update financial systems, and ensure compliance with additional disclosure requirements.
2. Ind AS 1 currently mandates the classification of expenses solely by nature, removing the option available in IAS 1 to classify expenses by function. However, under proposed Ind AS 118, companies opting for function-based classification will now be required to provide additional disclosures in the notes detailing expenses by nature, increasing compliance and reconciliation efforts. ERP systems and internal reporting processes must adapt to new requirements, ensuring consistent reporting without adding excessive manual adjustments. In the author's view, if classification by function is permitted, ICAI and SEBI may need to standardise functional categories to maintain consistency across industries. The onus also lies on companies to assess their classification methodology early and ensure alignment with industry practices.
3. Furthermore, Indian financial statements, governed by Schedule III may need to be revisited.
4. The introduction of Management-Defined Performance Measures (MPMs) under Ind AS 118 is a step towards enhancing investor communications through financial statements. From an investor's perspective, MPMs are beneficial as they provide insight into how management evaluates financial performance beyond statutory metrics. It presents a significant change for both management and auditors, primarily due to the separation of responsibilities within organizations. In most listed companies, the Investor Relations (IR) team communicates various performance measures to investors throughout the year, while the Financial Reporting team prepares financial statements. This makes it challenging to identify which MPMs should be included in financial statements, especially given that companies release numerous performance indicators across different reporting periods. To ensure consistency and comparability, clear guidance is needed on determining which MPMs to disclose in the financial statements and for what period. This requirement also aligns with the broader objective of ensuring that performance parameters communicated to investors are comparable, standardized, and reconciled with statutory requirements of financial reporting.

Source: CA. Jinal Arpit Patel, “Ind AS 118: Presentation and Disclosure in Financial Statements,” The Chartered Accountant, ICAI, November 2025, pp. 52–57.