Proposed Ind AS 118: A Milestone in Strengthening Presentation and Disclosure in Financial Reporting

In an evolving global economic environment, high-quality financial reporting plays a significant role. Transparent, comparable, and decision-useful financial information forms the backbone of investors’ confidence and capital-market efficiency.

Recognising this, India has implemented globally accepted high-quality accounting standards, i.e., International Financial Reporting Standards converged Indian Accounting Standards (Ind AS) for large companies. Moving forward in this direction, proposed Ind AS 118, Presentation and Disclosure in Financial Statements, has been formulated by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI), a standard aimed at redefining the structure and clarity of financial statements prepared under the Ind AS framework.

While in India, there is a presentation format of financial statements in the form of Schedule III to the Companies Act, 2013, notified by the Ministry of Corporate Affairs, the proposed Ind AS 118 aims to further improve the way entities communicate their financial story based on principles of relevance, faithful representation, and enhanced comparability. The proposed Standard focuses on how financial performance is presented in the statement of profit and loss. While Ind AS 118 does not change the measurement of financial performance, it introduces new requirements for its presentation and disclosure only. This Standard seeks to enhance the quality of financial reporting by introducing requirements for the presentation of defined subtotals in the statement of profit or loss, disclosures relating to management-defined performance measures, and strengthened principles for the aggregation and disaggregation of information.

This Standard is converged with IFRS 18, issued by the International Accounting Standards Board (IASB), and aligns India’s financial reporting landscape with global best practices.

Effective Date of IFRS 18 and Global Alignment

Globally – Accounting periods beginning on or after January 1, 2027.

Proposed in India – Annual reporting periods beginning on or after April 1, 2027, as per the Exposure Draft issued by the ICAI.

Main Changes for Entities in the Profit or Loss Section of the Statement of Profit and Loss

Required Subtotals

Entities will be required to present ‘operating profit or loss’ and ‘profit or loss before financing and income taxes’ (unless prohibited in specific circumstances) as additional subtotals in the profit or loss section.

The introduction of these subtotals establishes a consistent structure for profit or loss and enhances comparability, while leaving unchanged the measurement of financial performance and the overall profit figure.

Understanding the Categories for Classifying Income and Expenses

Income and expenses included in the profit or loss section of the statement of profit and loss will be required to be classified into the following five categories:

Presentation and Disclosure of Expenses in the Operating Category

Ind AS 1, Presentation of Financial Statements, currently requires an entity to present an analysis of expenses recognised in profit or loss using nature-wise classification of expenses. However, IAS 1 permits entities to present such expenses using either a nature-based or function-based classification.

Ind AS 118 proposes that in the operating category of profit or loss, an entity shall classify and present expenses in line items in a way that provides the most useful structured summary of its expenses, using characteristics of the nature of expenses or characteristics of the function of the expenses within the entity or both these characteristics (‘mixed presentation’). In accordance with the factors set out in the Standard, an entity shall determine the appropriate classification and presentation of expenses by their nature or function or on a mixed basis, considering what line items:

• provide the most useful information about the important components or drivers of the entity’s profitability; and
• most closely represent the way the entity is managed and how management reports internally.

The requirements of proposed Ind AS 118 are based on the premise that the entity should be able to provide the most useful structured summary of its expenses. It is not a free choice to present expenses based on their nature or function. Some entities might decide that classifying some expenses by nature and other expenses by function provides the most useful structured summary of their expenses.

The Standard also requires entities that present expenses classified by function to disclose the following in a single note:

• depreciation;
• amortisation;
• employee benefits;
• impairment losses and reversals of impairment losses; and
• write-downs and reversals of write-downs of inventories.

In India, this is a major change from the current requirements since presently, Ind AS 1, Presentation of Financial Statements, requires only nature-wise classification of expenses.

Illustrative Profit or Loss Section for Companies

Considering the presentation requirements of categories for classifying income and expenses, as well as the presentation and disclosure of expenses in the operating category, the profit or loss section of the Statement of Profit and Loss can be illustrated as under:

Legend: Required subtotals   Examples of additional subtotals

In the above illustrative format:

• It is assumed that the company presents some operating expenses by function and some by nature.
• Subtotals highlighted in green are required, and highlighted in blue are examples of additional subtotals. A company presents additional subtotals if necessary to provide a useful, structured summary of the company’s income and expenses.
• Ind AS 118 will be applied differently by companies with specific business activities, such as banks, insurers and investment property companies.

Entities with Specified Main Business Activities

The Standard requires an entity to assess whether it has a specified main business activity, viz., investing in particular types of assets. For e.g., investment entities, investment property companies and insurers or providing financing to customers, for e.g., banks.

Entities with specified main business activity classify some income and expenses in the operating category that would have been classified in the investing or financing category if the activity were not a main business activity.

Management-defined Performance Measures (MPM)

Entities often report their own performance measures, including subtotals of income and expenses, which they communicate externally outside the financial statements to provide insights into financial performance.

Ind AS 118 requires an entity to include information about such measures in a single note to improve the transparency of those measures.

The Standard prescribes that MPM is a subtotal of income and expenses that:

• is used in public communications outside financial statements;
• is used to communicate to investors management’s view of an aspect of the financial performance of the entity as a whole; and
• is not listed in Ind AS 118 or specifically required by Ind AS.

Enhanced Requirements for Aggregation & Disaggregation of Information

Often, companies group information in financial statements that may not always provide the information the users need for their analysis—for example, some information is not shown in enough detail, while other information is obscured with too much detail.

Ind AS 118 sets out principles for companies on how to group transactions and other events within the line items of the primary financial statements and the accompanying notes. Under these principles, companies are generally required to:

• Aggregate items that share similar characteristics and disaggregate those that differ;
• Group items in a manner that does not obscure material information or compromise the clarity and understandability of the financial statements; and
• Present items in the primary financial statements and notes in a way that ensures both serve their complementary roles.

Consequential Amendments

Ind AS 118 will replace Ind AS 1, Presentation of Financial Statements. As a result, the requirements in Ind AS 1 will be:

1. replaced by new requirements in Ind AS 118;
2. transferred to Ind AS 118 with only limited wording changes; or
3. moved to amended Ind AS 8, Basis of Preparation of Financial Statements, or Ind AS 107, Financial Instruments: Disclosures, with only limited wording changes.

There are also consequential amendments to some other Ind ASs.

It may be worth mentioning here that as part of global consequential amendments, IAS 7 has been revised to remove the presentation alternatives for cash flows related to interest and dividends paid and received. In India, these alternatives have already been eliminated under Ind AS 7, meaning that the requirements of IAS 7 are principally aligned with those of Ind AS 7 for entities engaged in specified business activities, such as banks. The provisions of Ind AS 7 are proposed to be updated to reflect the language of the revised IAS 7, ensuring greater consistency.

Preparing for Implementation

Although the effective date of Ind AS 118 may seem distant, entities are encouraged to assess the potential impact of the new requirements early, for which the Management needs to plan in advance.