4 IFRS 18 Presentation and Disclosure in Financial Statements

20 November 2025 Agenda Paper 4

Executive Summary

Project Type: Endorsement Project Scope: Significant

Purpose of the paper

This paper clarifies the concerns raised by a respondent to the [Draft] Endorsement Criteria Assessment (ECA) [Draft] ECA relating to the requirement in IFRS 18 to classify insurance finance income and expenses in the operating category of the income statement. It also describes the potential mitigations for these concerns.

This paper also requests the Board's approval of the individual documents included in the 'adoption package' for the project to assess IFRS 18 Presentation and Disclosure in Financial Statements for use in the UK for adoption.

The documents included in the adoption package are: * [Draft] Endorsement Criteria Assessment (ECA); * [Draft] Feedback Statement; * [Draft] Due Process Compliance Statement; * [Draft] Adoption Statement for IFRS 18; and * Annex to the Adoption Statement: Text of the UK-adopted international accounting standards (IFRS 18 Presentation and Disclosure in Financial Statements).

The ECA and the Feedback Statement reflect the actions agreed at the October 2025 meeting.

This paper also asks Board members to provide a tentative vote on the adoption of IFRS 18.

Summary of the Issue

In July 2025, the UKEB published the [Draft] Endorsement Criteria Assessment of IFRS 18 ([Draft] ECA) that tentatively concluded that IFRS 18 meets the adoption criteria set out in legislation. The consultation on the [Draft] ECA closed on 7 October

1. The UKEB received 10 formal responses to the consultation. A summary of the feedback received, along with recommended changes to the [Draf] ECA wording, was discussed by the Board in October 2025. The [Draft] ECA presented at this meeting has been revised to incorporate responses to the issues raised by the Board at its October 2025 meeting.

The paper includes: * Clarification of concerns raised on the classification of insurance finance income and expenses in the operating category for decision on whether the issue is included in the [Draft] ECA. * [Draft] ECA for approval. * [Draft] Feedback Statement for approval. * [Draft] Due Process Compliance Statement for approval * [Draft] Adoption Statement for IFRS 18 for approval.

A tentative vote on the adoption of IFRS 18 will be held at this meeting.

Voting forms for the formal written vote will be sent to Board members after the November 2025 Board meeting.

The result of that formal vote, when completed, will be updated on the UKEB website, in line with the Board's Terms of Reference.

Decisions for the Board

1. Does the Board agree that no further work should be undertaken in respect of the concerns raised about the classification of insurance finance income and expenses in the operating category?
2. If the Board disagrees with the Secretariat's recommendation above, does the Board have any comments on the provisional assessment included in Appendix A of this paper?

Recommendation

The Secretariat recommends that the Board: * Does not undertake further work in respect of the concerns raised about the classification of insurance finance income and expenses in the operating category; * approves the relevant documents in the adoption package; and * tentatively approves the adoption of IFRS 18 for use in the UK.

Appendices

Appendix A Provisional assessment—Classification of insurance finance income and expenses in the operating category Appendix B [Draft] Endorsement Criteria Assessment Appendix C [Draft] Feedback Statement Appendix D [Draft] Due Process Compliance Statement Appendix E [Draft] Adoption Statement for IFRS 18 Appendix F Annex to the Adoption Statement: Text of the UK-adopted international accounting standard (IFRS 18 Presentation and Disclosure in Financial Statements)

Endorsement of IFRS 18

Background

1At its October 2025 meeting, the Board considered the summary of stakeholder feedback received following the UKEB's public consultation on the [Draft] Endorsement Criteria Assessment ([Draft] ECA). Most of the feedback received was supportive of the Board's assessment. The [Draft] ECA included in the adoption pack has been revised to incorporate responses to the issues raised by the Board at its October 2025 meeting.

2The Board considered the summary of stakeholder feedback received following the UKEB's public consultation on the [Draft] ECA of whether to adopt IFRS 18 for use in the UK. Specifically, the Board:

a) After considering all the significant comments received on the Technical Accounting Criteria Assessment (in Section 3 of the ECA): i. Agreed that no further work should be undertaken in respect of the concerns raised about the classification of income and expenses from investments in associates and joint ventures accounted for under the equity method in the investing category. ii. Requested a clearer articulation of the concerns raised relating to the classification of insurance finance income and expenses in the operating category. b) Agreed to the proposed changes in the Long-Term Public Good assessment (in Section 4 of the ECA) subject to the incorporation of the comments raised during the meeting. The main changes made to the [Draft] ECA are: i. Paragraph 2.10 was amended to clarify why the analysis mainly focused on listed entities. ii. Paragraph 4.40(d) was added to note that preparers will only use Management-defined Performance Measures (MPMs) if they perceive benefits to outweigh the associated implementation costs. iii. Paragraph 4.58(c) was added to note that some smaller unlisted entities may face relatively higher staff reallocation costs. iv. Paragraph 4.79 was amended to clarify that users of financial statements look at unlisted entities' financial statements, including those of subsidiaries in some circumstances. c) Asked to note in relation to the true and fair assessment that IFRS 18 has moved the fair presentation requirements of IAS 1 Presentation of Financial Statements to IAS 8 Basis of Preparation of Financial Statements (changed by IFRS 18 and formerly called Accounting Policies, Changes in Accounting Estimates and Errors). Text moved from IAS 1 to IAS 8 relating to the fair presentation requirements was left unchanged. This amendment is shown in paragraph 5.6 of the [Draft] ECA. d) Agreed not to make changes to the assessment of whether IFRS 18 is likely to lead to significant change in practice (in Section 6 of the [Draft] ECA).

3The [draft] ECA included in the adoption pack has been revised to incorporate these actions. Changes to the text arising from that feedback are marked up in Appendix B.

Concern about the classification of insurance finance income and expenses in the operating category

4At the October 2025 meeting the Secretariat informed the Board about a concern raised by a preparer from an insurance entity that the requirement in paragraph 64(b) of IFRS 18 to classify insurance finance income and expenses in the operating category of the income statement does not meet the criteria of comparability, relevance, and understandability. Another respondent (a professional body) had also highlighted concerns from some insurance companies about the lack of comparability derived from these requirements.

5The following paragraphs provide additional clarification of these concerns, based on further engagement with the preparer, and potential mitigations for these concerns.

Summary of concerns raised by the preparer from the insurance industry

6The concern raised by the preparer from the insurance industry was that IFRS 18 does not meet the criteria of relevance and understandability required of the financial information because including insurance finance income and expenses¹ (which includes the change in discount rate of insurance liabilities) as part of the 'operating profit or loss' would not lead to a fair reflection of financial performance for an insurer that:

a) applies the fair value through profit or loss (FVTPL) approach to the measurement of financial assets under IFRS 9 Financial Instruments; and b) chooses not to apply the other comprehensive income option (OCI option) to disaggregate insurance finance income and expenses for the period between profit or loss and OCI under IFRS 17 Insurance Contracts,

as the preparer believes it would experience a significantly more volatile operating profit compared to insurers that measure their financial assets at fair value through OCI (FVOCI) and choose to apply the OCI option under IFRS 17.

7The preparer believes that this would also reduce the comparability of insurers' results depending on each insurer's approach to the measurement of financial assets under IFRS 9 and on whether an insurer chooses to apply the OCI option under IFRS 17.

8The respondent's comments² on this concern are reproduced below:

“In our view, IFRS 18 does not meet the criteria of relevance, understandability and comparability required of the financial information because operating profit is not a fair reflection of performance in the period for insurers that use the fair value through profit or loss (‘FVTPL') approach for valuing financial assets under IFRS 9 and insurance liabilities under IFRS 17. IFRS 18 requires insurance finance income and expenses (which includes the change in discount rate of insurance liabilities) to be presented in operating profit. It leads to reduced comparability of financial information for the insurance industry, as operating profit could differ significantly depending on the insurer's accounting policy choices that they make under IFRS 9 and IFRS 17. For example, an insurer that chooses to apply the fair value through profit or loss approach in the valuation of insurance liabilities under IFRS 17 and financial assets under IFRS 9 would experience a significantly more volatile operating profit than insurers that choose the fair value through other comprehensive income approach." [Aviva comment letter to the IFRS 18 [Draft] ECA page 4].

9To mitigate this situation, the preparer expects to include non-GAAP measures to explain an insurer's underlying profitability as stated below (emphasis added):

"We believe that disaggregating the fair value investment variances and economic assumption changes, which are often large and have no predictive value, is necessary to gain an understanding of the operating performance in the period. Thus, additional non-GAAP measures will be necessary to enable users of the accounts to understand an insurer's underlying profitability." [Aviva comment letter to the IFRS 18 [Draft] ECA page 4].

10Most UK insurers do not apply the OCI option³ in IFRS 17.

Secretariat's analysis

11The preparer further explained that 'operating profit or loss' under IFRS 18 would not be a fair reflection of the underlying performance of these insurers. They believe that reflecting market fluctuations in operating profit, especially in the short term, is not particularly useful for decision making when considering the longer-term nature of their business.

12As a result, it is common for such insurers to present a non-GAAP measure 'Adjusted Operating Profit' which excludes short-term market fluctuations on a non-GAAP basis.

13The preparer believes that the introduction of an 'operating profit' subtotal, as defined by IFRS 18, would affect the understanding of users as to the operating profit measure that fairly reflects how management views its business.

14To mitigate this situation, the preparer expects to continue to present a non-GAAP measure once IFRS 18 becomes effective but is considering changes to its communication and disclosures. The non-GAAP measure is expected to meet the definition of MPMs⁴ under IFRS 18.

15The preparer also clarified that a lack of comparability already exists today due to the different measurement and presentation approaches under IFRS 9 and IFRS 17. The preparer further observed that the introduction of a mandatory subtotal 'operating profit' that requires insurance finance and expenses to be part of this subtotal further highlights this difference.

16The Secretariat notes that mandating an ‘operating profit or loss' subtotal that includes the market movements in an insurer's assets and liabilities does not inherently affect comparability. It simply highlights the limitations to comparability that already exist due to the application of different measurement approaches under IFRS 9 and whether the OCI option is applied under IFRS 17.

17The concern that comparability would be reduced across insurers depending on whether the insurer chooses to apply the OCI option permitted in IFRS 17 has previously been addressed by the UKEB, when assessing IFRS 17 for adoption⁵.

Secretariat's overall recommendation

18IFRS 18 will allow preparers to continue providing their own measures of performance (i.e. MPMs). The disclosure requirements in IFRS 18⁶ (including the disclosures on MPMs⁷) along with the disclosure requirements in IFRS 17 (i.e. general and specific disclosure requirements specifically relating to insurance finance income and expenses⁸) are also likely to improve understandability of these measures.

19Many entities, in different sectors, use APMs to explain underlying performance. It is likely that some of these APMs will become MPMs.

20Based on our analysis, the Secretariat considers that the issue raised does not affect the assessment in Section 3 (Technical Accounting Criteria Assessment) of the ECA.

21However, if the Board considers that this issue should be assessed individually in the ECA, the Secretariat has prepared a provisional assessment against the technical accounting criteria (refer to Appendix A of this paper). The Board is asked to consider whether this assessment should be included in the final ECA.

Decision for the Board

1. Does the Board agree that no further work should be undertaken in respect of the concerns raised about the classification of insurance finance income and expenses in the operating category?
2. If the Board disagrees with the Secretariat's recommendation above, does the Board have any comments on the provisional assessment included in Appendix A of this paper?

Adoption of IFRS 18

22In accordance with the UKEB's Due Process Handbook paragraph 6.30, the project closure process for endorsement projects comprises the following steps:

a) preparation of an 'adoption package' for the Amendments; and b) voting on the adoption of the amended standard.

Adoption package

23The Board is asked whether it has any comments on the documents which, in accordance with paragraph 6.31 of the Due Process Handbook, form the adoption package for IFRS 18:

a) the ECA (Appendix B); b) the Feedback Statement (Appendix C); c) the draft Due Process Compliance Statement (Appendix D); d) the Adoption Statement for IFRS 18 (Appendix E); and e) the Annex to the Adoption Statement: the text of the UK-adopted international accounting standards (Appendix F).

Decision for the Board

1. Subject to addressing any changes identified at this meeting, does the Board approve the documents in the adoption package?

Voting on the adoption of IFRS 18

24Decisions on the adoption of a standard are made at public Board meetings and follow the requirements of paragraphs 5.2–5.5 of the UKEB's Terms of Reference (ToR).

25In line with the ToR and paragraphs 6.42–6.44 of the Due Process Handbook, at this meeting Board members are asked to provide a tentative vote on the adoption of IFRS 18 based on the information included in the adoption package.

Decision for the Board

1. Does the Board tentatively approve the adoption of IFRS 18 for use in the UK?

Next steps

26The written forms for the formal vote will be sent to Board members in early December 2025. The result of that formal vote, when completed, will be updated on the UKEB website in line with the Board's Terms of Reference.

27A final version of the Due Process Compliance Statement will be presented to the Board for noting in December 2025.

Endorsement and adoption of IFRS 18 (effective 1 January 2027)—partial timeline for 2025

Appendix A: Provisional assessment – Classification of insurance finance income and expenses in the operating category

Issue 4: Classification of insurance finance income and expenses in the operating category

Presentation and disclosure requirements

IFRS 17 Insurance Contracts

A1IFRS 17 requires the separate presentation of insurance finance income and expenses in the income statement.

A2In accordance with IFRS 17¹, insurance finance income and expenses mainly comprise the change in the carrying amount of the group of insurance contracts arising from the effect of (and changes in) the time value of money and financial risk, including the change in discount rate of insurance liabilities.

A3For insurance finance income and expenses not arising from risk mitigation activities², entities are required to make an accounting policy choice for each portfolio of insurance contracts on how to present insurance finance income and expenses. In accordance with paragraphs 88–90 of IFRS 17, such insurance finance income and expenses can be presented either:

a) in profit or loss; or, b) disaggregated between profit or loss and other comprehensive income (OCI). This is known as the ‘OCI option'. IFRS 17 prescribes three specific approaches or bases of disaggregation of insurance finance income and expenses between profit or loss and OCI, which depend on the method that the entity applies to account for the insurance contract, and whether the insurance finance income and expenses relate to insurance contracts with direct participation features for which the entity holds the underlying items.³

A4IFRS 17 requires an entity to disclose and explain the total amount of insurance finance income and expenses in the reporting period. In particular, an entity is required to explain the relationship between insurance finance income and expenses and the investment return on its assets, to enable users of its financial statements to evaluate the sources of finance income or expenses recognised in profit or loss and OCI.⁴

A5If an entity chooses to disaggregate insurance finance income and expenses into amounts presented in profit or loss and amounts presented in OCI, the entity is required to disclose an explanation of the methods used to determine the insurance finance income and expenses recognised in profit or loss.⁵

IFRS 18

A6Paragraph 47 of IFRS 18 introduces new mandatory categories for the classification of income and expenses (operating, investing or financing). Entities for which investing and/or financing are their main business activities are required to classify income and expenses from those main business activities in the operating category.⁶ Additionally, paragraph 70 of IFRS 18 mandates a new subtotal named 'operating profit or loss'.

A7As explained in paragraph BC89 of IFRS 18, the operating category includes an entity's main business activities as well as other income and expenses from supporting activities which may not generate revenue directly, including income and expenses that are volatile or unusual, to faithfully represent the results of an entity's operations in the period.

A8Paragraph 64(b) of IFRS 18 requires the presentation of “insurance finance income and expenses included in the statement of profit or loss applying IFRS 17 Insurance Contracts” to be in the operating category.

Accounting impact

A9IFRS 18 mandates a new subtotal named 'operating profit or loss'. The use of the OCI option under IFRS 17 together with the different measurement approaches for financial assets backing the insurance contracts under IFRS 9 Financial Instruments may result in differences in the 'operating profit or loss' being presented.

A10For insurers that measure their financial assets at fair value through profit or loss (FVTPL) and do not apply the OCI option, the fair value changes in the financial assets and the effect of changes in the time value of money and financial risk on the insurance contract balances will be included in the ‘operating profit or loss' being presented.

A11Most UK insurers do not apply the OCI option in IFRS 17⁷.

Assessment against the technical accounting criteria

A12Classifying insurance finance income and expenses within the income statement (as part of the operating category) indicates that such income and expenses relate to an insurer's main business activities and provides users with a consistent starting point for their analysis (and therefore with relevant information).

A13A potential consequence of this classification is that the 'operating profit or loss' may appear more volatile for insurers who do not apply the OCI option. This might reduce the perceived relevance and reliability of some financial information (especially when the business is longer-term and the market fluctuations are short-term).

A14However, IFRS 18 will allow preparers to continue providing their own measures of performance (i.e. MPMs), thereby mitigating the risk to relevance and reliability. The disclosure requirements in IFRS 17⁸ and in IFRS 18⁹ (including the disclosures on MPMs) are also likely to improve understandability of these measures.

A15Mandating an 'operating profit or loss' subtotal that includes the market movements in an insurer's assets and liabilities does not inherently affect comparability. It simply highlights the limitations to comparability that already exist due to the application of different measurement approaches under IFRS 9 and whether the OCI option is applied under IFRS 17.

A16The concern that comparability would be reduced across insurers depending on whether the insurer chooses to apply the OCI option permitted in IFRS 17 has previously been addressed by the UKEB when assessing IFRS 17 for adoption¹¹. Relevant paragraphs from the UKEB's IFRS 17 Endorsement Criteria Assessment (ECA) are reproduced below:

"The mechanism for determining the disaggregation between profit or loss and OCI is potentially complex. Entities will need to apply a significant degree of judgement, introducing a risk to the reliability and comparability of financial statements. However, the standard's requirements do not result in a degree of judgement that is inconsistent with that required under other IFRS Standards, and the disclosure requirements referred to above should serve to mitigate these risks.

Any risks to comparability or reliability need to be balanced against the enhanced relevance of the financial information in cases when use of the OCI Option enables entities to reduce or eliminate accounting mismatches. The specific disclosures required by IFRS 17 should also mitigate these risks. Users of insurers' accounts are likely to need to become familiar with new performance measures in any event, as IFRS 17 introduces significant change in a number of areas. [ECA, ‘Other comprehensive income option' page 170].

[Draft] Endorsement Criteria Assessment

IFRS 18 Presentation and Disclosure in Financial Statements

July-November 2025

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Footnotes

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UK Endorsement Board

July-November 2025

The UKEB does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.

© 2025 All Rights Reserved

Executive summary

Background

1The UK Endorsement Board (UKEB) is responsible for the endorsement and adoption of international accounting standards (issued by the International Accounting Standards Board (IASB) in the form of International Financial Reporting Standards, or (IFRS) for use in the United Kingdom (UK). The UKEB is therefore the UK's National Standard Setter for IFRS.

2This [Draft] Endorsement Criteria Assessment ([Draft] ECAECA) presents the work conducted by the UKEB to assess whether IFRS 18 Presentation and Disclosure in Financial Statements, issued by the International Accounting Standards Board in April 2024, meets the UK's statutory requirements for adoption of IFRS as set out in Regulation 7 of Statutory Instrument 2019/685 (the Regulations).

3Although the Regulations refer only to ‘adoption’, for the purposes of this [Draft] ECAECA the term endorsement is generally used when referring to the assessment of IFRS 18 against the criteria set out in the Regulations.

4This assessment addresses the three endorsement criteria set out in the Regulations:

1. whether IFRS 18 meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management;
2. whether IFRS 18 is likely to be conducive to the long-term public good in the UK; and
3. whether IFRS 18 is not contrary to the true and fair view principle for individual and consolidated accounts.

5These endorsement criteria are described in more detail in Section 1. Sections 3, 4 and 5 discuss whether these criteria are met.

6The [Draft] ECAECA also addresses, in Section 6, whether IFRS 18 is likely to lead to a significant change in accounting practice as set out in Regulation 11 of Sl 2019/685.

Work to support these assessments

7The work to support these assessments has spanned several months and has been responsive to stakeholder input throughout. The UKEB conducted the following activities to collect evidence to assess whether IFRS 18 meets the technical and the long term public good assessment criteria for endorsement:

1. Surveys: During Q3 2024, the UKEB conducted two surveys, one for preparers and one for users (including feedback from listed small- and medium-cap entities).¹
2. Engagement with UKEB Advisory Groups and with its Financial Instruments Working Group (FIWG).
3. Webinar poll: In July 2024, the UKEB held a joint webinar with the IASB to discuss the key requirements of IFRS 18 and its implications. During the webinar, participants were asked to respond to a poll on the costs and benefits of adoption.
4. Questionnaire to auditors: During Q3 2024, the UKEB sent a short questionnaire to members of the UKEB Accounting Firms and Institutes Advisory Group (AFIAG) to gather views on the likely costs and benefits of adoption.
5. Interviews: During Q4 2024, the UKEB conducted 15 interviews with preparers to gather evidence for the long term public good assessment (including with three preparers from listed small- and medium-cap entities).
6. Other engagement: The UKEB engaged bilaterally with UK regulators, professional accounting bodies, industry associations, users and other national and regional standard setters.
7. A desktop analysis of the requirements in IFRS 18, the basis for these requirements and its effects analysis, accounting firms’ publications and work by other standard setters.

IFRS 18 Presentation and Disclosure in Financial Statements

8IFRS 18 replaces IAS 1 Presentation of Financial Statements. IFRS 18 sets out general presentation and disclosure requirements that apply across the primary financial statements and the notes. It has an effective date of 1 January 2027, with earlier application permitted (subject to UKEB adoption in the UK). IFRS 18 does not change how entities recognise and measure items in the financial statements.

9Most requirements from IAS 1 have been incorporated into IFRS 18 unchanged or with minor revisions. Section 2 of this [Draft] ECAECA provides a summary of the requirements in IFRS 18 including an analysis of the requirements brought forward from IAS 1.

Technical accounting criteria

10Section 3 of this [Draft] ECAECAECA addresses whether IFRS 18 meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for users of accounts and investors in making economic decisions and assessing the stewardship of management (referred to in this [Draft] ECAECA as the technical accounting criteria).

11The assessment of IFRS 18 against the technical accounting criteria considers this Standard as a whole, including the requirements transferred from IAS 1. A detailed analysis against the technical accounting criteria is reported only in relation to the specific issues where stakeholders raised some practical challenges (an 'exceptions-based approach') (refer to Appendix B).

12In conducting this overall assessment against the technical accounting criteria, the UKEB is required to adopt an absolute, rather than a relative, approach.

13Overall, the UKEB [tentatively] concluded that IFRS 18 meets the technical accounting criteria.

UK long term public good

14The UKEB’s analysis of whether IFRS 18 is likely to be conducive to the long term public good in the UK is presented in Section 4 of this [Draft] ECAECA. In line with the Regulations, this section:

1. presents an overview of the improvements introduced by the Standard and discusses whether IFRS 18 is likely to improve the quality of financial reporting in the UK;
2. considers the costs and benefits likely to result from the use of IFRS 18 in the UK; and
3. considers whether the use of IFRS 18 is likely to have an adverse effect on the economy of the UK, including on economic growth.

15Considering whether IFRS 18 is likely to improve the quality of financial reporting involved comparing the main new requirements in IFRS 18 with current practice. This means that the approach for this assessment was a relative one.

16The assessment concludes that implementing IFRS 18 will lead to improvements in the quality of financial reporting in the UK by enhancing transparency and comparability of the information presented. It will also improve the disclosure requirements for management performance measures and enhance the requirements for grouping and disaggregating financial information.

17The economic impact assessment of IFRS 18 in this [Draft] ECAECA begins with the assessment of costs and benefits associated with its use.

18Users reported that the implementation of IFRS 18 should result in a more efficient use of time spent analysing financial statements, potentially increasing the quality of analysis and reports. Users indicated that they would be able to better compare entities' performance between each other and over time, enhance their assessment of individual entities’ performance and allocate capital more efficiently between entities. Users also indicated that they anticipated incurring minimal implementation costs. Preparers indicated that they expect to incur relatively small implementation costs (both one-off and ongoing) as a result of applying IFRS 18. Preparers expect one-off monetary costs to be largely associated with extra audit fees, familiarisation and changes to templates (non-monetary staff time reallocation costs). Preparers expect ongoing implementation costs to be much lower than one-off implementation costs, and to be subsumed into business as usual within a few years.

19The UKEB conducted quantitative analysis to obtain a high-level estimate of expected implementation costs for all UK-listed entities. The estimation provides an indicative range for implementation costs across the entire population of entities that would be required to apply IFRS 18 and should not be interpreted as an accurate forecast of implementation costs. The most likely point estimate within the range (reported in Appendix D), across the approximately 1,400 listed entities that are required to apply IFRS is that that total implementation costs would approximate £400 million (one-off and ongoing), of which approximately £100 million are expected to be actual extra monetary costs, while the rest represent opportunity costs associated with staff time reallocation. Total estimated implementation costs amount to approximately 0.02% of listed entities operating expenses as of 2023 year-end.

20The analysis of wider economic effects indicates that IFRS 18 may plausibly lead to wider capital market effects that would on average benefit preparers in the medium- to long-run. A quantitative analysis of such effects shows that small market-wide reductions in the cost of capital would be enough for UK-listed entities applying IFRS to indirectly recover their implementation costs in the medium- to long-term. The UKEB cannot predict with certainty whether any such market-wide effects will materialise and, if so, their magnitude.

21IFRS 18 is not expected to lead to wider economic effects that are detrimental to the UK economy, including on economic growth.

22An analysis of a non-adoption scenario shows that not implementing IFRS 18 for use in the UK would have a potentially detrimental effect on the UK economy (see paragraphs 4.106-4.111).

23Overall, the UKEB [tentatively] concluded that the use of IFRS 18 is likely to be conducive to the long term public good in the UK.

True and fair view principle

24Section 5 of the [Draft] ECAECA addresses whether IFRS 18 is not contrary to the true and fair view principle for both individual and consolidated accounts

25(Regulation 7(1)(a) of SI 2019/685 (namely, the assets, liabilities, financial position and profit or loss)) in the context of the preparation of the accounts as a whole. This assessment also considered the disclosures required by the Standard and its interaction with other UK-adopted international accounting standards. The assessment has not identified any IFRS 18 requirement that would prevent individual or consolidated accounts prepared using IFRS 18 from giving a true and fair view of the entity's assets, liabilities, financial position and profit or loss. Consequently, the UKEB [tentatively] concluded that IFRS 18 is not contrary to the true and fair view principle set out in Regulation 7(1)(a) of Sl 2019/685.

Is IFRS 18 likely to lead to a significant change in accounting practice?

26Section 6 of the [Draft] ECAECA addresses whether IFRS 18 is likely to lead to a significant change in accounting practice. If a standard adopted by the UKEB per Regulation 6 of SI 2019/685 is likely to lead to a ‘significant change in accounting practice’, the requirements in paragraph 3 of Regulation 11 of SI 2019/685 apply. Subject to said requirements, the UKEB is required to:

1. carry out a review of the impact of the adoption of the Standard; and
2. publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used).

27[The UKEB considers that IFRS 18 is a new standard that will not bring a significant change in the way all entities communicate information in the primary financial statements and the notes. As a result, it [tentatively] concludes that IFRS 18 is not likely to lead to a significant change in accounting practice and does not meet the criteria for a post-implementation review (PIR) under Regulation 11 in SI 2019/685.

Introduction

Purpose

1The UK Endorsement Board (UKEB) is responsible for the endorsement and adoption of international accounting standards (issued by the International Accounting Standards Board (IASB) in the form of International Financial Reporting Standards, or (IFRS) for use in the United Kingdom (UK). The UKEB is therefore the UK's National Standard Setter for IFRS.

2The purpose of this [Draft] Endorsement Criteria Assessment (ECA) is to determine whether IFRS 18 Presentation and Disclosure in Financial Statements (the Standard), issued by the IASB in April 2024, meets the UK's statutory requirements for adoption as set out in Regulation 7 of Statutory Instrument 2019/685² (SI 2019/685).

3The Standard has an effective date of 1 January 2027 with earlier application permitted (subject to the UKEB adoption in the UK). If an entity applies IFRS 18 for an earlier period, it shall disclose that fact in the notes.

4The UKEB actively influenced the development of IFRS 18. This included the Secretariat submitting a Final Comment Letter on 30 September 2020³, prior to the delegation of authority to the UKEB Board, in response to the IASB’s Exposure Draft ED/2019/7 General Presentation and Disclosures⁴.

Background to the Standard

5Section 2 in this [Draft] ECAECA provides a brief description of the main requirements in IFRS 18, including an analysis of the requirements brought forward from IAS 1.

Scope of the adoption assessment

6IFRS 18 replaces IAS 1 Presentation of Financial Statements and makes changes to the mandatory parts of IFRS Accounting Standards. These changes form part of the UKEB’s adoption assessment.

7UK-adopted international accounting standards comprise only the mandatory sections of standards.⁵ The Bases for Conclusion, Implementation Guidance, and Illustrative Examples of the IFRS Accounting Standards are not adopted by the UKEB and amendments to these non-mandatory sections are not considered in this [Draft] ECAECA.⁶

Structure of the assessment

8The UKEB’s analysis is presented in the following sections:

1. Section 1 describes UK statutory requirements for adoption of new or amended international accounting standards and the approach to the endorsement criteria assessment;
2. Section 2 describes:
   1. The entities in scope for the assessment of IFRS 18; and
   2. The main requirements in IFRS 18 and what has changed, including an overview of the elements imported from IAS 1.
3. Sections 3–5 discuss whether IFRS 18 meets the requirements for adoption described in Section 1. More specifically:
   1. Section 3: addresses whether IFRS 18 meets the technical accounting criteria and explains the approach to the assessment of these criteria. Appendix B includes an individual assessment of the specific technical issues raised by UK stakeholders;
   2. Section 4: analyses whether IFRS 18 is likely to be conducive to the long term public good in the UK. Appendices C, D and E provide extra evidence in support of this assessment; and
   3. Section 5: considers whether IFRS 18 is not contrary to the true and fair view principle for individual and consolidated accounts.
4. Section 6 considers whether IFRS 18 is likely to lead to a significant change in accounting practice.

I. Section 1: UK statutory requirements for adoption and the approach to the endorsement criteria assessment

Introduction

1.1This section describes UK statutory requirements for adoption of new or amended international accounting standards and the approach to the endorsement criteria assessment.

UK statutory requirements

1.2Paragraph 1 of Regulation 7 of SI 2019/685⁷ requires that an international accounting standard only be adopted if:

1. the standard⁸ is not contrary to either of the following principles—
   1. an undertaking’s accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss;
   2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking;
2. the use of the standard is likely to be conducive to the long term public good in the United Kingdom; and
3. the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.

Approach to the endorsement criteria

1.3This [Draft] ECAECA assesses the criteria above in the following order:

1. Whether the Standard meets the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management (Regulation 7(1)(c)). We refer to these criteria collectively as the ‘technical accounting criteria’ (refer to Section 3).
2. Whether use of the Standard is likely to be conducive to the long term public good in the UK (Regulation 7(1)(b)). Regulation 7(2) of SI 2019/685 includes specific areas to consider for this assessment (refer to Section 4). They are:
   1. whether the Standard is likely to improve the quality of financial reporting;
   2. the costs and benefits that are likely to result from the use of the Standard; and
   3. whether the use of the Standard is likely to have an adverse effect on the economy of the UK, including on economic growth.
3. Whether the Standard is not contrary to the principle that an entity’s accounts must give a true and fair view (Regulation 7(1)(a)) (refer to Section 5).

Technical accounting criteria: Relevance, Reliability, Understandability and Comparability9

1.4A description of the technical accounting criteria¹⁰ is provided below:

1.5In conducting the overall assessment against the technical accounting criteria, the UKEB adopts an absolute, rather than a relative, approach. This means that this is an absolute assessment against the criteria (does IFRS 18 provide information that is understandable, relevant, reliable and comparable?) rather than a relative one (does IFRS 18 provide information that is more understandable, relevant, reliable and comparable than current, or any other, accounting?).

1.6When the assessment of any individual aspect or requirement of IFRS 18 uses comparative language (e.g. ‘more comparable’), the objective is not to reflect a real comparison in relative terms, but to explain that that individual aspect or requirement has the potential to “enhance” one or more of the qualitative characteristics.

1.7A comparative consideration of whether IFRS 18 is likely to improve the quality of financial reporting is separate from this assessment and is included within the UK long term public good assessment in Section 4.

1.8As explained in Section 3 the assessment of the technical accounting criteria considers all principal aspects of IFRS 18. However, in the interest of efficiency and effectiveness the UKEB has reported a detailed analysis against the technical accounting criteria only in relation to significant issues (an 'exceptions-based approach').

Whether IFRS 18 is likely to be conducive to the long term public good in the UK11

1.9Regulation 7(2) of SI 2019/685 sets out certain matters that are required to be considered in the assessment of whether a standard is likely to be conducive to the long term public good in the UK. These are:

"[...]

1. whether the use of the standard is likely to improve the quality of financial reporting;
2. the costs and benefits that are likely to result from the use of the standard; and
3. whether the use of the standard is likely to have an adverse effect on the economy of the United Kingdom, including on economic growth.”

1.10When assessing whether the use of IFRS 18 is likely to improve the quality of financial reporting, the UKEB performs a relative assessment of whether the information required by IFRS 18 is likely more understandable, relevant, reliable and comparable than that specified by IAS 1 Presentation of Financial Statements.

1.11When assessing the costs and benefits that are likely to result from the use of IFRS 18 the UKEB considers both the initial direct costs/benefits associated with the implementation of IFRS 18 as well as the expected ongoing costs and benefits over future years. This allows an assessment of the economic effects over the longer-term, consistent with the assessment of the long-term public good in the UK.

1.12When assessing whether the use of IFRS 18 is likely to have an adverse effect on the economy of the United Kingdom, including on economic growth, the UKEB assesses the potential impact of the standard beyond direct costs and benefits, including capital market effects (e.g. cost of capital), microeconomic factors such as products, pricing and competition, and the national economy.

True and fair view assessment12

1.13The first adoption criterion set out in Regulation 7(1) of SI 2019/685 requires that an international accounting standard can be adopted only if:

"[....] the standard is not contrary to either of the following principles—

1. an undertaking’s accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss;
2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; [....]"

1.14For the sake of brevity, the UKEB refers to the assessment against this endorsement criterion as ‘the true and fair view assessment’ and to the principles set out in Regulation 7(1)(a) as the ‘true and fair principle’. However, these abbreviated expressions do not imply that the assessment has considered anything other than the full terms of the endorsement criterion set out above.

1.15The duty of the UKEB under Regulation 7(1)(a) is to determine generically whether that standard is ‘not contrary’ to the true and fair principle before a standard is applied to a set of accounts. In other words, it is an ex-ante assessment. The UKEB has therefore considered whether IFRS 18 contains any requirement that would prevent accounts prepared using IFRS 18 from giving a true and fair view.

1.16The approach is to determine whether IFRS 18 is not contrary to the true and fair principle in respect of any of the specific items identified in Regulation 7(1)(a) (namely, the assets, liabilities, financial position and profit or loss) in the context of the preparation of the accounts as a whole. A holistic approach has been taken to this assessment, considering the impact of IFRS 18 taken as a whole, including its interaction with other UK-adopted international accounting standards.

1.17For the purposes of the assessment, the UKEB considers the requirement in paragraph 15 of IAS 1 for financial statements to ‘present fairly the financial position, financial performance and cash flows of an entity’¹³ to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view.

1.18This assessment is separate from the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking’s or group’s assets, liabilities, financial position and profit or loss.

[Draft Adoption decision]

1.19Sections 3, 4 and 5 discuss whether IFRS 18 meets the requirements for adoption described in Section 1.

1.20On the basis of these assessments, and subject to any stakeholder feedback, the UKEB [tentatively] concludes that IFRS 18 meets the statutory endorsement criteria. The UKEB is therefore of the view that it will adopt IFRS 18 for use in the UK.]

Does IFRS 18 lead to a significant change in accounting practice?

1.21A standard adopted by the UKEB under Regulation 6 of SI 2019/685 that it considers is likely to lead to a 'significant change in accounting practice', is subject to the requirements in paragraph 3 of Regulation 11 of SI 2019/685 that the UKEB:

"[...]

1. carry out a review of the impact of the adoption of the standard; and
2. publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used)."

1.22Section 6 of the [Draft] ECAECA discusses whether IFRS 18 leads to a significant change in accounting practice.

---

“[...] a) carry out a review of the impact of the adoption of the standard; and b) publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used).”

1.22Section 6 of the [Draft] ECAECA discusses whether IFRS 18 leads to a significant change in accounting practice.

2. Section 2: Main requirements in IFRS 18

Introduction

2.1This section describes:

a) Tthe entities in scope for the assessment of IFRS 18. b) Tthe main requirements in IFRS 18 and what has changed, including an overview of the elements imported from IAS 1 *Presentation of Financial Statements

• without change.

Background

2.2IFRS 18 is a new IFRS Accounting Standard aimed at improving how entities communicate their financial performance in their financial statements and replaces IAS 1. The IASB developed IFRS 18 in response to strong demand from stakeholders, particularly from users of financial statements, for improvements to the reporting of financial performance.

2.3The IASB did not reconsider all aspects of IAS 1 when developing IFRS 18 but focused on the statement of profit or loss.

2.4IFRS 18 does not change how entities recognise and measure items in the financial statements.

2.5The objective of IFRS 18 is as follows:

"1 This Standard sets out requirements for the presentation and disclosure of information in general purpose financial statements (financial statements) to help ensure they provide relevant information that faithfully represents an entity's assets, liabilities, equity, income and expenses”.

2.6Paragraphs 10–12 of IFRS 18 define a complete set of financial statements as follows:

2.7

"10 A complete set of financial statements comprises: a) a statement (or statements) of financial performance for the reporting period [...]; b) a statement of financial position as at the end of the reporting period; c) a statement of changes in equity for the reporting period; d) a statement of cash flows for the reporting period; e) notes for the reporting period; f) comparative information in respect of the preceding period [...]; g) a statement of financial position as at the beginning of the preceding period [...]."

"11 The statements listed in paragraphs 10(a)-10(d) (and their comparative information) are referred to as the primary financial statements. [...].”

"12 An entity shall present its statement(s) of financial performance as either: a) a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections [...] b) a statement of profit or loss and a separate statement presenting comprehensive income that shall begin with profit or loss [....].”

Entities in scope for the assessment of IFRS 18

2.8All entities that prepare financial statements using UK-adopted international accounting standards are required to apply IFRS 18 retrospectively from 1 January 2027 with earlier application permitted (subject to the UKEB adoption in the UK).

2.9This analysis considers all entities listed on the London Stock Exchange (LSE)¹⁴ using IFRS Accounting Standards for 2023 year-ends. The entities considered have the following characteristics (see information below):

Source: Thomson Reuters-Eikon. It is important to note that approximately 14,000 unlisted entities take the option in UK law to use UK-adopted International Accounting Standards (source: UKEB estimates based on FAME, Companies Watch and other proprietary data).

2.10It is acknowledged that unlisted entities that use UK-adopted international accounting standards are in scope of IFRS 18. However, this [Draft] ECAECA does not explicitly consider them in the assessment for the following reasons:

a) Unlisted entities apply IFRS voluntarily.; b) The number of unlisted entities is an unconsolidated figure, and the exact number of unlisted groups applying UK-adopted international accounting standards is unknown.; c) Following from the above, the number of unlisted entities would include subsidiaries of listed companies, which would be considered in the analysis of costs and benefits as evidence is collected at a group level.; d) The UKEB possesses only the total number of unlisted entities applying IFRS. Granular information is not available from data vendors. This makes the estimation of costs for unlisted entities unfeasible.; e) Unlisted entities will generally they will be subject to the same considerations as listed entities.¹⁵

Entities with specified main business activities

2.11IFRS 18 includes specific requirements for entities that have specified main business activities. These are entities that¹⁶:

a) Invest in assets as a main business activity (e.g. investment entities as defined by IFRS 10 Consolidated Financial Statements, investment property entities and insurers). b) Provide financing to customers as a main business activity (e.g. banks and other lending institutions, entities that provide financing to customers to enable those customers to buy an entity's products or lessors that provide financing to customers in finance leases).

2.12Entities in the Banking, Insurance, Financial Services and Real Estate sectors are expected to have specified main business activities. In the UK, roughly 30% of UK-listed entities belong to one of these sectors. Table 2 provides further detail.

Source: UKEB calculations based on Reuters-Eikon data February 2025

2.13The market capitalisation of entities in these sectors was approximately £704 billion, 26% of the total market capitalisation of the LSE.

2.14This analysis does not include entities in other industries that may also undertake specified main business activities, such as entities that provide financing to enable those customers to buy the entity's products or lessors that provide financing to customers in finance leases (paragraphs B32(b)−(c) of IFRS 18)¹⁷.

2.15Consequently, the prevalence of entities with specified main business activities is expected to be higher.

2.16IFRS 18 also contains specific requirements for entities that have:

a) Investments in associates and joint ventures accounted for using the equity method ('equity-accounted investments'). b) Non-controlling interests.

2.17The UKEB Secretariat analysed Reuters-Eikon data to ascertain the prevalence of these among UK-listed entities. The prevalence of equity-accounted investments is discussed in paragraphs B13-B14. The prevalence of non-controlling interests is discussed in paragraph B40.

Main requirements in IFRS 18

2.18IFRS 18 includes 282 paragraphs¹⁸. As indicated in Table 3 below, some paragraphs were imported from IAS 1 or based on IAS 1.

Overview of the elements imported from IAS 1

2.19IAS 1 includes 158 paragraphs that were either brought forward unchanged or with minor revisions into IFRS 18, IFRS 7 Financial Instruments: Disclosures or IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors¹⁹; or, substantially changed and replaced by new requirements in IFRS 18. This is shown in Table 4 below.

2.20Table 5 below provides an overview of the main topics in IAS 1 that were brought forward into IFRS 18, IFRS 7 or IAS 8.

Overview of the main requirements in IFRS 18 (and what has changed)

2.21IFRS 18 introduces new presentation and disclosure requirements and more detailed guidance in the form of application guidance which IAS 1 did not have. The following section discusses the main requirements in IFRS 18 and what has changed (for example, in respect of the requirements in IAS 1).

a) Specified categories and required subtotals in the statement of profit or loss. b) Mandatory disclosures about management-defined performance measures (or 'MPMs') in a single note. c) Enhanced requirements on the aggregation, disaggregation, location and labelling of items across the primary financial statements and the notes.

2.22IFRS 18 also:

a) Makes limited amendments to IAS 7 Statement of Cash Flows²⁰ and to the statement of financial position. b) Includes transition requirements.

Specified categories and required subtotals in the statement of profit or loss

Specified categories

2.23IFRS 18 requires entities to classify income and expenses into five categories, three of which are new (i.e. operating, investing and financing). This is a departure from IAS 1, which does not have a requirement to classify income and expenses into “classes” or “categories”. These categories are discussed below:

a) the operating category (paragraph 52 of IFRS 18) includes income and expenses (i) not classified in the investing, financing, income taxes or discontinued operations categories including income and expenses that are volatile, unusual or non-recurring (i.e. it’s the default category); and (ii) arising from a company's main business activities if they do not meet the requirements to be classified in any of the other categories; b) the investing category (paragraphs 53-58 of IFRS 18) includes income and expenses from: (i) investments in associates, joint ventures and unconsolidated subsidiaries. This classification is irrespective of whether an entity invests in assets as a main business activity; (ii) cash and cash equivalents; and (iii) other assets that generate a return individually and largely independently of the company’s other resources; c) the financing category (paragraphs 59-66 of IFRS 18) includes income and expenses from: i. liabilities arising from transactions that involve only the raising of finance (e.g. interest expenses on debt instruments issued); and ii. liabilities (other than those described in (c)(i) above) arising from transactions that do not involve only the raising of finance. d) income taxes (paragraph 67 of IFRS 18), include tax expense or tax income included in the statement of profit or loss applying IAS 12 Income Taxes, and any related foreign exchange differences; and e) discontinued operations (paragraph 68 of IFRS 18) include income and expenses from discontinued operations required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

2.24IFRS 18 also includes requirements for the classification of certain items of income and expense. In this respect:

a) Foreign exchange differences are classified in the same category as the income and expenses from the items that gave rise to those differences. If an entity cannot allocate these differences to the applicable categories without undue cost or effort the entity can classify the affected differences in the operating category (paragraphs B65–B68 of IFRS 18). b) Gains and losses on derivatives are classified depending on whether the derivatives are used to manage exposure to identified risks and whether they are designated as hedging instruments. IFRS 18 provides undue cost or effort relief for the classification of gains or losses on derivatives used to manage identified risks but not designated as hedging instruments (paragraphs B70–B76 of IFRS 18). c) Income and expenses from hybrid contracts comprising host liabilities and embedded derivatives are classified depending on whether the embedded derivative is separated from the host liability and the nature of the hybrid contract (paragraphs B56–B57 of IFRS 18). d) Income and expenses arising from the derecognition of an asset or a liability are classified in the same category as the entity classified the income and expenses from the asset (or liability) immediately before its derecognition. For example, gains and losses on the disposal of property, plant and equipment will be classified in the operating category (paragraphs B60–B61 of IFRS 18).

Requirements for entities with specified main business activities

2.25An entity is required in accordance with paragraph 49 of IFRS 18 to assess whether it has either (or both²¹) of the following specified main business activities:

a) investing in particular type of assets; and/or b) providing financing to customers.

2.26As an exception to the general classification requirements, paragraphs 55–58 and 65–66 of IFRS 18 require entities with a specified main business activity to classify in the operating category some of their income and expenses that would otherwise have been included in investing or financing categories. This would allow entities with specified main business activities to present key measures of performance in the operating category.

Required subtotals, items to be presented in the primary financial statements and presentation of additional line items and subtotals

2.27IFRS 18 brings forward from IAS 1 the requirement to present totals for profit or loss and for other comprehensive income. IFRS 18 requires the presentation of two new subtotals—‘operating profit or loss' and 'profit or loss before financing and income taxes' (paragraph 69 of IFRS 18)²².

2.28IFRS 18 brings forward from IAS 1 the requirement to present separately in the primary financial statements specific line items (e.g. paragraphs 75 and 103 of IFRS 18), but only if the line item is necessary to provide a useful structured summary. Otherwise, the line item is disclosed in the notes if it provides material information (paragraphs 23–24, 42 and B8 of IFRS 18).

2.29An entity can present additional line items and subtotals subject to the requirements in paragraph 24 of IFRS 18: for example, if such presentation provides a useful structured summary; or, if the additional line items or subtotals fit the specified structure of the primary financial statements.

Disclosures about management-defined performance measures (MPMs)

2.30UK entities that currently report Alternative Performance Measure or 'APMs' generally use the guidelines issued by the European Securities and Markets Authority's Guidelines on Alternative Performance Measures (ESMA APM guidelines)²³, ²⁴. These guidelines are considered best practice²⁵ but do not constitute mandatory requirements.²⁶ The location of these measures varies in the UK but generally entities place their APMs in the annual report outside the financial statements²⁷.

2.31IFRS 18 requires the integration of a subset of APMs (i.e. those that meet the definition of an MPM) as part of an entity's financial statements. An MPM is defined in paragraph 117 of IFRS 18 as a subtotal of income and expense used in public communications outside financial statements that communicates management's view of an aspect of the financial performance of the entity as a whole to users and that is not listed in paragraph 118 of IFRS 18 or specifically required by IFRS Accounting Standards. There is a presumption in paragraph 119 of IFRS 18 that a subtotal of income and expenses, that an entity uses in public communications outside its financial statements, communicates to users of financial statements the management's view of an aspect of the financial performance of the entity as a whole. This presumption can be rebutted with reasonable and supportable information (paragraph 120 of IFRS 18).

2.32Paragraphs 122–123 of IFRS 18 require an entity to disclose information about all its MPMs in a single note to the financial statements, including:

a) a description of the aspect of financial performance that it communicates, including why management believes the MPM provides useful information about the entity's financial performance; b) a description of how the MPM is calculated; c) a reconciliation between the MPM and the most directly comparable subtotal listed in paragraph 118 of IFRS 18 or total or subtotal specifically required to be presented or disclosed by IFRS Accounting Standards. This includes the disclosure of the income tax effect and the effect on non-controlling interests (NCIs) for each item disclosed in the reconciliation; and d) a description of how the company determined the income tax effect.

2.33Furthermore, if an entity changes the calculation of an MPM, introduces a new MPM or ceases to use a previously disclosed MPM, it is required to disclose in accordance with paragraph 124 of IFRS 18 an explanation of the change, the reasons for the change and provide restated comparative information (unless it is impracticable).

Requirements on aggregation and disaggregation

2.34IAS 1 required the presentation or disclosure of material information²⁸. IFRS 18 builds on these requirements by introducing new and defined roles for the primary financial statements and for the notes which an entity considers in providing material information:

a) The role of the primary financial statements is to provide useful structured summaries of an entity's recognised assets, liabilities, equity, income, expenses and cash flows (paragraph 16 of IFRS 18); and b) The role of the notes is to provide material information necessary to enable investors to understand the items in the primary financial statements; and to supplement the primary financial statements with additional information to achieve the objective of the financial statements (paragraph 17 of IFRS 18).

2.35IFRS 18 also:

a) Introduces principles for aggregating and disaggregating information with reference to similar and dissimilar characteristics and provides application guidance to assist entities in making these judgements (paragraph 41 of IFRS 18). b) Requires entities to determine how to label and describe the items presented and disclosed. For example, to consider whether a more informative label exists before labelling items as 'other' (paragraph 43 of IFRS 18). c) Provides enhanced guidance to assess how to present operating expenses in the statement of profit or loss based on either the nature of expenses or the function of the expenses within the entity. An entity can also provide a 'mixed presentation' (i.e. by classifying some expenses by function and others by nature), if this provides the most useful structured summary (paragraph 78 of IFRS 18). d) Requires an entity presenting expenses classified by function in the operating category of the statement of profit or loss to disclose in a single note additional information by nature (paragraph 83 of IFRS 18). This requirement is limited to five specified expenses by nature: depreciation, amortisation, employee benefits, impairment losses (and reversals of impairment losses) and write-downs of inventories (and reversals of write-downs of inventories). The amounts presented or disclosed need not be the amounts recognised as an expense in the period. They could include amounts that have been recognised as part of the carrying amount of an asset (paragraph B84 of IFRS 18)²⁹.

Limited changes to the statement of cash flows

Starting point for the indirect method

2.36Paragraph 20 of IAS 7 requires the use of the 'profit or loss' total as the starting point for the indirect reconciliation of cash flows from operating activities. The Illustrative examples accompanying IAS 7, however, use 'profit before tax' as the starting point for determining net cash flows from operating activities, which has led to diversity of practice.

2.37IFRS 18 amends paragraph 20 of IAS 7 to require all entities to use the operating profit subtotal as the starting point for the indirect method of reporting cash flows from operating activities.

Classification of interest and dividends paid and/or received

2.38Paragraphs 31–34 of IAS 7 allow entities to choose how to present cash flows arising from interest and dividends, leading to significant diversity in practice in the presentation of these line items.

2.39IFRS 18 amends paragraphs 31–34 of IAS 7 to remove the presentation alternatives for cash flows related to interest and dividends paid and received. For all entities IAS 7 (as amended by IFRS 18) requires the classification of dividends paid as cash flows from financing activities. The approach to the classification of interest paid and interest and dividends received depends on whether an entity has a specified main business activity as follows:

a) For an entity without a specified main business activity, IAS 7 requires the classification of interest paid as cash flows from financing activities (including interest capitalised as part of the costs of an asset applying IAS 23 Borrowing Costs). Interest and dividends received are classified as cash flows from investing activities. b) For an entity with a specified main business activity, IAS 7 requires the classification of dividends received, interest paid and interest received in a single category in the statement of cash flows (operating, investing or financing activities). IAS 7 requires that this classification be consistent with the classification of the income and expenses corresponding to such cash flows. If an entity classifies related income and expenses in more than one category of the statement of profit or loss, an entity should make an accounting policy choice to classify the cash flows in one of the corresponding categories of the statement of cash flows.

Limited changes to the statement of financial position

2.40Paragraph 103(d) of IFRS 18 adds a requirement to present goodwill separately.

Transition requirements

2.41Paragraph C2 of IFRS 18 requires an entity to apply IFRS 18 retrospectively applying IAS 8 and to restate comparative information for the prior year presented.

2.42If an entity applies IAS 34 Interim Financial Reporting in preparing condensed interim financial statements in the first year of applying IFRS 18, it is required to present the headings that it expects to use in applying IFRS 18 and subtotals consistent with the requirements in IFRS 18. In addition, an entity is required to disclose reconciliations for each line item presented in the statement of profit or loss for the comparative periods immediately preceding the current and cumulative current periods.

2.43At the date of initial application of IFRS 18, an entity eligible to apply paragraph 18 of IAS 28 Investments in Associates and Joint Ventures is permitted by paragraph C7 of IFRS 18 to change its election for measuring an investment in an associate or joint venture from the equity method to fair value through profit or loss in accordance with IFRS 9 Financial Instruments³⁰. If an entity makes such a change, the entity shall apply the change retrospectively by applying IAS 8. An entity applying paragraph 11 of IAS 27 Separate Financial Statements is required to make the same change in its separate financial statements.

3. Section 3: Technical accounting criteria assessment

Introduction

3.1This section addresses whether IFRS 18 meets the technical accounting criteria and explains the approach to the assessment of these criteria.

Approach to the assessment against the technical accounting criteria

3.2SI 2019/685 requires an assessment of whether IFRS 18 meets the following criteria in regulation 7(1)(c):

"...(c) the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.”

3.3These criteria are referred collectively as the ‘technical accounting criteria'. An explanation of the basis for and our interpretation of the technical accounting criteria is provided in Section 1. This section sets out the principal aspects of IFRS 18 and assesses those requirements against the technical accounting criteria.

3.4The assessment against the technical accounting criteria considers IFRS 18 as a whole, including the requirements carried over from IAS 1 Presentation of Financial Statements³¹. However, in the interest of efficiency and effectiveness a detailed analysis against these criteria is reported only in relation to specific technical issues where UK stakeholders raised some practical challenges (an 'exceptions-based approach'). These issues are analysed in Appendix B against the technical accounting criteria and are the:

a) Classification of income and expenses from associates and joint ventures accounted for using the equity method in the investing category. b) Accounting policy choice for the classification of income and expenses for entities that provide financing to customers.

3. Section 3: Technical accounting criteria assessment

Introduction

3.1 This section addresses whether IFRS 18 meets the technical accounting criteria and explains the approach to the assessment of these criteria.

Approach to the assessment against the technical accounting criteria

3.2 SI 2019/685 requires an assessment of whether IFRS 18 meets the following criteria in regulation 7(1)(c):

"...(c) the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.”

3.3 These criteria are referred collectively as the ‘technical accounting criteria'. An explanation of the basis for and our interpretation of the technical accounting criteria is provided in Section 1. This section sets out the principal aspects of IFRS 18 and assesses those requirements against the technical accounting criteria.

3.4 The assessment against the technical accounting criteria considers IFRS 18 as a whole, including the requirements carried over from IAS 1 Presentation of Financial Statements.³¹ However, in the interest of efficiency and effectiveness a detailed analysis against these criteria is reported only in relation to specific technical issues where UK stakeholders raised some practical challenges (an 'exceptions-based approach'). These issues are analysed in Appendix B against the technical accounting criteria and are the:

1. Classification of income and expenses from associates and joint ventures accounted for using the equity method in the investing category.
2. Accounting policy choice for the classification of income and expenses for entities that provide financing to customers.
3. Disclosure of the income tax effect and the effect on non-controlling interests (NCI) in the management-defined performance measure reconciliation.

3.5 In conducting this overall assessment against the technical accounting criteria the UKEB is required to adopt an absolute, rather than a relative, approach.

3.6 Outreach [to date] has provided assurance that there are no further issues that UK stakeholders consider need to be addressed in the [Draft] ECAECA.

3.7 The UKEB notes that the IASB issued IFRS 18 after reaching an overall consensus, following extensive consultations with a wide range of constituents, including those from the UK. The main rationale behind the final IASB decisions is described in the Basis for Conclusions of IFRS 18 and has been used as part of the technical criteria assessment. The UKEB recognises that IFRS 18 is intended to define principle-based requirements which could be applied in a consistent manner across entities and industries.

3.8 The UKEB's overall [tentative] conclusion on whether IFRS 18 as a whole meets the technical accounting criteria is set out at the end of this section.

Assessment of main requirements in IFRS 18

3.9 This section includes an assessment of the main requirements of IFRS 18 against the technical accounting criteria. For a detailed description of these requirements refer to Section 2 of this [Draft] ECAECA.

3.10 Input for this assessment was obtained from:

1. A review of the survey results from the UKEB Preparer survey and from the UKEB User survey (including feedback from listed small- and medium-cap entities) and from the UKEB's webinar poll.
2. Engagement with UKEB Advisory Groups and with its Financial Instruments Working Group.
3. Interviews with preparers (including with preparers from listed small- and medium-cap entities) and users.
4. A desktop analysis of the requirements in IFRS 18 and the basis for these requirements.

3.11 Overall, the UKEB received positive feedback from stakeholders that IFRS 18 leads to financial information that is understandable, relevant, reliable and comparable.

Specified categories and required subtotals in the statement of profit or loss

Accounting impact

3.12 The requirements for the classification of income and expenses in separate categories (and specific classification rules depending on the entity's main business activities) and for the presentation of specific subtotals are expected to reduce diversity in practice and enhance users' ability to understand and compare information across different companies.[^32]

3.13 IFRS 18 requires all entities to present an 'operating' category which is a residual category. This will have an impact on how entities report their operating results. For example, entities will not be able to exclude from the operating category income and expenses that are volatile, unusual or non-recurring.[^33] Any change in an entity's definition of operating profit may also require investors to make changes to the calculation of their metrics.

3.14 The impact of the new presentation and classification requirements and subtotals will depend on an entity's current reporting practices. If an entity's practices differ from the new classification requirements for income and expenses, an entity may incur higher costs to implement any necessary changes to their current systems. However, some of these costs may be reduced through the application of classification reliefs for 'undue cost or effort' applicable to specific income and expenses.[^34]

3.15 Practical challenges that may arise as IFRS 18 is implemented are as follows:

1. The classification of income and expenses in the operating category may differ for entities already presenting an operating profit subtotal. For example, evidence from the Preparer survey showed that some entities currently present the share of the profit or loss of associates and joint ventures accounted for using the equity method in the operating category, which is not permitted in IFRS 18.[^35]
2. The new structure of the statement of profit or loss may change the subtotals that are currently used for determining management incentives, income tax or compliance with covenants.
3. For conglomerates with diverse business activities, determining the ‘main business activity' may be challenging.

Assessment against the endorsement criteria

3.16 The new requirements for specified categories and required subtotals will provide investors with relevant and reliable information to make informed decisions as the evidence obtained from the UKEB surveys suggests that the new structure in the statement of profit or loss better aligns with how investors analyse the statement of profit or loss.

3.17 Feedback from the UKEB User survey indicated that the introduction of new specified categories and required subtotals such as 'operating profit' will give investors:

1. a comparable and consistent starting point for their analyses given that currently IAS 1 does not provide a structure to the statement of profit or loss or require the presentation of an ‘operating profit' subtotal;
2. additional useful information about the entity's operating performance and its performance before the effect of financing. This will result in more relevant and reliable information for users' decision making; and
3. a better understanding of the drivers of financial performance. This should improve users' ability to compare performance between entities and between reporting periods for the same entity.

3.18 The use of the operating category as the 'default' category, will also ensure that all income and expenses from an entity's main business activities (including any non-recurring, unusual or volatile items), are presented in the same category, which also facilitates comparability between entities.

3.19 IFRS 18 prescribes the classification of certain items of income and expense and exceptions to the general classification requirements for entities with specified main business activities. For example, IFRS 18 allows an accounting policy choice for the classification of income and expenses for entities that provide financing to customers. Having exceptions to the general classification principles may introduce a risk to the comparability of the information presented. However, these requirements were developed to ensure that investors obtain relevant and useful information about an entity's performance.

Disclosures about management-defined performance measures (MPMs)

Accounting impact

3.20 IFRS 18 requires the integration of APMs that meet the definition of MPMs in a single note as part of an entity's financial statements.[^36] Entities already disclosing information about APMs may need to revisit those APMs that are used in public communications as some may meet the definition of MPMs and will need to be disclosed in the financial statements. Feedback received from the UKEB's outreach activities revealed that listed small- and medium-cap entities tend to present a high number of these measures in their annual reports. Therefore, it is expected that these entities will be revisiting their performance measures to comply with the MPM requirements.

3.21 Feedback from the UKEB Preparer survey and from the UKEB User survey (referred to as “UKEB surveys”) supports the MPM requirements as the required disclosures around MPMs and disclosing these measures in a single note will bring discipline, transparency and confidence to those measures.[^37]

3.22 Feedback from the UKEB Preparer survey showed that UK current practices for communicating performance measures are mostly aligned with the requirements for MPMs. However, the introduction of MPM requirements is expected to result in changes to:

1. How an entity identifies performance measures. Since MPMs are a subset of APMs, entities will need to carefully consider which of their APMs meet the definition of MPMs in IFRS 18 to subject these measures to the requirements for MPMs.[^38] This may require system changes to capture all the performance measures that meet this definition. This may also prompt entities to revisit the purpose and relevance of their own APMs (including MPMs) used in their external communications.
2. The content of what is communicated about each MPM. IFRS 18 requires additional information that some entities may currently not disclose[^39] to enable users understand how a measure is calculated. IFRS 18 permits the use of alternative approaches for calculating the income tax effects for each reconciling item included in the MPM reconciliation to reduce the cost of application.[^40]
3. The location of performance measures (i.e. IFRS 18 requires the disclosure of all MPMs in a single note within the financial statements). This will trigger a change in the location of APMs that meet the definition of MPMs and that are currently provided outside the financial statements. MPMs will also be subject to audit.

Assessment against the endorsement criteria

3.23 It is anticipated, based on the results from the UKEB surveys, that the requirements for MPMs will add more discipline, transparency and credibility for these measures, therefore increasing the relevance and reliability of these measures for users.

3.24 Presenting these measures in a single note to the financial statements will help users locate and access information on MPMs more easily. The disclosure requirements to describe each MPM in a clear and understandable manner will improve users' understanding of how entities view their performance.[^41] This will also enhance the reliability of individual measures because with all this information users are expected to be able to make a complete assessment of these measures. The reliability of these measures is also assured via audit.

3.25 MPMs are, by definition, entity-specific measures and are not necessarily comparable across entities. However, the requirement in IFRS 18 to provide comparative information for all MPM disclosures will make it easier for users to track an entity's performance over time.

3.26 The different approaches available to determine the income tax effects of the reconciling items[^42] may introduce a risk to the comparability and reliability of the information presented. However, this could be mitigated by the relevance of the information presented, given that the information required to be disclosed about MPMs is useful for users' analyses (e.g. information on income tax and NCI effects, see paragraph B42).

Aggregation and disaggregation

Accounting impact

3.27 The results from the UKEB surveys reflected that many respondents supported the requirements for aggregating and disaggregating items in the financial statements (including the requirements applicable to the presentation and disclosure of an analysis of operating expenses) as they will bring increased clarity and transparency of the information presented or disclosed. It will also prompt entities to provide more detailed and granular information in their financial statements (for example, about their operating expenses) than they may currently provide.

3.28 The disclosure of information about non-recurring or unusual items is also expected to be improved given the requirements in IFRS 18 for disaggregating items with dissimilar characteristics and the requirement to provide more informative labels.

3.29 The application of the principles of aggregation and disaggregation may involve the exercise of judgement as they may be interpreted differently, leading to inconsistent application and lack of comparability. For example, presenting fewer or more line items in the primary financial statements will depend on an entity considering whether this information provides a useful structured summary.

Assessment against the endorsement criteria

3.30 The relevance of financial information is enhanced with consistent principles for aggregation and disaggregation as it will help entities group or disaggregate material information that users can use in their analysis to make predictions or confirm or change evaluations of the past. The guidance on labelling of items should lead to informative and relevant description of items, enabling users to understand the nature of the items included in the financial statements.

3.31 The application guidance in IFRS 18 will also assist entities in making judgements for grouping or disaggregating items based on similar or dissimilar characteristics and for labelling and describing the items presented and disclosed. This will improve the understandability and relevance of this information as well as its reliability (as it will enhance the faithful representation of the characteristics of each item presented or disclosed).

3.32 The degree of judgement involved in the application of the principles for aggregation and disaggregation, may create a risk to the comparability and reliability of financial statements. However, this is consistent with other requirements in IFRS 18 that require judgement and with other IFRS Accounting Standards that also require the exercise of judgement.

3.33 When entities choose to disclose the amounts that have been recognised as part of the carrying amount of an asset in the disclosure of the five specified operating expenses by nature[^43] this information may be challenging to understand for users (given that an entity will choose to disclose the cost amounts rather than the amounts recognised as an expense in the period). However additional disclosures could mitigate these challenges.[^44]

Limited changes to the statement of cash flows

Accounting impact

3.34 IFRS 18 amends IAS 7 to require operating profit as the starting point for the reconciliation of cash flows under the indirect method. This will remove some of the reconciling items that entities currently present. IFRS 18 also removes the presentation alternatives for cash flows related to interest and dividends paid and received.

Assessment against the endorsement criteria

3.35 The UKEB expects that requiring entities to use the operating profit subtotal as a consistent starting point will make the statement of cash flows more consistent and help investors analyse and compare entities' cash flows. This change will also simplify the presentation of cash flows from operating activities making this information more relevant and understandable.

3.36 The UKEB expects that removing the classification alternatives for cash flows related to interest and dividends paid and received will make the statement of cash flows more consistent and comparable. This would also bring relevant information for users about the role of interest and dividends in an entity's business activities.

Overall [tentative] conclusion on whether IFRS 18 meets the technical accounting criteria

3.37 In drawing the conclusion as to whether IFRS 18 meets the technical accounting criteria the UKEB has considered:

1. the main requirements in IFRS 18 (see paragraphs 3.12–3.36 above); and
2. specific issues stakeholders have raised, which are set out in Appendix B.

3.38 The UKEB [tentative] conclusion is that IFRS 18 sets out clear principles that can be applied to the financial statements and that will result in understandable, relevant, reliable and comparable information for users of the financial statements.

3.39 In some cases (including for those issues raised by stakeholders which are addressed in Appendix B), it will be particularly important for management to provide appropriate disclosures as required both by IFRS 18 and more generally by IFRS Accounting Standards to achieve the objectives of understandability, relevance, reliability and comparability. We have taken account of such disclosure requirements in our assessment and in coming to our conclusion.

3.40 Overall, therefore, the UKEB [tentatively] concludes that IFRS 18 meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.

4. Section 4: UK long term public good assessment

Introduction

4.1 This section analyses whether IFRS 18 is likely to be conducive to the long term public good in the UK. The assessment is based on the following:

1. An analysis of whether the use of IFRS 18 likely to improve the quality of financial reporting.
2. An economic impact assessment, focusing on:
   1. The costs and benefits of applying IFRS 18.
   2. The wider economic effects associated with the application of IFRS 18.
   3. The consequences of not adopting IFRS 18 (counterfactual analysis).

4.2 Each of the sections above contributes to the Board's overall assessment of whether IFRS 18 is conducive to the long-term public good in the UK.

4.3 Appendices C, D and E contain information that supplements the analysis in this section.

Is use of IFRS 18 likely to improve the quality of financial reporting?

Approach for this assessment

4.4 Regulation 7(2)(a) of SI 2019/685 requires the UK long term public good assessment to consider whether the use of the standard is likely to improve the quality of financial reporting. As explained in paragraph 1.10 of this [Draft] ECAECA, in conducting this assessment the UKEB adopts a relative approach. This assessment also considers whether IFRS 18 is likely to meet the IASB's objective of improving how companies communicate in their financial statements in response to investor demands for better information about financial performance.[^45]

Improvements introduced by IFRS 18

4.5 The IASB developed IFRS 18 in response to strong demand from stakeholders, particularly from users of financial statements, for improvements to the reporting of financial performance as IFRS Accounting Standards do not have detailed requirements on:

1. the classification of income and expenses in the statement of profit or loss;
2. the subtotals to present above 'profit or loss' in the statement of profit or loss; and
3. grouping or disaggregation of information in the primary financial statements and in the notes to the financial statements.

4.6 The absence of such requirements has led to diversity in practice, making it difficult for users to analyse and compare companies' performance.

4.7 In addition, there are no mandatory requirements around the use of Alternative Performance Measures or 'APMs'.[^46]

4.8 The following paragraphs highlight the principal areas where IFRS 18 is likely to lead to improvements in the quality of financial reporting for entities in the UK. Relevant feedback from the UKEB surveys[^47] has also been reproduced.

Categories and subtotals

New specified subtotals and new structure for the statement of profit or loss

4.9 The introduction of new specified subtotals and required categories in the statement of profit or loss is expected to provide users with:

1. Additional useful information about the entity's operating performance and its performance before financing. This will result in more relevant and reliable information for users' decision making.
2. Improved comparability through new required categories (operating, investing and financing) and through a definition of operating profit and a consistent starting point for their analyses. This will also enable users to understand financial information more easily as currently IAS 1 does not provide a structure to the statement of profit or loss.

4.10 The use of the operating category as the 'default' category, will also ensure that all income and expenses from an entity's main business activities are presented in the same category, which will facilitate comparability between entities.

4.11 These views are shared by respondents to the UKEB surveys:

UKEB User survey

Respondents agreed that the new structure and defined subtotals in the income statement will be useful as this will:

• improve users' ability to compare performance:
  • between entities (91% of respondents); and
  • between reporting periods for the same entity (86% of respondents);
• improve the understanding of the drivers of financial performance (77% of respondents).

UKEB Preparer survey

Respondents who agreed with the requirements on defined categories and subtotals [...] observed a number of benefits derived from these requirements. They think that these requirements will:

• help provide more comparable information [...] that would help users with their analysis;
• enhance the understandability of an entity's business activities.

Management-defined performance measures

Enhanced relevance, understandability and reliability of MPM information

4.12 The integration of a subset of APMs (i.e. those that meet the definition of an MPM in IFRS 18) as part of an entity's financial information will enhance the reliability and transparency for users of these measures and will add discipline in the disclosure of these measures.

4.13 The requirements on MPMs (e.g. the disclosure of tax and NCI effects in the MPM reconciliation) will also provide more relevant and understandable information for users on the entity-specific performance measures that qualify as MPMs and enable users to make any adjustments they consider necessary in their analyses.

4.14 These views are shared by respondents to the UKEB surveys as shown below:

UKEB User survey

86% of respondents observed that auditing MPMs will enhance users' confidence in, and the credibility of, these measures.

77% of respondents were of the view that the requirements on MPMs will help users understand how entities view their performance.

UKEB Preparer survey

56% of respondents considered that the requirements on MPMs will represent an improvement over current practices for communicating financial performance. Some of the reasons provided were that:

• Including these measures in a single location in a note to the financial statements will bring discipline, transparency and confidence on those measures as they will be subject to external audit.
• The MPM requirements will improve understandability and comparability of these measures for users.

Aggregation and disaggregation

Enhanced comparability, understandability and relevance of the information presented or disclosed

4.15 IFRS 18 enhances the requirements in IAS 1 for grouping and disaggregating of financial information. It also introduces new and defined roles for the primary financial statements and the notes to guide the presentation and disclosure of information. These will result in greater disaggregation in the primary financial statements and notes that would allow users to better understand and forecast performance metrics.

4.16 IFRS 18 also enhances the guidance around the presentation and disclosure of an analysis of operating expenses, including new requirements for disclosure of operating expenses by nature.[^48] This will result in more comparable, understandable and relevant information for users.

4.17 The guidance on labelling of items should also lead to more informative and relevant description of items, enabling users to better understand the nature of the items included in the financial statements.

4.18 These views are shared by respondents to the UKEB surveys as shown below:

UKEB User survey

77% of respondents agreed that the guidance on the use of the label 'other' and requiring the disaggregation of large ‘other' items will enhance comparability.

UKEB Preparer survey

61% of respondents supported the requirements on aggregation and disaggregation because they:

• Improve the comparability and consistency of the information presented and/or disclosed across different entities and industries.
• Enhance the understandability, relevance and reliability of the primary financial statements.

Limited changes to IAS 7

Enhanced comparability, understandability and relevance of cash flows information

4.19 Requiring the operating profit subtotal as a consistent starting point for the reconciliation of cash flows under the indirect method will simplify the reconciliation of cash flows from operating activities making this information more relevant and understandable. It will also make the statement of cash flows more consistent and help investors analyse and compare entities' cash flows.

4.20 Removing alternatives for the classification of cash flows related to interest and dividends paid or received, will make the statement of cash flows more consistent and comparable. This will also provide more relevant information for users.

Potential improvement from interaction across the main changes

4.21 The enhanced principles of aggregation and disaggregation, including the concept of a 'useful structured summary', and the requirements of categories and subtotals should result in a more understandable structure of the statement of profit or loss. Most respondents in a global survey[^49] conducted by CFA Institute expected that improvements in the structure of the statement of profit or loss and enhanced disaggregation of statement of profit or loss can also reduce the need for APMs.

Summary of whether IFRS 18 likely to improve the quality of financial reporting

4.22 Stakeholders, and users in particular, suggested that implementing IFRS 18 will lead to:

1. improvements to the presentation and disclosure of information in the primary financial statements and the notes; and
2. financial information that is more useful and relevant to users.

Therefore, the UKEB [tentatively] concludes that IFRS 18 is likely to improve the quality of financial reporting in the UK.

Economic impact assessment

4.23 The economic impact assessment considers the following:

1. Government guidance.
2. An analysis of costs and benefits that are likely to result from the use of IFRS 18.
3. Whether the use of IFRS 18 is likely to have an adverse effect on the economy of the UK, including on economic growth (wider economic effects).
4. The consequences of not adopting IFRS 18 (counterfactual analysis).

Government guidance

4.24 The UK government's Better Regulation Framework (BRF) provides a set of guidelines on how to conduct economic impact assessments for UK government departments.[^50]

4.25 The UKEB currently is not required to apply the BRF. However, the UKEB considered and agreed that it should broadly follow the BRF guidance. Accordingly, the cost and benefits analysis (CBA) for the adoption of IFRS 18 was developed to be broadly consistent with the BRF.[^51]

4.26 In the analysis that follows, the UKEB followed the principle of proportionality of assessment. This means “ensuring the appropriate level of resources is invested in gathering and analysing evidence on the impacts of a policy". In the case of the UKEB the adoption of a new accounting standard is considered “a policy”.[^52]

Analysis of costs and benefits likely to result from the use of IFRS 18

Objective

4.27 The assessment of the long-term public good requires an analysis of costs and benefits associated with the use of IFRS 18.

4.28 The CBA looks at the economic impact in terms of direct compliance costs (one-off and ongoing). It also considers direct benefits for stakeholders affected: preparers, users and other stakeholder categories (i.e. auditors, regulators). As is common with financial reporting regulation, preparers are expected to incur most compliance costs, largely for the direct benefit of users of financial statements. Indirect effects are considered in the wider economic effects section.

4.29 The analysis of costs and benefits associated with the implementation of IFRS 18 focuses on incremental costs and benefits, (i.e. costs and benefits incurred as a direct result of meeting the requirements of the Standard).

4.30 Qualitative and quantitative evidence on costs comprises both expected monetary costs (e.g. external audit) and staff reallocation costs (e.g. because of familiarisation, changes to internal processes).

Collection of evidence

4.31 Evidence was collected using different research tools.

1. Surveys: During Q3 2024, the UKEB conducted two surveys, one for preparers and one for users, to collect evidence to assess whether IFRS 18 meets the technical and the long term public good assessment criteria for endorsement.[^53]
2. Engagement with UKEB Advisory Groups and with its Financial Instruments Working Group (FIWG).
3. Webinar poll: In July 2024, the UKEB held a joint webinar with the IASB to discuss the key requirements of IFRS 18 and its implications. During the webinar, participants were asked to respond to a poll on the costs and benefits of adoption, the results of which are summarised in Appendix C.
4. Questionnaire to auditors: During Q3 2024, the UKEB sent a short questionnaire to members of the Accounting Firms and Institutes Advisory Group (AFIAG) to gather views on the likely costs and benefits of adoption.
5. Interviews: During Q4 2024, the UKEB conducted a total of 15 interviews with preparers as part of the outreach for the assessment of long term public good (including with three preparers from listed small- and medium-cap entities) and one with a user. The interviews were aimed at gathering additional quantitative information on implementation costs, as well as detailed contextual information.
6. Other engagement: The UKEB engaged bilaterally with UK regulators, professional accounting bodies, industry associations, users and other national and regional standard setters to understand their views on the costs and benefits associated with the adoption of IFRS 18.

Users

Benefits for users

4.32 Respondents to the UKEB User survey were asked to provide information about benefits, such as incremental cost reductions, as well as incremental one-off and ongoing costs, associated with the implementation of IFRS 18.

4.33 On direct benefits, users reported that the more consistent structure for the statement of profit or loss should result in more efficient use of time spent analysing financial statements and an increase in the quality of analysis/reports. Nearly half of the respondents also believed that the IFRS 18 will lead to enhanced company assessments. Chart 1 provides a visual representation of the results:

Note: The chart reports the share of responses over the total number of responses (22).

4.34 The UKEB Preparer survey provided additional evidence on the potential benefits for users of IFRS 18. Specifically, the survey asked preparers to indicate whether they expected IFRS 18 to affect:

1. The comparability of the entity's reporting of financial performance: 60% of respondents indicated that they anticipate a mild to strong positive effect.

The transparency of the entity's financial performance: 51% of respondents indicated that they anticipate a mild to strong positive effect.

The reporting of an entity's financial performance in line with underlying economics: 31% of respondents indicated that they anticipate a mild to strong positive effect, however 44% indicated that they do not anticipate any effect.

Preparers anticipate that users will reap ongoing benefits.

4.35 These results are consistent with IFRS 18 enhancing the quality of financial reporting (paragraphs 4.4-4.22).

Costs for users

4.36 On implementation costs, users reported that they:

1. Expected one-off costs to be nil in the majority of cases, and lower than 1% of their operating costs in the remaining cases. Feedback from comment boxes suggested that costs are in general anticipated to be negligible (i.e. not close to 1% of operating costs).
2. Did not expect to incur any ongoing costs.
3. Did not generally expect ongoing cost reductions.

Preparers

Benefits for preparers

4.37 The UKEB Preparer Survey and interviews asked preparers to provide information about benefits, such as incremental cost reductions, as well as incremental one-off and ongoing costs, associated with the implementation of IFRS 18.

4.38 The information from preparers suggests that they do not anticipate IFRS 18 to bring any direct benefits or cost savings to preparers. Some preparers expected indirect benefits to be delivered as a result of the enhanced interaction between users and capital markets (e.g. potential cost of capital reductions).

Costs for preparers

4.39 The majority of stakeholders indicated that they expected incremental one-off costs to be small.

4.40 Comments from interviewees indicated that:

1. IFRS 18 implementation is not anticipated to be costly. This is because IFRS 18 changes presentation and disclosure but not the recognition and measurement of the components of financial statements. Interviewees noted that implementation costs would comprise both monetary costs (e.g. external audit) and staff time reallocation costs (e.g. familiarisation).
2. Implementation costs are a function of complexity and not just size. Costs associated with the implementation of IFRS 18 are not just a function of an entity's size but are correlated with the complexity of the business (e.g. investments in joint ventures and associates accounted for using the equity method or non-controlling interests) ³². IFRS 18 however includes cost mitigations that are likely to affect the scale of one-off costs ³³.
3. Approach to compliance will vary. When adopting IFRS 18, some preparers indicated that they would make only the minimum necessary changes to comply with IFRS 18, while others indicated that they would thoroughly re-think their profit or loss presentation as well as their disclosures. Most entities positioned themselves between these two approaches.
4. MPMs compliance costs/benefits assessment: it was noted entities indicated that they will include MPMs in the notes only if they perceive benefits to outweigh implementation costs.

Appendix C reports more detailed information (see paragraph C17(a)−(c)).

4.41 Most preparers indicated that one-off costs are anticipated to be much higher than ongoing costs.

1. One-off costs: The cost categories most likely to be affected upon implementation are accounts preparation, familiarisation, changes to data handling processes and controls, audit costs. One interviewee indicated that management time dedicated when handling the transition may lead to some one-off costs (i.e. management's time reallocation). Preparers indicated that all cost categories -except for audit costs- would result in a reallocation of finance department staff time in most cases. The costs associated with the reallocation of staff time would represent an opportunity cost ³⁴ as staff will not be able to spend this time on other productive activities. Opportunity costs would not have direct monetary consequences on entities.
2. Ongoing costs: Most preparers anticipated incurring some incremental audit costs on an ongoing basis. Preparers expect to incur other costs on an ongoing basis, associated, for example, with accounts preparation and changes to data handling processes and controls. These are expected to be smaller than audit costs and largely attributable to staff time reallocations (i.e. an opportunity cost). On balance, preparers suggested that incremental ongoing costs, including audit fees, will be subsumed into business as usual and therefore would not lead to staff time reallocation or extra monetary costs after a few years. In some instances, preparers indicated that increases in audit fees are expected to be permanent. Results from the Preparer survey suggests that preparers anticipate incurring ongoing costs from implementing IFRS 18 for five years on average.

4.42 Preparers were asked to rank the different topics in IFRS 18 in terms of costliness. The following emerged:

1. Categories and subtotals: Preparers listed this as one of the costliest sets of requirements upon implementation, but not an on ongoing basis. This is because these requirements entail a change in the presentation of the statement of profit and loss that will lead to a one-off change in templates. This is most likely to entail a reallocation of finance department staff time (e.g. to adjust templates for the presentation and classification of line items in the statement of profit or loss in line with the requirements in IFRS 18). In addition, preparers anticipate that auditors will dedicate extra time on a one-off basis to audit relevant changes to the presentation of the statement of profit or loss. However, not all preparers expect the structure of the statement of profit and loss to change significantly as a result of IFRS 18. For example, feedback from the UKEB Preparer survey showed that some entities may already be separating investing and financing items in the statement of profit or loss and therefore do not expect the implementation costs for these changes to be significant. When IFRS 18 requirements are not expected to significantly alter presentation (i.e. entities with “low complexity”, see paragraph 4.40(b)), implementation costs are anticipated to be minimal. Some preparers however indicated that classification requirements are perceived to be complex and may require potential system changes.
2. Management-defined performance measures: Preparers' views on this aspect were split as follows:
   1. Requirements on MPMs will cause higher implementation costs: These preparers emphasised that, while MPMs are not individually difficult to prepare, the volume and complexity of the required disclosures and the fact that they are subject to audit would lead to an increase in one-off and ongoing costs.
   2. Requirements on MPMs will not cause high implementation costs: These preparers indicated that incremental costs would be minimal because either they report APMs by following similar practices to those required for MPMs, or they make limited use of APMs.
3. Aggregation and disaggregation: Some preparers listed aggregation and disaggregation as a costly set of requirements on a one-off basis. This was mostly due to changes in the accounting system associated with disclosing items by nature in the notes and audit costs increases associated with considering the new required disaggregation.
4. Limited amendments to the statement of cash flows: Preparers associated this set of requirements with low implementation costs because their current practices for reporting cash flows will not be significantly affected by the limited changes made in IFRS 18.

4.43 Appendix C includes more detailed evidence on costs and benefits for preparers.

4.44 The UKEB distributed a short questionnaire to AFIAG members to gather auditors' views on costs and benefits associated with the implementation of IFRS 18. Auditors' views on costs are summarised in the preparers' costs section as auditors pass extra costs on to preparers.

4.45 AFIAG members indicated that the magnitude of one-off costs will largely depend on the nature and complexity of the business rather than just its size, confirming preparers' views. Considering IFRS 18 requirements, one-off audit costs may be higher depending on:

1. The presence of specified main business activities.
2. The number of investments in associates and joint ventures accounted for using the equity method.
3. The number and nature of MPMs.
4. The presence of non-controlling interests.
5. The prevalence of foreign exchange transactions.
6. Changes derived from the application of the aggregation or disaggregation requirements.

4.46 AFIAG members indicated that ongoing costs are anticipated to be much smaller than one-off implementation costs.

Quantitative assessment of implementation costs

4.47 The UKEB conducted a quantitative assessment of the cost impact to preparers associated with the implementation of IFRS 18 with the purpose of:

1. triangulating the qualitative evidence reported above; and
2. obtaining an important input in the analysis of capital market effects developed in paragraphs 4.81-4.96 below.

4.48 The results discussed suggest that the estimation of costs is complex and likely to vary across different types of entities, though costs are expected to be relatively small. Therefore, the quantitative analysis that follows should be interpreted as a high-level estimate. The estimation provides an indicative range for implementation costs across the entire population of approximately 1,400 publicly listed entities that would be required to apply IFRS 18 and should not be interpreted as an accurate forecast of implementation costs.

4.49 The quantitative assessment was based on:

1. A regression model of implementation costs on consolidated revenues (source: Reuters-Eikon) using a sample of 18 responses from the UKEB Preparer survey and interviews.
2. A subsequent market-wide extrapolation based on the regression results.

Limitations of the analysis

4.50 The following limitations apply:

1. Sample size: the assessment is based on a small sample not representative of the population.
2. Model specification: the regression model is very simple, including only one variable (revenues).
3. No causality: the interpretation of the results is a correlation and should not be interpreted as causal.

4.51 The assessment is based on ex-ante cost estimates provided by finance department staff. The UKEB made all possible efforts to limit bias and imprecision when collecting data. Specifically, when drafting the survey and in the interview questionnaires the UKEB ensured that preparers were invited to carefully consider the composition and size of implementation costs. Questionnaires were thoroughly reviewed internally and by stakeholders (e.g. by the UKEB Academic Advisory Group). Follow-up interviews were conducted to challenge and validate the figures when the cost estimates necessitated further explanations, which led to revised figures in a limited number of cases. Survey responses were triangulated with interview responses. While preparers' assessments were, preliminary and ex-ante, the above precautions ensured that preparers' estimates were the result of a thorough process.

Estimated implementation costs

4.52 As noted, the estimation was based on a regression model. This delivered a point estimate, i.e. the most statistically likely outcome, and a range within which the point estimate lies with a given probability, known as confidence interval ³⁵. The cost estimates reported in the main text below are based on the point estimate, as it is the most statistically likely outcome as per estimation model. However, based on the regression model, implementation costs lie within a range. Appendix D provides further detail on the lower and upper bounds on the estimation.

4.53 The assessment indicated that estimated implementation costs based on the regression point estimate could approximately be in the order of: ³⁶, ³⁷

1. £65 million of extra one-off monetary costs, comprised largely of audit fees.
2. £200 million of extra one-off costs. These are attributable largely to familiarisation with IFRS 18, changes to templates and data handling processes. Most of these costs are expected to be opportunity costs associated with staff time reallocation.
3. £45 million of extra ongoing monetary costs, comprised largely of audit fees (present value over a five-year period).
4. £75 million of extra ongoing costs. These are attributable to accounts preparation, data handling processes and accounting systems maintenance (present value over a five-year period). Most of these costs are expected to be opportunity costs associated with staff time reallocation.

4.54 Total implementation costs are the sum of the above figures for the approximately 1,400 publicly listed entities that would be required to apply IFRS 18. These are estimated to be in the order of £400 million. Of these, only approximately £110 million are expected to be actual extra monetary costs, the rest being opportunity costs. Total implementation costs amount to approximately 0.02% of listed entities operating expenses as of the 2023 year-end. This result is consistent with feedback from preparers.

4.55 The following should be considered for added context:

1. Preparers who responded to the Preparer survey/interviews responded on behalf of groups required to prepare consolidated accounts. Therefore, estimates of implementation costs are at a group-level and consider any costs to be incurred by subsidiaries ³⁸.
2. On average, preparers expect monetary and non-monetary ongoing costs to be subsumed into business as usual within a five-year period (as estimated using survey responses), which is the period used to calculate present values.
3. It is possible that preparers exerted caution when responding, and estimates may lie at the higher end of the distribution.
4. A similar analysis was not conducted for unlisted entities that use UK-adopted international accounting standards on proportionality grounds.

4.56 The technical details of the analysis, including summary statistics, are described in Appendix D.

Proportionate engagement with listed small- and medium-cap entities

4.57 The UKEB conducted targeted proportionate engagement with entities listed on the Alternative Investment Market (AIM) to conduct an initial assessment of whether IFRS 18 is expected to impose disproportionately large costs on listed small- and medium-cap entities. The proportionate engagement was as follows:

1. Five Preparer survey responses from AIM-listed entities.
2. Three interviews with AIM-listed entities ³⁹.
3. A presentation of preliminary results from the economic assessment of IFRS 18 to the Accounting, Auditing & Financial Reporting Expert Group (AAFREG) of the Quoted Companies Alliance (an industry body representing small- and medium-sized quoted entities in the UK).

4.58 Feedback from the engagement suggested that:

1. Listed small- and medium-cap entities have limited resources dedicated to technical accounting and therefore are more likely to start compliance closer to the implementation date of IFRS 18.
2. Familiarisation and audit costs are the cost categories most likely to be affected by the implementation of IFRS 18 for these entities.

4.59 This initial feedback suggested that listed small- and medium-cap entities are unlikely to be disproportionately affected by the adoption of IFRS 18. The UKEB therefore did not conduct extra targeted engagement with listed small- and medium-cap entities.

Costs and benefits for regulators

4.60 The UKEB contacted several UK financial and economic regulators to ask whether IFRS 18 is anticipated to create extra costs or benefits to their organisation, and if so, why. For example, the UKEB asked whether IFRS 18 may lead to a revision of regulatory templates, the development of additional procedures to regulate the new requirements, or additional costs to enforce the new requirements.

4.61 Regulators indicated that IFRS 18 is not anticipated to generate any significant extra costs for them. ⁴⁰

Summary of costs and benefits analysis 41

4.62 Users anticipate significant benefits from the application of IFRS 18. For example, users reported that the implementation of IFRS 18 should result in more efficient use of time spent analysing financial statements and an increase in the quality of analysis/reports. Preparers have also acknowledged that users are likely to reap benefits from the implementation of IFRS 18, for example enhanced comparability on the statement of profit or loss between entities. Users also indicated that they anticipate incurring minimal implementation costs.

4.63 Preparers indicated that they expect to incur both one-off and ongoing incremental costs as a result of applying IFRS 18, though they expect them to be small. Implementation costs will comprise both monetary costs (e.g. extra audit costs) and staff time reallocation (e.g. familiarisation, changes to internal processes). Preparers expect one-off costs associated with extra audit fees, familiarisation and changes to templates to comprise most of the costs. Preparers expect ongoing implementation costs to be much lower that the one-off implementation costs. They also expect these costs to be subsumed into business as usual in a few years' time.

4.64 The UKEB conducted quantitative analysis to obtain a high-level estimate of expected implementation costs for all UK-listed entities. Estimated implementation costs (one-off and ongoing) are approximately £400 million, of which approximately £110 million are expected to be actual extra monetary costs, while the rest represent opportunity costs associated with staff time reallocation. Total implementation costs amount to approximately 0.02% of listed entities operating expenses as of 2023 year-end.

4.65 It is acknowledged that preparers will incur most of the direct compliance costs, with users reaping most of the direct benefits associated with the implementation of IFRS 18.

4.66 However, the fact that users expect to reap benefits from the increased transparency arising from the implementation of IFRS 18 suggests that capital allocation decisions may improve as a result of enhanced analysis/decision-making. Enhanced capital allocation may translate into beneficial capital market effects, such as an appreciation of traded securities or a reduction in the cost of capital for entities. Therefore, based on this initial assessment, it is plausible that preparers are likely to recover their implementation costs in the longer term. The next section will discuss the likelihood of any such effects.

Analysis of wider economic effects

Structure of the analysis

4.67 The assessment of the long-term public good involves a consideration of whether the use of IFRS 18 is likely to have an adverse effect on the economy of the UK, including on economic growth. This [draft] ECA will refer to these as “wider economic effects” in the remainder of this section.

4.68 The analysis of wider economic effects looks at:

1. Transmission mechanisms: For example, whether the adoption of a Standard would lead to a change in how information circulates within relevant organisations, different internal processes or a different assessment of competition. Transmission mechanisms include effects on management's stewardship.
2. First-order indirect effects (capital market effects): These are indirect effects due to the enhanced interaction between users and capital markets attributable to the change in accounting, such as effects on liquidity or volatility in public equity markets, and cost of capital.
3. Second-order indirect effects: Microeconomic effects on preparers, users and other stakeholders that go beyond capital market effects. Examples include any effects on management compensation schemes, covenants, dividend payments and tax obligations that may arise from changes in accounting line items ⁴². In addition, microeconomic effects such as product or pricing decisions, competition, economic output or productivity and capital investment are considered.
4. Third order indirect effects: Micro and macroeconomic effects that go beyond preparers/users, such as:
   1. Externalities: The impact of a transaction on a third party who is not directly involved in the transaction itself, for instance, financial reporting impacting not just the capital markets ecosystem but other parties (e.g. economic and financial regulators, tax authorities, other stakeholders such as competitors, suppliers or employees).
   2. Network effects: Economic impacts that increase in magnitude as the number of network users increases, e.g. credit cards, social media.
   3. Macroeconomic effects: Economic impacts that spread to the national economy.

4.69 Chart 2 provides a visual representation of direct and wider economic effects.

Collection of evidence

4.70 To assess wider economic impacts, the UKEB collected evidence using a range of research tools, as follows:

1. Surveys: Both UKEB surveys contained questions on transmission mechanisms and indirect economic effects.
2. Cost of capital analysis: The UKEB developed a methodology to assess whether, at a market level, capital market effects potentially associated with the application of IFRS 18 may deliver indirect monetary benefits that would allow preparers to indirectly recover implementation costs. The methodology also allows the assessment of the plausibility of the results.
3. Qualitative analysis: The UKEB assessed second- and third-order economic effects qualitatively, using desk-based research and economic reasoning ⁴³.

Transmission mechanisms

Preparers

4.71 The UKEB Preparer survey included questions on the wider economic impact of IFRS 18, focusing on transmission mechanisms.

4.72 Preparers were asked to indicate the extent to which they expected the implementation of IFRS 18 to affect management's stewardship and other transmission mechanisms, such as whether IFRS 18 would affect how information circulates within an entity or internal processes.

4.73 Management's stewardship: Respondents were asked to indicate whether they expected IFRS 18 to affect:

1. Presentation of management's use of economic resources to users: 61% of respondents indicated that they anticipate no effect.
2. Transparency over management's performance in financial reporting: 53% of respondents indicated that they expected no effects.
3. Management's discretion in presenting the entity's financial performance: The opinions on this outcome were divided, with 49% of respondents indicating that they anticipate IFRS 18 to lead to less management discretion in presenting entities' financial performance. However, 42% of respondents indicate that they anticipate no effect.

4.74 On balance, preparers' views were that IFRS 18 is unlikely to affect management's stewardship.

4.75 Other transmission mechanisms: Respondents were asked to indicate whether they expected IFRS 18 to affect:

1. How information circulates within the organisation.
2. Streamlining of internal systems and processes.
3. Disclosure of proprietary information, where more disclosures were interpreted to be a negative effect.
4. Competitors' assessment of the entity's performance, where a better assessment was interpreted to have a negative effect.
5. Internal assessment of competitors' financial performance, where a better assessment was interpreted to have a positive effect.
6. Risk of litigation, where lower risk was interpreted to have a positive effect.

4.76 Respondents either clearly indicated that no effect was expected or had split opinions with no clear pattern emerging. On balance, preparers' views were that IFRS 18 is unlikely to affect any of the above outcomes.

Users

4.77 The UKEB User survey asked respondents to indicate whether the Standard would affect a number of transmission mechanisms.

4.78 On the items listed below, users indicated that IFRS 18 will either slightly improve or greatly improve their ability to analyse financial statements: ⁴⁴

1. Compare entities' performance over multiple periods (74%).
2. Assess an individual entity's performance (74%).
3. Compare entities' performance with other entities (74%).
4. Conduct research (68%).
5. Understand how entities measure their own performance (58%).
6. Allocate time spent analysing financial statements efficiently (58%).

4.79 Only 32% of respondents indicated that IFRS 18 would help users better assess a company's solvency and only 37% of respondents indicated that IFRS 18 would enhance users' ability to conduct credit ratings. These results are not surprising, considering that IFRS 18 mainly deals with the presentation of financial performance (and therefore is not likely to alter balance sheet line items or balance sheet ratios). It is worth noting that unlisted entities include unlisted groups which may access external finance even if they don't rely on public capital markets. Moreover, in some specific circumstances (e.g. absence of intra-group guarantees), lenders also consider subsidiaries' financial statements in detail. Therefore, improvements to the structure of the statement of financial performance, better aggregation and disaggregation criteria, and MPMs, to the extent that they are used by subsidiaries, would help users of these entities assess the financial performance and position of entities and enhance their decision-making.

4.80 There was a suggestion that IFRS 18 could be helpful to lenders, because:

1. For some lenders (e.g. leveraged finance specialists) adjusted EBITDA is an important metric. Paragraph 118 of IFRS 18 permits the disclosure of a subtotal (i.e. operating profit or loss before depreciation, amortisation and impairments within the scope of IAS 36 Impairment of Assets, or ‘OPDAI’) ⁴⁵ that provides similar information to many of the EBITDA measures currently provided. If a company provides an EBITDA subtotal in its public communications that is not calculated in the same way as OPDAI, that subtotal would be an MPM, so the entity will need to provide disclosures about how it is calculated.
2. Better principles for disaggregation would give some items greater visibility in the primary financial statements and provide information on the key drivers of cost (i.e. whether cost is part of their operating business).

4.81 It is worth noting that unlisted entities include unlisted groups which may access external finance even if they don't rely on public capital markets. Moreover, in some specific circumstances (e.g. absence of intra-group guarantees), lenders also consider subsidiaries' financial statements in detail ⁴⁶. Therefore, improvements to the structure of the statement of financial performance, better aggregation and disaggregation criteria, and MPMs, to the extent that they are used by subsidiaries, would help users of these entities assess the financial performance and position of entities and enhance their decision-making.

First-order indirect effects - capital market effects

4.82 This section applies a methodology developed by the UKEB to assess whether, at a market level, capital market effects potentially associated with the application of IFRS 18 may deliver indirect monetary benefits that would allow preparers to indirectly recover implementation costs. The methodology is based on evidence, grounded in research, and makes use of updated market data.

4.83 The analysis that follows shows that small and plausible market-wide reductions in the cost of capital would be enough for UK-listed entities applying IFRS to indirectly recover their implementation costs in the medium- to long-term.

Background information

4.84 Users suggested that they may improve decision-making and enhance their capital allocation decisions on securities markets as a result of IFRS 18.

4.85 In line with economic theory and evidence, improved presentation of accounts resulting from IFRS 18 requirements should lead to enhanced trading activity, more liquidity, and a reduction in bid/ask spreads on securities markets ⁴⁷. Investors may demand lower returns for holding securities. In the longer term:

1. Market-wide cost of capital on public capital markets might go down ⁴⁸.
2. The prices of publicly traded securities might, on average, increase ⁴⁹.

4.86 Preparers indicated that they expect to incur direct costs associated with the implementation of IFRS 18. However, to the extent that capital market effects materialise (e.g. a market-wide decrease in cost of capital and/or a consequent increase in market capitalisation), preparers would reap indirect benefits in the longer term. These may allow preparers to partly cover, break even on, or even outweigh implementation costs, albeit indirectly.

4.87 The analysis that follows permits us to:

1. quantify the magnitude of capital market effects that would allow preparers to recover implementation costs in the medium- to long-term; and
2. assess whether these magnitudes are plausible.

4.88 The figures obtained are not predictions of securities prices' trends or cost of capital reductions associated with IFRS 18 and should not be interpreted as such.

Effects considered

4.89 The methodology considers the following concurrent market-wide effects potentially associated with the introduction of an accounting standard:

1. An increase in market capitalisation, leading to an increase of shareholders' wealth at a market level ⁵⁰.
2. A decrease in the cost of equity, leading to more projects funded through public equity capital at a market level.
3. An increase in the outstanding value of listed bonds, leading to an increase of bondholders' wealth at a market level.
4. A decrease in the cost of debt, leading to more projects funded through public debt capital at a market level.

4.90 Table 6 shows the interaction between these market-wide effects:

Source: UKEB

4.88The figures obtained are not predictions of securities prices' trends or cost of capital reductions associated with IFRS 18 and should not be interpreted as such.

Effects considered

4.89The methodology considers the following concurrent market-wide effects potentially associated with the introduction of an accounting standard:

1. An increase in market capitalisation, leading to an increase of shareholders' wealth at a market level.
2. A decrease in the cost of equity, leading to more projects funded through public equity capital at a market level.
3. An increase in the outstanding value of listed bonds, leading to an increase of bondholders' wealth at a market level.
4. A decrease in the cost of debt, leading to more projects funded through public debt capital at a market level.

4.90Table 6 shows the interaction between these market-wide effects:

Source: UKEB

4.91These effects are likely to be correlated, for example because a reduction in the cost of capital would lead to projects being funded through equity/debt in the future but also to changes in the market value of securities ⁵¹. Nonetheless, they should be considered as separate effects as:

1. the effect on cost of capital on future capital flows is of interest to entities that plan to raise capital in the future; but
2. increases in the value of traded securities affect the market in its entirety.

Application of the methodology

4.92Market-wide implementation costs for preparers are the starting point for the analysis. The UKEB estimated market-wide implementation costs (one-off and ongoing costs) for preparers to be approximately £400 million (see paragraph 4.64).

4.93The UKEB considered a hypothetical scenario where:

1. 75% of the costs are recovered through equity markets (equally split between an increase in market capitalisation and an increase in the value of projects funded through equity); and
2. 25% of the costs are recovered through bond markets (equally split between an increase in the value of bonds outstanding and an increase in the value of projects funded through fixed income). ⁵²

4.94Table 7 below shows that the following capital effects need to materialise for preparers to recover implementation costs in the medium- to long-term:

Note: allocations are arbitrary. Appendix E contains results associated with different allocations. Source: UKEB calculations based on LSE and Reuters-Eikon data. A basis point is a hundredth of a percentage point. Increases in the market value of securities would affect the market in its entirety. Increases in the value of projects funded through equity/debt would affect only companies that plan on raising funds through capital markets in the future. It is acknowledged that these concurrent effects are likely to be correlated.

4.95The analysis suggests that to allow preparers to recover implementation costs of approximately £400 million (see paragraph 4.64) the following effects should happen concurrently:

1. Increase in market capitalisation: Market capitalisation for the UK listed market should increase by £146 million, or 0.5 Bps (basis points) using its value as of October 2024 (£2.69 trillion) ⁵³.
2. Decrease in the cost of equity leading to more projects funded through public equity: Cost of equity should decrease by 3.2 Bps for the present value (PV) of projects funded through equity to increase by £146 million (the present value of equity issuances over a ten-year forecast is equal to £143 billion; baseline cost of equity: 11.23%).
3. Increase in the outstanding value of corporate bonds: The outstanding value of corporate bonds issued by UK companies on public bond markets should increase by £49 million, or by 0.6 Bps using its value as of October 2024 (£759 billion).
4. Decrease in the cost of debt leading to more projects funded through publicly traded corporate bonds: Cost of debt should decrease by 0.2 Bps for the PV of projects funded through debt to increase by £49 million (present value of public corporate bond issuances over a ten-year forecast is equal to £491.75 billion; baseline cost of debt: 5.03%).

4.96The UKEB considered that the figures obtained are plausible ⁵⁴. A plausibility assessment is reported in Appendix E. It is caveated that the results cannot be used to conclude or predict what capital market effects will materialise, if any, as a result of IFRS 18.

4.97The analysis shows that small and plausible reductions in market-wide cost of capital would be enough for UK-listed entities applying IFRS to indirectly recover their implementation costs in the medium- to long-term.

Potential impact on new public listings

4.98It is possible that:

1. presenting additional subtotals such as OPDAI; and
2. reconciling MPMs with the most directly comparable subtotal,

may help users of financial statements involved in public equity listings (e.g. underwriters, nominated advisors) better contextualise entities' financial performance. To the extent that reporting requirements in IFRS 18 convey better information that can facilitate public equity listings, this may represent a small incentive for entities to list on UK public equity markets.

Second-order indirect effects

Effects on management compensation schemes, covenants, dividend payments and tax obligations

4.99The UKEB Preparer survey asked respondents to indicate whether IFRS 18 is anticipated to affect the following items:

1. Management compensation schemes.
2. Covenants.
3. Dividend payments.
4. Tax obligations that may arise from changes in accounting line items.

4.100Most preparers expected no effect on any of these items. A preparer commented that “the new standard won't have impact on measurement. Presentational differences from a statutory perspective will not impact any of the above measures".

Other second-order indirect effects

4.101The following second-order microeconomic effects on preparers are discussed:

1. Effects on product or pricing decisions: The requirements of IFRS 18 are not expected to affect the underlying economics that determines the prices charged or the nature of products supplied by entities. Therefore, no effects on product and pricing decisions are expected.
2. Effects on competition: IFRS 18 is not anticipated to affect the determinants of competition between entities (e.g. product or pricing decisions or barriers to entry or exit). IFRS 18 is anticipated to provide more comparable information about preparers, thus potentially enhancing preparers' ability to benchmark or assess their competitors. This suggests that IFRS 18 may have a minor role in fostering a competitive economic environment between entities.
3. An increase/reduction in preparers' economic output or productivity: The changes in presentation and disclosure requirements in IFRS 18 are not expected to affect the preparers' output, or their productivity. However, a reduction in the cost of capital that may materialise as a result of implementing IFRS 18 may lead to an increase in capital investment.
4. An increase/reduction in capital investments: IFRS 18 is not anticipated to directly alter preparers' output outlook or their strategic vision for the future and therefore is not likely to affect the entity's long-term capital needs. However, it is noted that a potential reduction in the cost of capital associated with IFRS 18 may lead preparers to fund more projects through public equity or debt, resulting in higher investment and/or a different capital structure.

Third-order indirect effects

Network effects

4.102IFRS 18 is not expected to be associated with network effects. Industries where network externalities are present (e.g. tech) are not likely to be more or less affected than other industries by IFRS 18. The requirements are not anticipated to affect the number of people accessing the platforms or services provided by such entities.

Externalities

4.103Economists view the provision of publicly available financial reporting as a positive externality, affecting parties that are beyond the capital markets ecosystem (such as regulators, tax agencies, other stakeholders) ⁵⁵. Therefore, enhancements to financial reporting brought by IFRS 18 are expected to improve the quality of the "public good” provided by preparers. This is a small, positive economic effect. It should be noted that the requirements of IFRS 18 are not anticipated to generate negative externalities.

Macroeconomic effects, including economic growth

4.104No significant macroeconomic effects are anticipated as a direct result of IFRS 18 requirements. However, as noted in the First-order indirect effects - capital market effects section, IFRS 18 could:

1. Positively affect the prices of traded securities. This would translate into higher shareholders' and bondholders' wealth.
2. Reduce cost of capital. If actualised, this would translate into enhanced investment opportunities for entities applying IFRS 18.

4.105To the extent that capital market effects materialise, they could have a small positive effect on the consumption and investment components of GDP. The UKEB assessment is that IFRS 18 is not anticipated to have negative effects on economic growth.

Summary of the analysis of wider economic effects

4.106The analysis of wider economic effects suggests that:

1. IFRS 18 may plausibly lead to market-wide capital market effects that would benefit preparers in the medium- to long-run. A quantitative analysis of such effects conducted using an in-house methodology suggests that preparers may indirectly recover their implementation costs. The UKEB cannot predict, however, whether any such effects will materialise and, if so, of what magnitude.
2. Capital market effects, to the extent that they materialise, could have a small positive effect on the consumption and investment components of GDP.
3. IFRS 18 is not expected to lead to wider economic effects that are detrimental to the UK economy, including on economic growth.

Consideration of the consequences of not adopting IFRS 18 (counterfactual analysis)

4.107This section considers the consequences of not adopting IFRS 18 for use in the UK (the 'non-adoption scenario'). The analysis assumes that IFRS 18 is widely adopted in other jurisdictions.

4.108In a non-adoption scenario, UK entities applying UK-adopted international accounting standards would not incur incremental costs associated with the adoption of the standard (see paragraph 4.64 for a market-wide estimate of implementation costs).

4.109However, in a non-adoption scenario, benefits for users associated with the adoption of IFRS 18 would not materialise. UK and overseas investors may redirect funds to jurisdictions that apply IFRS 18. In the long-term, non-adoption of IFRS 18 would be likely to have an adverse effect on UK capital markets, potentially leading to an increase in the cost of capital or reductions in the price of their traded securities for UK entities. The size and importance of UK capital markets are likely to play a key role in retaining investor interest and capital, which is a mitigating factor. However, in line with the analysis shown in paragraphs 4.81–4.96, even small adverse capital market effects (such as cost of capital increases) may lead to indirect adverse effects to companies in the medium- to long-term. These would likely outweigh implementation costs associated with the adoption of the standard itself ⁵⁶.

4.110In addition, non-adoption may lead to some other adverse wider economic effects, for example:

1. Entities in other jurisdictions using IFRS 18 may be able to attract additional sources of capital and potentially benefit from a lower cost of capital, which could provide them with a competitive advantage over UK companies.
2. UK unlisted entities that apply UK-adopted international accounting standards may choose to list in jurisdictions that apply full IFRS.

4.111Finally, feedback from preparers suggested that UK listed entities cross-listed abroad could incur extra costs if UK-adopted international accounting standards were to deviate from IFRS Accounting Standards as issued by the IASB. However, cross-listed entities may still have to apply IFRS 18 to their financial statements. For example, entities cross-listed in the US filing a Form 20-F can prepare their financial statements using IFRS Accounting Standards as issued by the IASB. That would limit potential negative capital market effects for these entities.

4.112These considerations suggest that, on balance, not adopting IFRS 18 for use in the UK would have a potentially detrimental effect on the UK economy.

[Tentative] Overall assessment of long term public good

4.113There are three aspects to consider when assessing whether the use of IFRS 18 is likely to be conducive to the long term public good in the UK. These are:

1. Whether IFRS 18 is likely to improve the quality of financial reporting.
2. The costs and benefits that are likely to result from the use of IFRS 18.
3. Whether the use of IFRS 18 is likely to have an adverse effect on the economy of the UK, including on economic growth.

4.114The conclusions drawn on each of these aspects as summarised below.

Quality of financial reporting

4.115Implementation of IFRS 18 is likely to improve the quality of financial reporting by specifying enhanced presentation and disclosure requirements for the financial statements. This will lead to financial reporting that is more useful to investors and other users of accounts, providing information that is more relevant, reliable and transparent. The new requirements in IFRS 18 are also likely to facilitate comparability and lead to clearer presentation and disclosure of information in the financial statements.

Costs and benefits

4.116Users anticipate significant benefits from the application of IFRS 18. For example, users reported that the enhanced presentation of financial performance brought by IFRS 18 should result in more efficient use of time spent analysing financial statements and an increase in the quality of analysis/reports. Users also indicated that they anticipate incurring minimal implementation costs.

4.117Preparers indicated that they will incur both one-off and ongoing incremental costs as a result of applying IFRS 18, though they expect them to be small. Preparers expect one-off costs to be largely associated with extra audit fees, familiarisation and changes to templates. Preparers expect ongoing implementation costs to be much lower that one-off implementation costs, and to be subsumed into business as usual in a few years' time.

Effect on the economy of the UK

4.118While it is acknowledged that preparers will incur most of the direct compliance costs, the fact that users expect to reap benefits from the increased transparency arising from the implementation of IFRS 18 suggests that their capital allocation decisions may improve. Enhanced capital allocation may translate into beneficial capital market effects, such as an appreciation of traded securities or a reduction in the cost of capital for entities.

4.119The analysis of wider economic effects suggests that IFRS 18 may plausibly lead to wider capital market effects that would benefit preparers in the medium- to long-run. A quantitative analysis of such effects conducted using an in-house methodology suggests that small and plausible market-wide reductions in the cost of capital would be enough for UK-listed entities applying IFRS to indirectly recover their implementation costs in the medium- to long-term. The UKEB cannot predict however whether any such effects will materialise and, if so, of what magnitude.

4.120Any capital market effects associated with the application of IFRS 18, to the extent that they materialise, could have a small positive effect on the consumption and investment components of GDP.

4.121IFRS 18 is not expected to lead to wider economic effects that are detrimental to the UK economy, including on economic growth.

Counterfactual analysis

4.122Overall, not implementing IFRS 18 for use in the UK would have a potentially negative outcome from the perspective of the UK long term public good.

[Tentative] Overall assessment

4.123The tentative assessment is based on the joint consideration of the evidence reported above.

4.124Overall, based on a holistic assessment of the evidence reported in this section, the UKEB considered that the use of IFRS 18 is likely to be conducive to the long term public good in the UK.

5. Section 5: True and fair view assessment

Introduction

5.1This section considers whether IFRS 18 is not contrary to the true and fair view principle for individual and consolidated accounts.

Legislative basis and our approach to the assessment

5.2The UKEB is required to consider whether an international accounting standard being assessed for use in the UK meets certain legislative criteria set out in Regulation 7 (1) of SI 2019/685. The first criterion set out in that regulation requires that an international accounting standard can be adopted only if:

"[....] the standard is not contrary to either of the following principles-

1. an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;
2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; [....]”

5.3In this section of the [Draft] ECAECA we consider whether IFRS 18 meets this endorsement criterion. For the sake of brevity, we refer to our assessment against this endorsement criterion as 'the true and fair view assessment' and to the principles set out in Regulation 7(1)(a) as the ‘true and fair view principle'. However, these abbreviated expressions do not imply that our assessment has considered anything other than the full terms of the endorsement criterion set out above.

5.4The duty of the UKEB under Regulation 7(1)(a) is to determine generically, before a standard is applied to a set of accounts, whether that standard is 'not contrary' to the true and fair view principle. In other words, it is an ex-ante assessment. We have therefore considered whether IFRS 18 contains any requirement that would prevent accounts prepared using the standard from giving a true and fair view.

5.5Our approach is to determine whether IFRS 18 is not contrary to the true and fair view principle in respect of any of the items identified in Regulation 7(1)(a) (namely, the assets, liabilities, financial position and profit or loss) in the context of the preparation of the accounts as a whole. In carrying out our assessment of the impact of IFRS 18, we have also considered the disclosures required by the Standard and its interaction with other UK-adopted international accounting standards.

5.6For the purposes of our assessment, we consider the requirement in paragraph 15 of IAS 1 for financial statements to “present fairly the financial position, financial performance and cash flows of an entity" ⁵⁷ to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view. IFRS 18 has moved paragraphs 15–24 of IAS 1 relating to fair presentation to IAS 8 (as paragraphs 6A-6J). Text moved to IAS 8 was left unchanged. This change is effective on 1 January 2027.

5.7Our assessment is separate from the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking's or group's assets, liabilities, financial position and profit or loss.

Interaction with other UK-adopted international accounting standards

5.8We have considered whether any requirement of IFRS 18 would necessarily create distortions in its interaction with other UK-adopted international accounting standards. IFRS 18 introduces presentation and disclosure requirements that improve the relevance of financial information and do not change the recognition and measurement of the items in the financial statements. Therefore, it is unlikely that IFRS 18 will have a negative impact on other UK-adopted international accounting standards.

5.9[Tentative] In addition, feedback from stakeholders and our own assessments of significant technical accounting issues in Section 3 and in Appendix B have not indicated that any distortions arising from the interaction of IFRS 18 with other UK-adopted international accounting standards are a major concern for UK stakeholders.

[Tentative] assessment True and fair view assessment

5.10[Tentative] [Consultation feedback on the [Draft] ECAECA indicated that stakeholders generally agreed with the UKEB's tentative conclusion that IFRS 18 was not contrary to the true and fair view principle].

5.11Section 3 of this [Draft] ECAECA concludes that IFRS 18 as a whole meets the technical accounting criteria. The technical accounting criteria refer to reliability which includes the notion of faithful representation of the economic substance of transactions and events (see Section 1 of the [Draft] ECAECA). The technical accounting criteria assessment therefore further underpins the overall true and fair view assessment.

5.12Our assessment has not identified any requirement of IFRS 18 that would prevent individual accounts prepared using the Standard from giving a true and fair view of the entity's assets, liabilities, financial position and profit or loss. We are satisfied, therefore, that the circumstances in which the application of IFRS 18 would result in accounts which did not give a true and fair view would be extremely rare.

5.13SI 2019/685 requires an assessment of whether IFRS 18 is not contrary to the true and fair view principle for both individual and consolidated accounts. We have not identified any reason why the IFRS 18 true and fair view assessment should conclude differently for consolidated accounts.

[Tentative] Overall conclusion

5.14[Overall, therefore, we conclude that IFRS 18 is not contrary to the true and fair view principle set out in Regulation 7 (1) (a) of SI 2019/685.]

6. Section 6: Is IFRS 18 likely to lead to a significant change in accounting practice?

Introduction

6.1This section considers whether IFRS 18 is likely to lead to a significant change in accounting practice.

UK statutory requirements

6.2Paragraphs 1-4 of Regulation 11 of SI 2019/685 require a review of the impact of the adoption of an international accounting standard ⁵⁸ when this standard is likely to lead to a significant change in accounting practice. These paragraphs are reproduced below (emphasis added):

"(1) The Secretary of State must publish a statement setting out the Secretary of State's policy on what amounts to a significant change in accounting practice, and must keep this policy statement under review.

(2) Paragraphs (3) and (4) apply in relation to the adoption of any standard by the Secretary of State under regulation 6 which the Secretary of State considers likely to lead to a significant change in accounting practice.

(3) The Secretary of State must-

1. carry out a review of the impact of the adoption of the standard; and
2. publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used).

(4) The Secretary of State may carry out subsequent reviews from time to time, and in the event of doing so the Secretary of State must publish a report setting out the conclusions of any review conducted."

Due Process Handbook requirements

What constitutes a significant change in accounting practice?

6.3Paragraph 1 of Regulation 11 of SI 2019/685 does not define the term 'significant change in accounting practice'. However, it does require the UKEB to publish a statement setting out its policy on what amounts to a significant change in accounting practice. This can be found in paragraph 8.6 of the UKEB Due Process Handbook:

Whether or not a standard adopted under Regulation 6 is likely to lead to a 'significant change in accounting practice' will usually depend on the number of entities affected and the impact on those entities and may require judgement. It usually occurs when a new standard is issued by the IASB.

Approach to the assessment

6.4In this section we consider whether IFRS 18 is likely to lead to a 'significant change in accounting practice'.

6.5The UKEB has considered for this assessment:

1. the number of entities that will be affected by IFRS 18; and
2. the potential impact on entities applying the requirements in IFRS 18.

The number of entities that will be affected by IFRS 18

6.6As discussed in Section 2 (paragraphs 2.7–2.10) IFRS 18 will impact all entities across all sectors that prepare financial statements using UK-adopted international accounting standards. In other words, all entities listed on the London Stock Exchange will be required to apply it. Additionally, approximately 14,000 unlisted entities that use the option in UK law to use UK-adopted international accounting standards will also be required to adopt it. These entities will be required to apply IFRS 18 retrospectively from 1 January 2027, with earlier application permitted (subject to the UKEB adoption in the UK).

Potential impact on entities applying the requirements in IFRS 18

6.7IFRS 18 is a new general standard on presentation and disclosure in financial statements that will replace IAS 1.

6.8IFRS 18 is not expected to bring a significant change in accounting practice as:

1. Approximately 80% of the requirements in IAS 1 have been carried forward into IFRS 18 (or into IAS 8 or IFRS 7) with limited or no changes. Likewise, a few of the new requirements in IFRS 18 are based on previous requirements in IAS 1 (see Tables 3–5 in Section 2, paragraphs 2.18–2.20).
2. It does not include requirements on how entities recognise and measure items in the financial statements. This means that entities will continue applying the same recognition and measurement principles in measuring financial performance (i.e. it will not affect net profit after interest and tax). This means that IFRS 18 is not fundamentally changing the way financial information is generated.
3. It introduces new presentation and disclosure requirements mainly aimed at improving the relevance (e.g. aggregation requirements), reliability (e.g. requirements on MPMs) and comparability of the financial statements. It also enhances how information about financial performance is communicated in the financial statements.
4. The current practices for reporting financial information in the UK may already be consistent with some of the new requirements in IFRS 18. For example, the results from the UKEB Preparer survey indicated that some respondents may already be:
   
   1. Presenting the results from equity-accounted investments outside their main business operations.
   2. Presenting their adjusted performance measures in the financial statements and/or providing information about the tax for each reconciling item and about the effects of non-controlling interests for each reconciling item.
   3. Disclosing information on the five specified operating expenses by nature.
5. The implementation of IFRS 18 may help entities reconsider their presentation and disclosure practices to consider whether improvements to those practices can be made (in terms of changes to its systems, charts of accounts or mappings). However, as discussed in Section 4 these changes are not expected to be costly or significant.

[Tentative] Overall conclusion

6.9Having considered the above and acknowledging that IFRS 18 will impact all entities across all sectors that prepare financial statements using UK-adopted international accounting standards, the UKEB does not consider that IFRS 18 will bring a significant change in the way all entities communicate information in the primary financial statements and the notes. As a result, it [tentatively] concludes that IFRS 18 is not likely to lead to a significant change in accounting practice and does not meet the criteria for a post-implementation review (PIR) under Regulation 11 in SI 2019/685.

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Footnotes

Appendix A: Glossary

Appendix B: Individual assessment of technical issues raised by UK stakeholders

Introduction

B1The approach to the assessment of IFRS 18 against the technical accounting criteria (that is specified in SI 2019/685 Regulation 7(1)(c)) is set out in Section 3 of this [Draft] ECAECA. This Appendix includes an individual assessment against the technical accounting criteria of specific technical issues where UK stakeholders raised some practical challenges.

B2The technical accounting issues assessed in this Appendix are:

1. Issue 1: Classification of income and expenses from associates and joint ventures accounted for using the equity method in the investing category.
2. Issue 2: Accounting policy choice for the classification of income and expenses for entities that provide financing to customers.
3. Issue 3: Disclosure of the income tax effect and the effect on non-controlling interests (NCIs) in the management-defined performance measures (MPM) reconciliation.

Issue 1: Classification of income and expenses from associates and joint ventures accounted for using the equity method in the investing category

IFRS 18 requirements

B3IFRS 18 requires entities to classify all income and expenses from investments in associates and joint ventures accounted for using the equity method ('equity-accounted investments') in the investing category of the statement of profit or loss. This includes (a) the entity's share of profit or loss from associates, joint ventures and unconsolidated subsidiaries; and (b) other income and expenses from those investments (e.g. impairment losses). This approach reflects that investments in associates and joint ventures generate returns individually and largely independent of the entity's other resources.

B4This is consistent with other income and expenses classified in the investing category. The same presentation requirement applies to income and expenses

B5from subsidiaries in separate financial statements accounted for using the equity method in accordance with paragraph 10(c) of IAS 27 Separate Financial Statements.

B6In addition, the transitional provisions in paragraph C7 of IFRS 18 allow an eligible entity to apply paragraph 18 of IAS 28 Investments in Associates and Joint Ventures⁵⁹ to change its election for measuring an investment in an associate or joint venture from the equity method to fair value through profit or loss (FVTPL) in accordance with IFRS 9 Financial Instruments at the date of initial application of IFRS 18 and to classify the income and expenses from such investments in the operating category when they are investments as a main business activity.

Accounting impact

B7IAS 1⁶⁰ requires the separate presentation of the share of the profit or loss of associates and joint ventures accounted for using the equity method without specifying where this line item should appear in the statement of profit or loss. The requirements in IFRS 18 will change the presentation of this item, where an entity considers that its associates and joint ventures are ‘integral' to its main business activities.

B8The results from the UKEB Preparer survey revealed that some entities in the insurance, utilities or banking sectors in the UK have 'integral' investments in associates and joint ventures. Respondents to this survey were of the view that entities should have flexibility to classify equity-accounted investments in the operating category when these investments are considered:

• part of the entity's main business operations; or
• strategic partnerships. For example, joint ventures are commonly used in large-scale infrastructure projects that require substantial capital to develop and structure large-scale infrastructure projects.

B9In their view requiring the classification of the results from 'integral' investments in 'investing' (i.e. outside the operating category) may not allow users to understand the true nature and strategic value of these investments within the entity's main business operation.

B10Another example is entities with specified main business activities such as insurance entities investing in assets. Respondents to the UKEB Preparer survey emphasised the importance of presenting income and expenses from investments in associates and joint ventures that are linked to insurance contracts (e.g. that are backing up liabilities) within the operating category. This is because it is common practice to include those results as part of 'net financial result' (investment income minus insurance finance income and expenses) which is an important indicator of an insurer's operating performance. IFRS 18 in their view would generate a mismatch as the operating category would contain insurance finance income and expenses from insurance contract liabilities but might not contain all the associated investment income from the assets held to service those liabilities. Some insurance entities consider that this may prevent users from understanding and correctly evaluating their performance.

B11These concerns have been acknowledged by the IASB (for example, in paragraphs BC114-BC115 of IFRS 18's Basis for Conclusions). The IASB concluded that specifying the location of income and expenses from equity-accounted investments in associates and joint ventures in a single category (i.e. the investing category) for all entities (including those that invest in assets as a specified main business activity):

1. Provides users with a consistent starting point for their analysis.
2. Is consistent with the way users of financial statements use information to analyse investments in associates and joint ventures. In this respect, users typically consider the results of equity-accounted investments to be different from other results, for instance because they are a blend of different amounts (i.e. operating, investing, financing and tax amounts of the investee). In addition, the investing entity does not control these results as it exercises only significant influence over an associate or joint control over a joint venture.
3. Avoids making an artificial identification of investments that are considered part of the entity's main business activities which in the IASB's view would have led to:
   1. complexity and diversity in practice (given that the nature and purpose of investments in associates and joint ventures differ); or
   2. an opportunistic application of such a requirement.

B12The IASB acknowledged that a presentation 'mismatch' may occur in the statement of profit or loss of insurance entities i.e. when excluding income and expenses of equity-accounted investments in associates and joint ventures from the 'operating' category. However, it further observed that this potential 'mismatch':

1. Would be entity-specific and it would depend on whether the insurer accounts for these investments using the equity method or measures them at fair value through profit or loss, in which case no mismatch would arise as the insurer would be able to classify those income and expenses within the operating category.
2. May be material for some insurers but it did not appear to be pervasive in the insurance industry.

B13This new presentation requirement in IFRS 18 will only impact the entities that have equity-accounted investments. The UKEB Secretariat conducted an analysis of Reuters-Eikon data to ascertain the prevalence of associates and joint ventures accounted for using the equity method among UK listed entities. This requirement may be significant to only a small number of UK entities given that, for 2023 year-ends:

1. only 22% of entities in the UK have this type of investment and holdings in associates and joint ventures. The total balance sheet value of these investments was approximately £124 billion as of 2023 year-ends, accounting for 1% of total assets of all listed entities; and
2. equity-accounted investments in associates and joint ventures were highly concentrated among few large companies. For instance, the five entities with the largest holdings in joint ventures and associates accounted for nearly 60% of all holdings.

B14This analysis also revealed that equity-accounted investments in joint ventures and associates in the insurance sector were held by about 47% of listed insurers. However, these investments made up a small proportion (0.3%) of the total assets of listed insurers (adding up to £4 billion).

B15The UKEB observes that requirements in IFRS 18 will permit entities to inform users that their equity-accounted investments are closely related to their main business activities. For example, by:

1. presenting a line item for income and expenses from investments in associates and joint ventures accounted for using the equity method (if this provides a useful structured summary)⁶¹ immediately below its operating profit so that users could consider this line item as part of its analysis;
2. presenting an additional subtotal that would add together operating profit and income and expenses from investments in associates and joint ventures accounted for using the equity method. This may be when an entity disaggregates into one or more line items income and expenses from associates and joint ventures with dissimilar characteristics⁶²;
3. providing additional information in the notes disclosing any impact on the operating result⁶³;
4. disclosing an MPM that adjusts 'operating profit'; and/or
5. changing the measurement of an investment in an associate or joint venture from the equity method to FVTPL on transition to IFRS 18⁶⁴. This change would enable an entity to present the results of those investments as part of the 'operating' category. The results from the UKEB Preparer survey indicated, however, that some respondents did not support the election offered on transition to IFRS 18 because:
   1. introducing an election would impair comparability across entities in the same sector/industry;
   2. the election offered on transition is limited to eligible entities;
   3. using fair value to measure an investment in an associate or joint venture would:
      1. increase earnings volatility in profit and loss, which may lead to the presentation of additional performance measures;
      2. add a layer of complexity and subjectivity in the measurement of these investments, for example, in determining the fair value of unlisted investees; and
      3. be onerous as entities will be required to prepare disclosures under other IFRS Accounting Standards.

Assessment against the technical accounting criteria

B16The UKEB acknowledges the concerns from preparers resulting from classifying the results from all equity-accounted investments in the investing category. In the view of some stakeholders this could lead to the presentation of information that is not relevant or understandable. Some preparers also consider that presenting the results from those investments outside ‘operating' will not provide reliable information of their operating performance.

B17In contrast, users consider that this information will be relevant, reliable and understandable, because requiring a single classification in the investing category better aligns with the way users of financial statements use information to analyse investments in associates and joint ventures and avoids disrupting their analyses of operating margins. Users are also of the view that prescribing a consistent classification for income and expenses of equity-accounted investments will reduce diversity in practice and bring comparability as it will provide a consistent 'anchor' for users for their analysis.

B18The concern expressed by preparers during our outreach activities about the potential lack of understandability of the nature of investments that are integral to an entity's main business activities being excluded from the operating category, can be mitigated by preparers by using other aspects of IFRS 18. Paragraphs B15(a)-(e) above give examples of some different presentations that could help.

Issue 2: Accounting policy choice for the classification of income and expenses for entities that provide financing to customers

IFRS 18 requirements

B19Paragraphs 65–66 of IFRS 18 require an entity that provides financing to customers to sub-categorise the income and expenses derived from liabilities that arise from transactions that involve only the raising of finance into the following:

1. If the income and expenses are from liabilities that relate to the provision of finance to customers, these are classified in the ‘operating' category.
2. If the income and expenses are from liabilities that do not relate to providing financing to customers, an entity has an 'accounting policy choice' to classify these income and expenses in:
   1. the financing category; or
   2. the operating category, when an entity cannot distinguish between liabilities that relate to providing financing to customers and those that do not. The outcome will be that the operating category will include all income and expenses derived from transactions that involve only the raising of finance.

Accounting impact

B20IFRS 18 replaces the requirement in IAS 1 to present ‘finance costs' as a separate line item (paragraph 82(b) of IAS 1) by introducing a separate 'financing' category. An entity that provides financing to customers is also required to follow specific classification requirements for specific types of liabilities (see paragraph B19 above). IFRS 18 also requires the exercise of judgement in determining which line items of income and expense an entity presents to provide a useful structured summary⁶⁵).

B21As described in paragraph 2.12 approximately 30% of UK-listed entities is expected to have specified main business activities. Entities that provide financing to customers will be able to use the accounting policy choice to present income and expenses that are not related to the provision of financing to customers either in the operating category or in the financing category.

B22The UKEB Secretariat response to the IASB's Exposure Draft General Presentation and Disclosures⁶⁶ indicated that there is currently diversity of practice in the UK amongst entities that provide finance to customers as a main business activity. For example, it was observed that:

1. Entities in the financial sector typically present the income and expenses derived from the provision of finance to customers within the operating category.
2. Other (non-financial) entities that provide financing to customers as a main business activity (e.g. entities that manufacture or retail goods as well as providing financing to customers as a main business activity) present the results of the provision of financing to customers either in the operating category or in the financing category.

B23Feedback on the UKEB Preparer survey, revealed that a majority of respondents agreed with the requirements in IFRS 18 for entities with specified main business activities and observed that these requirements will have the following benefits:

1. bring more comparability and consistency for investor's analysis;
2. provide a more faithful representation of the nature of an entity's main business activities (for example, by excluding from operating profit income and expenses not directly related to an entity's main business activities); and
3. allow these entities to portray their operations in a better way by giving them a choice in the presentation of certain income and expenses.

B24Some members of UKEB advisory groups and UKEB working group noted that the application of the accounting policy choice that is permitted for entities that provide financing to customers as a main business activity would reduce comparability. This view was shared by a couple of preparers who responded to the UKEB Preparer survey. Users however have not commented on this topic. Feedback from an IASB's fieldwork exercise⁶⁷ shows that entities may apply this accounting policy choice in different ways which could lead to diversity in practice.

Assessment against the technical accounting criteria

B25This section assesses:

1. the requirement to classify income and expenses that relate to the provision of finance to customers as part of the operating category; and
2. the accounting policy choice to present income and expenses that are not related to the provision of financing to customers either in the financing category or in the operating category.

Classification of income and expenses related to the provision of finance to customers

B26The requirement to classify income and expenses that relate to the provision of finance to customers as part of the operating category will lead to:

1. relevant financial information for users' decision-making process as it will enable entities to present in 'operating' the income and expenses that are related to an entity's main business activities and present key measures of operating performance. For example, as acknowledged by the IASB in paragraph BC180 of IFRS 18, it will enable an entity to present the difference between the interest revenue from that main business activity and the related interest expense incurred to obtain the financing needed for that main business activity.
2. reliable information as entities will be able to provide a faithful representation of the results for an entity's operations for the period.
3. comparable information for users, as well as allowing users to have a better understanding of an entity's operating performance.

The accounting policy choice to present income and expenses that are not related to the provision of financing to customers

B27The UKEB acknowledges that having an accounting policy choice to present income and expenses that are not related to the provision of financing to customers either in the financing category or in the operating category may pose some risks to the comparability of the information presented in the statement of profit or loss and lead to diversity in practice.

B28As acknowledged by the IASB (refer for example to paragraphs BC182 and BC185 of the Basis for Conclusions in IFRS 18), this accounting policy choice arises because it might not be possible for certain entities, for example those with a central treasury function, to easily distinguish the income and expenses from liabilities that relate to providing financing to customers in a non-arbitrary way and without undue cost or effort. Therefore, any risks to comparability need to be balanced against other criteria or mitigating factors depending on the choice an entity makes. For instance, a choice to:

1. Classify income and expenses that are unrelated to the provision of in the financing category will lead to enhanced relevance and reliability of the information presented as it would provide users with a fair representation of an entity's business performance (i.e. by classifying income and expenses that are unrelated to the provision of finance to customers outside an entity's operations).
2. Classify all income and expenses that arise from transactions that involve only the raising of finance in operating (including the portion that is unrelated to the provision of finance), could potentially reduce the relevance and reliability of the information presented as the operating category will include income and expenses that are unrelated to the entity's main business operations. However, avoiding arbitrary allocations may also enhance the relevance and reliability of the information presented. In addition, the potential loss of comparability would be mitigated by the benefits of providing preparers with a practical option that would reduce their costs of application when they are unable to easily distinguish between income and expenses that relate to the provision of finance to customers.

B29The reduced comparability can also be mitigated by separate disclosures⁶⁸ so that users are able to understand the choice made by the entity as well as the nature and significance of the income and expenses recognised within and outside the operating category. This could help users analyse and compare the information presented.

Issue 3: Disclosure of the income tax effect and the effect on non-controlling interests (NCIs) in the MPM reconciliation

IFRS 18 requirements

B30IFRS 18 requires an entity to disclose information about its MPMs in a single note to the financial statements, including the disclosure of the income tax effect and the effect on NCIs for each item disclosed in the MPM reconciliation (in line with paragraph 123(d) of IFRS 18).

B31Paragraph B141 of IFRS 18 requires an entity to determine the income tax effects of the underlying transactions using the following approaches:

1. At the statutory tax rate applicable to the transaction.⁶⁹
2. Based on a reasonable pro-rata allocation of the current and deferred tax of the entity.
3. By using another method that achieves a more appropriate allocation.

B32This section will focus on the disclosure of the income tax effect and the effect on NCIs for each reconciling item in the MPM reconciliation.

Accounting impact

B33As mentioned in paragraph 2.30, most UK entities currently use ESMA's guidelines to report Alternative Performance Measures (APMs). These guidelines do not require an entity to disclose the income tax effect and the effect on NCIs for each reconciling item in the reconciliation of APMs.

B34Entities may already disclose information about APMs in the financial statements by providing a reconciliation of the APM to the most directly reconcilable line item, subtotal or total presented in the financial statements. However, entities may need to change this disclosure to comply with the requirement in IFRS 18 to disclose within the MPM reconciliation the income tax effect and the effect on NCIs for each reconciling item.

Impact of the disclosure of the income tax effect

B35The impact of disclosing the income tax effect for each reconciling item in the MPM reconciliation would depend on the entities' current practices in disclosing information about performance measures.

B36Desk-based research indicates that most entities currently disclose the aggregated tax effect for the combined reconciling items (and not for each individual reconciling item)⁷⁰ and that only some preparers include the tax effect for each reconciling item⁷¹.

B37The results from the UKEB Preparer survey indicated that just over half of the respondents do not include the tax effect for each reconciling item. The reasons are that:

1. their reconciliation is to operating profit so adding the tax effects is viewed as unnecessary;
2. the tax effects would be immaterial;
3. the tax effects would be of little value, as users in other jurisdictions do not normally request this information; and
4. the tax effects are normally provided aggregated for the combined reconciling items and not for each individual reconciling item.

B38Entities that currently disclose aggregated tax effects or no tax effects in their reconciliations of performance measures are expected to incur additional costs to prepare this disclosure. The amount of costs would depend on whether the information is readily available internally. Nonetheless, all entities may incur additional costs in having the reconciliation of MPMs audited, as entities may need to develop or revise the internal processes and/or prepare documentation for preparing the reconciliation. The details of the cost implication on auditing these performance measures are in Section 4 and Appendix C.

B39One member from AFIAG noted that the requirements on the effects of tax and NCIs in the MPM reconciliations could lead to additional work, but not necessarily useful information⁷². Another member welcomed more guidance around these requirements.

B40The UKEB Secretariat conducted an analysis of Reuters-Eikon data's analysis of the prevalence of NCI amounts among UK listed entities. This analysis showed that at a market level, NCI amounts are immaterial as they account for roughly 2.5% of total net assets for 2023 year-ends. For a limited number of UK-listed entities (less than 50), non-controlling interests made up greater than 10% of net assets.

Assessment against the technical accounting criteria

B41Feedback from users indicates that information on tax and NCI effects is useful for making necessary adjustments for their analysis. As mentioned in paragraphs BC384-BC385 of IFRS 18, users need information about the amounts of the adjustments attributable to owners of the parent and the tax effects of those adjustments to be able to adjust management's adjusted earnings per share (EPS) figure to calculate their own EPS measure (which will be based only on the adjustments they want to consider in their analysis). Therefore, having the required information for each reconciling item and within the financial statements would improve both the confirmatory and predictive value of this information. This will provide users with relevant information.

B42In addition, feedback received by the IASB from users indicates that having high-level information about the tax effects (by applying the different approaches in

iv. the tax effects are normally provided aggregated for the combined reconciling items and not for each individual reconciling item.

B38Entities that currently disclose aggregated tax effects or no tax effects in their reconciliations of performance measures are expected to incur additional costs to prepare this disclosure. The amount of costs would depend on whether the information is readily available internally. Nonetheless, all entities may incur additional costs in having the reconciliation of MPMs audited, as entities may need to develop or revise the internal processes and/or prepare documentation for preparing the reconciliation. The details of the cost implication on auditing these performance measures are in Section 4 and Appendix C.

B39One member from AFIAG noted that the requirements on the effects of tax and NCIs in the MPM reconciliations could lead to additional work, but not necessarily useful information⁷². Another member welcomed more guidance around these requirements.

B40The UKEB Secretariat conducted an analysis of Reuters-Eikon data's analysis of the prevalence of NCI amounts among UK listed entities. This analysis showed that at a market level, NCI amounts are immaterial as they account for roughly 2.5% of total net assets for 2023 year-ends. For a limited number of UK-listed entities (less than 50), non-controlling interests made up greater than 10% of net assets.

Assessment against the technical accounting criteria

B41Feedback from users indicates that information on tax and NCI effects is useful for making necessary adjustments for their analysis. As mentioned in paragraphs BC384–BC385 of IFRS 18, users need information about the amounts of the adjustments attributable to owners of the parent and the tax effects of those adjustments to be able to adjust management's adjusted earnings per share (EPS) figure to calculate their own EPS measure (which will be based only on the adjustments they want to consider in their analysis). Therefore, having the required information for each reconciling item and within the financial statements would improve both the confirmatory and predictive value of this information. This will provide users with relevant information.

B42In addition, feedback received by the IASB from users indicates that having high-level information about the tax effects (by applying the different approaches in paragraph B141 of IFRS 18) would meet user needs (refer to paragraph BC386 of IFRS 18). Some PAG members noted that the three approaches available to calculate the income tax effects for each item disclosed in the MPM reconciliation should allow entities to obtain reasonable estimates of the tax effects for each reconciling item. This could potentially reduce the complexity and potential costs of preparation of this information. Although input from one member suggests that these options may be more difficult to apply for circumstances where an entity has for example, the Pillar 2 top-up tax⁷³.

B43The requirement in IFRS 18 to disclose how the income tax effects are calculated⁷⁴ along with the assurance from the auditing of this information is also expected to provide users with reliable MPM information.

B44The requirement to disclose the tax and NCI effects and how tax effects are calculated has also been welcomed by the user community as it is expected to improve transparency on the calculation of MPMs and enable users to understand the underlying calculation of these performance measures.

B45Likewise, the requirements in IFRS 18 to disclose any changes on how an entity determines the income tax effects of reconciling items as well as restated comparative information⁷⁵ will enable users to compare the financial performance both from one financial period to another and across different entities.

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Appendix C: Evidence about costs and benefits for preparers

C1This Appendix reports detailed evidence that underpins the costs and benefits analysis conducted as part of the long-term public good assessment in Section 4.

Survey results

C2The UKEB Preparer survey gathered information about incremental one-off and ongoing costs, with preparers having the option to express them as either:

1. a percentage of the costs of preparing accounts as of previous year-end (referred to as baseline costs in the remainder of Appendix C)⁷⁶; or
2. a percentage of operating costs.

C3Questions on direct implementation costs focused on the following categories:

1. Familiarisation.
2. Accounting system changes.
3. Changes to data handling processes and controls.
4. Accounts preparation.
5. Communication with third parties.
6. Audit costs.
7. Legal costs.

C4In summary, respondents indicated the following:

1. Incremental one-off costs expressed as a share of baseline costs. Preparers anticipated incurring some one-off costs as a result of IFRS 18. In particular, entities expected to incur extra audit costs (approximately 30% of the respondents expected these to be 5% of their baseline costs or above), accounts preparation costs (25% of the respondents expected these to be 5% of their baseline costs or above) and familiarisation costs (9% of the respondents expected these to be 5% of their baseline costs or above). Overall, however, preparers expected one-off costs to be relatively small, with the majority of respondents indicating that they expected them to be lower than 5% of baseline costs for all cost categories.
2. Incremental ongoing costs expressed as a share of baseline costs. Preparers anticipated incurring some ongoing costs as a result of adopting IFRS 18. These were expected to be much smaller than one-off costs. Preparers expected to incur extra audit costs on an ongoing basis, but also some accounts preparation and accounting system maintenance costs. For all cost categories, the majority of respondents expected incremental ongoing costs to be nil or less than 1% of baseline costs.
3. Incremental one-off costs expressed as a share of operating costs. Consistent with the rest of the results, preparers anticipated incurring some one-off costs as a result of IFRS 18, particularly related to external audit, accounting system changes, accounts preparation and familiarisation. However, when expressed as a shared of operating costs, preparers considered these to be minimal: for all cost categories, most respondents expected incremental one-off costs to be negligible or less than 1% of operating costs.
4. Incremental ongoing costs expressed as a share of operating costs. Consistent with the rest of the results, preparers anticipated incurring some ongoing costs as a result of IFRS 18, though they expected these to be smaller than one-off costs. Preparers expected to incur extra audit costs on an ongoing basis, but also some accounts preparation and accounting system maintenance costs. For all cost categories, most respondents expected incremental ongoing costs to be negligible or less than 1% of operating cost.

C5On balance, preparers suggested that they expect to incur ongoing costs for a few years till they are subsumed into business as usual. Views varied:

1. At one extreme, some preparers anticipated incurring extra ongoing costs permanently.
2. At the other extreme, some preparers suggested that they would incur no ongoing costs at all.

On average, preparers expected to incur extra costs for a period of five years before they were subsumed into business as usual.

C6The survey results are broadly consistent with the results of third-party research discussed later in this Appendix.

C7The UKEB survey results are also broadly consistent with the those of a poll conducted by ICAEW during a webinar on IFRS 18 held in October 2024, which aimed to gather audience feedback on the expected challenges of the Standard’s implementation⁷⁷.

C8The poll provided four categories of expected implementation challenges:

1. Accounts preparation.
2. Accounting system changes.
3. Familiarisation with IFRS 18 requirements.
4. Changes to data handling processes and controls.

C9Respondents could also choose “All of the above” and “No challenge” options.

C10Chart 3 provides a visual representation of these results as follows:

Engagement with advisory groups

C11Advisory groups provided the following feedback on preparers' costs and benefits associated with IFRS 18:

1. PAG: Members observed that applying IFRS 18 would lead to limited implementation costs (as compared to the size of an entity’s operations) and would generally not require significant changes to the general ledger of accounts. It was observed that, at the time of stakeholder engagement, many preparers were likely to be at an early implementation stage, which would limit the availability of cost estimates. Paragraph D3 provides detail on how the UKEB tackled this limitation.
2. IAG: A member of the IAG commented that the IFRS 18 requirements may lead to more transparent financial information and allow entities to present financial information in a way that is consistent with their business model.
3. AFIAG: Members observed that the approach taken by entities in implementing IFRS 18 will influence the level of costs that they will incur on adoption. For example, some entities may take a simple ‘compliance approach’ whereas others may take a ‘wider compliance approach’ in their implementation of IFRS 18 and look for additional areas of improvement in the presentation and disclosure of their financial information. These entities are likely to incur higher implementation costs.

UKEB Webinar poll results

C12Webinar participants were asked about the costs they expected to incur to implement IFRS 18 on transition and in the first year of adoption. Out of 43 responses:

1. 12% said IFRS 18 would involve very low implementation costs as their practices were mostly aligned with the requirements in IFRS 18;
2. 53% said IFRS 18 would involve some changes to systems, procedures and/or current practices;
3. 23% said IFRS 18 would involve significant and costly changes to systems, procedures and/or current practices; and
4. the rest (12%) did not know.

C13The categories utilised in the webinar poll are not directly comparable to those utilised in the UKEB Preparer Survey. However, approximately 65% of the respondents indicated that IFRS 18 is expected to lead to “some” or “very low" implementation costs. The UKEB considered this evidence to be in line with that of the UKEB Preparer survey and the interviews.

Results from qualitative interviews

C14A total of 15 interviews were conducted between Q4 2024 and Q1 2025.

C15Interview questions were based on the survey questions, and focused on implementation costs⁷⁸, ⁷⁹.

C16Interviewees were asked to discuss incremental costs of IFRS 18 implementation, either as a share of baseline costs or as a share of operating costs. The results were broadly in line with the UKEB survey results.

1. One-off costs as a share of baseline costs: Interviewees considered familiarisation and audit to be the cost categories that would experience the highest percentage increase. Legal costs and communication with third parties were the cost categories that were expected to experience the least percentage increase.
2. Ongoing as a share of baseline costs: Audit was the cost category expected to face the highest percentage increase, while legal costs and accounting system maintenance were the cost categories associated with the lowest percentage increase.
3. Implementation costs as a share of operating costs: Interviewees indicated that expected implementation costs would be minimal as compared to operating costs.

C17The following overarching themes emerged from the interviews:

1. IFRS 18 implementation is not anticipated to be particularly costly: Interviewees suggested that implementation of IFRS 18 is not going to be particularly burdensome, especially as compared to other recent standards, such as IFRS 15 Revenues from Contracts with Customers, IFRS 16 Leases and IFRS 17 Insurance Contracts. The main reason is that IFRS 18 does not change the recognition and measurement of the components of financial statements. Preparers expected the additional disclosures, in particular around MPMs, to be not too burdensome to prepare or audit, as most preparers already disclose Alternative Performance Measures (APMs). Implementation costs would comprise both monetary costs (e.g. external audit) and staff reallocation costs (e.g. familiarisation). Some preparers indicated that they already present their statement of profit or loss in a way that is consistent with IFRS 18 requirements and therefore do not anticipate incurring any major implementation costs.
2. Implementation costs are a function of complexity, and not just size: Preparers indicated that implementation costs associated with IFRS 18 are not just a function of company size but also of the complexity of the business. More specifically, the size of implementation costs would depend on whether the business has: specified main business activities; investments in joint ventures and associates accounted for using the equity method; non-controlling interests; foreign exchange transactions. Preparers suggested that two companies of similar size may face very different implementation costs depending on the complexity of their businesses. These features are more likely to affect one-off costs rather than ongoing costs. IFRS 18 includes cost mitigations that are likely to affect the scale of one-off costs. Estimates provided by preparers were consistent with this assertion.
3. Approach to compliance will vary: Preparers indicated that they expect to approach the implementation of IFRS 18 differently. Some would make only the minimum necessary changes to comply with IFRS 18, whereas others would use the implementation of IFRS 18 as an opportunity to thoroughly re-think their profit or loss presentation as well as their disclosures. Most entities positioned themselves between these two approaches, with more complex businesses more likely to reconsider their approach to presentation.

C18On the individual items that comprise implementation costs, interviewees provided the following feedback:

1. Familiarisation: respondents noted that familiarisation would entail reallocation of existing staff’s time to tasks such as reading IFRS 18, preparing and disseminating accounting papers and organising internal seminars. Most respondents indicated that no extra monetary costs will be incurred (e.g. external training). Some respondents considered meetings with auditors to discuss the new requirements as part of their familiarisation costs.
2. Changes to accounting systems: preparers generally agreed that they were not anticipating undergoing major accounting system changes as a result of applying IFRS 18 requirements. Some preparers indicated that changes can be performed in-house (i.e. staff time re-allocation) and would require relatively simple re-mapping to relabel the income and cash flow statements, and to move items to different categories (e.g. from the operating to the investing category).
3. Changes to data handling processes and controls: preparers noted that most internal accounting changes would affect templates (i.e. accounts preparation) but not the underlying data processes and controls because IFRS 18 does not affect recognition and measurement.
4. Accounts preparation: Most preparers indicated that IFRS 18 will lead to some incremental costs associated with the adjustment of templates (one preparer commented: “everything has to be mapped”). How the adjustment of templates will be tackled will largely depend on internal processes. Some preparers indicated that the process will be done manually and in-house and involving staff time reallocation without extra monetary costs. Preparers noted that while the amendment of templates was anticipated to be a significant one-off change, associated ongoing cost would be much smaller. Some preparers said that incremental costs for them would be minimal as they already present information in line with IFRS 18 requirements.
5. Communication with third parties: preparers anticipated incremental costs associated with communication with third parties to be minimal. In some cases, communication to investors, banks and shareholders would be done through an agency (thus leading to extra monetary costs) while in some other cases it would be done internally, leading to staff time reallocation.
6. Legal costs: preparers anticipated incremental legal costs to be minimal or nil. A preparer said that they would incur extra legal costs to re-assess their covenants.
7. Audit costs: consistent with the UKEB survey results, most interviewees anticipated audit costs to increase as a result of the implementation of IFRS 18. The size of the increase varied between preparers. Preparers with relatively less complex operations anticipate smaller extra audit costs. A preparer stated: “Once [the] auditors believe [we] have an acceptable interpretation of IFRS 18, there may be some work to do, but not big". Another preparer said that audit fees would be “more in the first year" but going forward would be less than 1% of baseline costs. A preparer stated that once IFRS 18 is implemented, the ongoing audit costs will be part of their day-to-day responsibilities. Another preparer said IFRS 18 adds no extra hours to their audit.
8. Other costs: Some preparers noted that there would be some management time reallocation to support the process changes associated with the implementation of IFRS 18.

C19Interviewees' views on the length of ongoing costs were consistent with those from the UKEB Preparer Survey.

Third-party work on the economic assessment of IFRS 18

C20Desk-based research formed part of the evidence that the UKEB used for the [Draft] ECAECA. This section summarises the work carried out by other organisations on the costs and benefits of applying IFRS 18. The results of third-party research are broadly in line with those reported by the UKEB in this [Draft] ECAECA.

IASB Effects Analysis

C21When the IASB published IFRS 18, the Effects Analysis alongside the Standard reports on the likely costs and benefits associated with the new requirements at an international level.

C22The IASB gathered evidence on the topic largely through consultation, outreach with stakeholders (users, preparers, regulators, standard-setters, accounting firms and academics) and fieldwork.

C23The main results are as follows.

Implementation costs

C24Preparers: Preparers are expected to incur some implementation costs, attributable mainly to: changes in internal processes and controls; changes to information systems; training for staff and management; and communication (internally and to third parties). Most implementation costs are anticipated to be one-off. The size of ongoing costs will largely depend on how IFRS 18 is applied. For example, companies might incur ongoing costs if application of the requirements leads to a change in how they communicate performance. The Standard may also result in ongoing costs if a company’s processes require the manual collection of data. Ongoing costs are nonetheless expected to gradually reduce and be subsumed into business as usual.

C25Users: Users will likely incur some minor costs to adjust models and methods of analysis to the new requirements.

C26Regulators: Regulators may face some costs to revise regulatory templates and possibly develop procedures to regulate the new requirements (e.g. the enforcement of the new requirements for MPMs).

C27Auditors: Auditors are likely to incur higher costs to evaluate the judgements entities will make to apply the new requirements (e.g. on presentation and disaggregation) and to audit the new requirements.

Benefits for users

C28Comparability: IFRS 18 is expected to enhance comparability of financial statements by standardising the structure of the statement of profit or loss and requiring preparers to report consistent subtotals, particularly operating profit. As a result, users are expected to use time more efficiently when analysing financial statements. Users will also benefit from the use of the operating profit subtotal as a starting point for the indirect method of reporting cash flows from operating activities.

C29Transparency: The new aggregation and disaggregation requirements may lead to decision-useful items that were aggregated in the past to be presented separately in the financial statements. As a result, users would benefit from additional (audited) decision-useful information. In addition, requirements on MPMs will improve the transparency of APMs that meet IFRS 18 criteria.

EFRAG Endorsement Advice on IFRS 18

C30In May 2025, EFRAG submitted its Final Endorsement Advice on IFRS 18 to the European Commission⁸⁰. This assessment summarises EFRAG’s technical and economic analysis on IFRS 18. In its Endorsement Advice, EFRAG confirmed the initial assessment that IFRS 18 satisfies the criteria for endorsement in the EU and therefore is recommended for endorsement ⁸¹.

C31For its assessment, EFRAG gathered evidence through desk-based research, an analysis of 2023 annual reports and associated press releases of 45 European listed entities⁸². EFRAG also considered the feedback received during its field testing, targeted stakeholder outreach and from EFRAG’s technical expert groups and working groups.

C32A summary of EFRAG’s main observations derived from its economic analysis is presented below. Their results are broadly in line with those reported in this [Draft] ECAECA.

Implementation costs

C33Preparers: Reporting entities will incur some initial one-off costs, but ongoing costs to comply with the new requirements should be relatively low. These results are in line with those reported in this [Draft] ECAECA (see paragraph 4.41).

C34Users: EFRAG does not anticipate any significant costs. While users will need to become familiar with the new requirements, the costs involved are anticipated to be minimal. These results are in line with those reported in this [Draft] ECAECA (see paragraph 4.34).

Benefits

C35Users: Users provided positive feedback, indicating that:

1. The new structure for the statement of profit or loss will allow for better analysis and improved comparability. These results are in line with those reported in this [Draft] ECAECA (see paragraphs 3.16–3.18).
2. The disclosure of MPMs in a single note and the reconciliation requirements will improve the reliability of such information. These results are in line with those reported in this [Draft] ECAECA (see paragraphs 3.24–3.25).
3. The enhanced aggregation and disaggregation requirements will lead to better understandability of the information presented. These results are in line with those reported in this [Draft] ECAECA (see paragraphs 3.30–3.31).

C36Preparers: IFRS 18 will lead to a better presentation of preparers’ performance, which may be associated with a more efficient capital allocation. These results are in line with those reported in this [Draft] ECAECA (see paragraphs 4.81–4.96).

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Appendix D: Quantitative assessment of implementation costs

Method and limitations

D1The UKEB conducted an indicative monetary estimate of implementation costs to entities that will be required to implement IFRS 18.

D2This assessment provides an indicative range for implementation costs. It should not be interpreted as an accurate forecast of implementation costs.

D3To assess implementation costs, the UKEB used the following approach:

1. Sample collection: The UKEB surveyed/interviewed a sample of preparers asking them to report monetary estimates of anticipated implementation costs⁸³.
2. Regression model estimation: For the entities sampled, implementation costs were regressed against revenues, as revenues are expected to be highly correlated.
3. Extraction of market-wide estimates: The regression estimates were used to predict implementation costs for the UK-listed entities that did not provide information during stakeholder engagement. Market-wide estimates were then obtained by totalling all entity-level estimates.

D4Sample data points on implementation costs were retained only from survey respondents/interviewees who reported absolute monetary cost estimates⁸⁴. Cost data points were generally utilised as reported.

D5The following limitations apply:

1. Sample size: the assessment is based on a small sample not representative of the population.
2. Model specification: the regression model is very simple, including only one variable (revenues).

Analysis of sample responses

D6The UKEB collected 18 observations from survey responses and interviews⁸⁵.

D7The UKEB also collected consolidated revenue amounts (source: Reuters-Eikon) as implementation costs are typically correlated with the size of an entity⁸⁶.

D8Summary statistics for these respondents are as follows:

Source: UKEB estimates using Reuters-Eikon and proprietary data. Sample comprised of 18 companies. Data collected through the UKEB Preparer Survey and 1-2-1 interviews.

D9Entities in the sample ranged from relatively young businesses listed on AIM to established businesses included in the FTSE100. This is reflected in the range of revenues, spanning from as little as £1.5 million to as much as and over £10 billion. Entities belonged to a variety of industries, including technology, asset managers, manufacturers and utilities.

D10Implementation costs estimates are comprised of both external monetary costs (e.g. audit fees, legal costs) and staff time reallocation. This ensured the inclusion of opportunity costs in the estimates.

D11One-off costs spanned from as little as zero to a maximum of £3 million. The maximum is attributable to a large entity with operations in the range of tens of billions of pounds. Median implementation costs equal £100,000, meaning that half of the respondents in the sample anticipated spending £100,000 or less on a one-off basis. Average implementation costs were equal to £312,000. The average higher than the median reflects the presence of large entities in the sample.

D12Ongoing costs spanned from as little as zero to a maximum of £150,000. The maximum is attributable to a large entity with operations in the range of tens of billions of pounds. Median implementation costs equal £10,000, meaning that half of the respondents in the sample anticipated spending £10,000 or less per year on an ongoing basis. Average implementation costs were equal to £29,000. The average higher than the median reflects the presence of large entities in the sample.

D13Both the average and median ongoing costs are approximately 10% of one-off costs.

Regression model estimation

D14The UKEB estimated the following regression model:

One – off implementation Costsi = β0 + β1Revenuesi + ui(1)

D15Where one-off implementation costs are the cost figures collected through stakeholder engagement, revenues are an indicator of company size, and ui is an error term.

D16The model delivered the following estimates⁸⁷:

Source: UKEB estimates using Reuters-Eikon and proprietary data. t statistics in parentheses. * p<0.05, ** p<0.01, *** p<0.001. R-squared: 61%. Number of observations: 18.

D17The estimates have the following interpretation:

1. Revenues: β1: The estimate indicates that a company whose revenues are £1 billion or larger is anticipated to spend an additional £128,000 in one-off costs. There is a statistically strong relationship between revenues on one-off costs: the null that the coefficient is equal to zero is rejected with 99% probability. The estimate lies between 0.00007 and 0.00018 with 95% probability.
2. Constant: β0: The negative coefficient does not have a meaningful economic interpretation. This coefficient is statistically not distinguishable from zero, suggesting that implementation costs are scalable. This result is consistent with feedback from interviewees and data points collected from survey respondents and interviewees.

D18Based on the estimates obtained, a company with revenues equal to £3.2 billion (the average in the sample) would spend approximately £410,000 on a one-off basis.

Extraction of market-wide estimates

D19The regression coefficients are used to extrapolate implementation costs for entities for which cost information was not obtained.

D20Extrapolation on the population of entities that would be required to apply IFRS 18 delivers market-wide one-off approximate estimates as below:

Source: UKEB estimates using Reuters-Eikon and proprietary data. The estimates are normally distributed, which means that lower and upper bounds are not as likely as the mid-point estimate.

D21The estimates are comprised of incremental external monetary costs, such as audit fees and legal costs, as well as opportunity costs associated with staff time reallocation (such as familiarisation, changes to templates and data handling processes). With reference to the mid-point estimate of £270 million, an approximate allocation of costs based on an analysis of survey results indicates that approximately £65 million could be attributed to incremental audit fees, with the remaining costs attributable to staff-time reallocation.

D22In the sample, ongoing costs per annum are on average 10% of one-off costs (see Table 8 and paragraph D13). The UKEB used this rule of thumb to estimate market-wide implementation costs using the formula below.

D23Ongoing costs: Ongoing costs per entity are calculated as the present value (PV) of annual ongoing costs. These were calculated using the following formula:

Total ongoing costs = $\sum_{i=1}^{5}$ Annual ongoing costs * (1 + 3.5%)$^{-i}$ (2)

1. off costs: the null that the coefficient is equal to zero is rejected with 99% probability. The estimate lies between 0.00007 and 0.00018 with 95% probability. Constant: B0: The negative coefficient does not have a meaningful economic interpretation. This coefficient is statistically not distinguishable from zero, suggesting that implementation costs are scalable. This result is consistent with feedback from interviewees and data points collected from survey respondents and interviewees.

D18Based on the estimates obtained, a company with revenues equal to £3.2 billion (the average in the sample) would spend approximately £410,000 on a one-off basis.

Extraction of market-wide estimates

D19The regression coefficients are used to extrapolate implementation costs for entities for which cost information was not obtained.

D20Extrapolation on the population of entities that would be required to apply IFRS 18 delivers market-wide one-off approximate estimates as below:

Source: UKEB estimates using Reuters-Eikon and proprietary data. The estimates are normally distributed, which means that lower and upper bounds are not as likely as the mid-point estimate.

D21The estimates are comprised of incremental external monetary costs, such as audit fees and legal costs, as well as opportunity costs associated with staff time reallocation (such as familiarisation, changes to templates and data handling processes). With reference to the mid-point estimate of £270 million, an approximate allocation of costs based on an analysis of survey results indicates that approximately £65 million could be attributed to incremental audit fees, with the remaining costs attributable to staff-time reallocation.

D22In the sample, ongoing costs per annum are on average 10% of one-off costs (see Table 8 and paragraph D13). The UKEB used this rule of thumb to estimate market-wide implementation costs using the formula below.

D23Ongoing costs: Ongoing costs per entity are calculated as the present value (PV) of annual ongoing costs. These were calculated using the following formula:

Total ongoing costs = $\sum_{i=1}^{5} \text{Annual ongoing costs} * (1 + 3.5\%)^{-i}$ (2)

D243.5% is the rate typically used to discount costs and benefits in the BRF. The appraisal period is 5 years based on survey and interview results⁸⁸.

D25Applying equation (2) delivers the following PV estimates for ongoing implementation costs:

Source: UKEB estimates using Reuters-Eikon and proprietary data. PV value calculation based on a 10-year appraisal period, using a 3.5% discount rate.

D26The estimates are comprised of incremental external monetary costs, such as audit fees and legal costs, as well as opportunity costs associated with staff time reallocation (such as familiarisation, changes to templates and data handling processes). With reference to the mid-point estimate of £120 million, an approximate allocation of costs based on an analysis of survey results indicates that approximately 40% of these costs, or £45 million, could be attributed to incremental audit fees, with the remaining costs due to staff-time reallocation.

Appendix E: Capital markets effects: additional results

E1This Appendix reports the results of an analysis of capital markets effects to the assessment of IFRS 18, using five scenarios.

Inputs to the analysis

E2The UKEB estimated market-wide implementation costs (one-off and ongoing costs) for preparers to be approximately £400 million (see paragraph 4.64).

E3Due to the fact that exact monetary effects are impossible to predict with accuracy, the estimated market-wide implementation costs are allocated to market-wide effects on cost of capital using five scenarios.

Source: UKEB

E4Another important input of the analysis is whether IFRS 18 is expected to deliver direct benefits for users, enhancing their decision-making. This is because users' confidence that the accounting changes brought by IFRS 18 will deliver direct benefits is interpreted as supportive evidence that the new Standard would deliver a cost of capital reduction, in line with the evidence on the topic.

Results

E5The cost of capital analysis for IFRS 18 implementation delivered the following results.

Source: UKEB calculations based on LSE and Reuters-Eikon data. A basis point is a hundredth of a percentage point.

Are the figures plausible?

E6Stakeholder engagement shows that users have confidence that IFRS 18 requirements will deliver direct benefits, thereby enhancing their decision-making.

E7This is supportive of IFRS 18 potentially delivering a cost of capital reduction and being associated with an increase in the price of traded securities. Therefore, it is plausible to expect that preparers will reap indirect benefits that will materialise through capital markets in the longer term. This would allow them to recover the implementation costs they will have incurred upon implementing IFRS 18. As for the magnitudes, this analysis suggests that capital markets might plausibly deliver effects that would allow preparers to recover implementation costs in Scenario 4, as noted below:

1. A decrease in the cost of equity of 3.2 Bps is credible considering that:
   1. The adoption of IFRS in the UK in 2005 was associated with a likely cost of equity reduction of approximately 100 Bps⁸⁹.
   2. Recent research commissioned by the AASB shows that adoption of IFRS 15 and IFRS 16 in Australia was associated with a 100-190 Bps reduction in cost of capital⁹⁰.
   3. As compared to the baseline cost of capital (11.23%), the required change is small, amounting to 0.3% of baseline cost of capital.
   4. The required change is also small as compared to the year-on-year volatility of comparable cost of equity measures as reported in academic research.
2. A decrease in the cost of debt of 0.2 Bps is credible considering that the adoption of IFRS in 2005 was associated with a likely cost of debt reduction of approximately 30 Bps⁹¹. As compared to the baseline cost of capital (4.05%), the required change is small, amounting to 0.01% of baseline cost of capital
3. The associated increases in the value of traded securities (increase in market capitalisation and in the outstanding value of corporate bonds) are small as compared to the size of the market and well within the range of day-to-day price volatility of securities listed⁹².

E8The analysis does not allow the isolation of effects that may be triggered as a direct result of the implementation of IFRS 18.

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Feedback Statement

IFRS 18 Presentation and Disclosure in Financial Statements

Endorsement Criteria Assessment (ECA) November 2025

The UK Endorsement Board (UKEB) is responsible for endorsement and adoption of IFRS for use in the UK and therefore is the UK's National Standard Setter for IFRS. The UKEB also leads the UK's engagement with the IFRS Foundation on the development of new standards, amendments and interpretations.

Foreword

“The UK Endorsement Board is grateful for our ongoing dialogue with stakeholders, and we have welcomed their input to our deliberations regarding IFRS 18.

That input has helped test our thinking and our confidence that we have considered appropriately all relevant issues in the context of our statutory duties. It has thus played an important role in our final adoption decision."

Paul Lee, Chair, UK Endorsement Board

Purpose of this Feedback Statement

This Feedback Statement presents the views of UK stakeholders received during the UKEB's public consultation on the [Draft] Endorsement Criteria Assessment (ECA) of IFRS 18 *Presentation and Disclosure in Financial Statements

• and, where relevant, explains how the UKEB has addressed those views in the final ECA.

Description of IFRS 18 – overall

IFRS 18 *Presentation and Disclosure in Financial Statements

• was issued by the IASB in April 2024. IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.

IFRS 18 is a new IFRS Accounting Standard aimed at improving how entities communicate their financial performance in their financial statements and replaces IAS 1 Presentation of Financial Statements.

The IASB developed IFRS 18 in response to strong demand from stakeholders, particularly from users of financial statements, for improvements to the reporting of financial performance. Many requirements from IAS 1 were incorporated into IFRS 18 unchanged or with minor revisions.

IFRS 18 sets out general presentation and disclosure requirements that apply across the primary financial statements and the notes. IFRS 18 also makes consequential amendments to other IFRS Accounting Standards.

Description of IFRS 18 – main requirements