The Accounting Standards Council (ASC) has enacted Singapore Financial Reporting Standards 118 [SFRS(I) 18] Presentation and Disclosure in Financial Statements, effective for annual periods beginning on or after 1 January 2027. This standard, aligning with IFRS 18, constitutes a fundamental shift in presentation principles, moving beyond disclosure updates to redefine the architecture of the statement of profit or loss and the management of performance measures.
Core Impact
SFRS 118 replaces the flexible presentation requirements of SFRS 1 with a structured, principle-based model. The most significant operational change is the mandatory classification of all income and expenses into five defined categories: Operating, Investing, Financing, Income Taxes, and Discontinued Operations.
- Operating: Encompasses income/expenses from core business activities. For entities whose main business is investing or financing (e.g., banks, insurers), related revenues and costs are classified here.
- Investing: Includes returns from assets independent of main operations (e.g., dividend income from strategic investments).
- Financing: Captures costs/income related to capital structure (e.g., interest expense, fair value gains/losses on financial liabilities).
- Income Taxes: All tax-related items are aggregated here, isolating tax effects for clearer analysis.
- Discontinued Operations: Results of disposed or held-for-sale major components are separately presented.
Entities must re-map their chart of accounts and reporting systems to align with these definitions. The classification of items like interest income on operational cash balances or dividends from subsidiaries requires careful assessment based on the entity’s primary activities.
Mandatory Sub-Totals
The standard mandates three defined sub-totals in the statement of profit or loss, enhancing cross-entity comparability:
- Operating Profit or Loss: Reflects performance from core operations.
- Profit or Loss before Financing and Income Taxes: Shows operational performance independent of capital structure and tax jurisdiction.
- Profit or Loss: The net result for the period.
These sub-totals will become benchmark metrics. Management commentary and external analysis will likely pivot to these standardized figures, requiring consistent calculation across periods.
Governance and Disclosure of Management-Defined Performance Measures (MPMs)
SFRS 118 formally regulates non-GAAP measures, termed MPMs (e.g., EBITDA, adjusted earnings). Key requirements:
- Any MPM communicated externally must be disclosed in a single, dedicated note in the financial statements.
- A clear reconciliation from the MPM to the most directly comparable SFRS(I)-defined sub-total (typically Operating Profit) is mandatory.
- The objective is to improve transparency, reduce misleading portrayals, and provide audited context for these commonly used metrics.
Finance teams must inventory all non-standard metrics used in earnings releases, investor presentations, and regulatory filings. Processes must be established to compile, reconcile, and audit these measures for inclusion in the financial statements.
Enhanced Principles on Materiality and Aggregation
The standard reinforces materiality judgments and discourages generic “boilerplate” disclosures. It promotes:
- Aggregation in Primary Statements: Similar items must be grouped to provide a useful summary.
- Disaggregation in Notes: Significant items cannot be hidden within broad categories like “other expenses.” Further breakdown based on nature or function is required.
Financial Statements preparers must critically review note disclosures for relevance. The use of cross-referencing, tables, and visual aids is encouraged to improve usability, which may involve changes to financial reporting software and layout.
Transition and Implementation
Application is retrospective, effective 1 January 2027. Comparative periods must be restated using the new categories.
- Entities must present a reconciliation of each line item from the old (SFRS 1) format to the new (SFRS 118) format for the comparative period in the first year of adoption.
- A reconciliation for the current period (first year) is optional but recommended.
The requirement for restated comparatives means systems and processes must be ready no later than Q1 2026 to prepare for the 31 December 2027 year-end reporting. Early assessment of the impact on key performance indicators and debt covenants is crucial.
Conclusion
SFRS 118 is a transformative standard requiring proactive preparation. The focus should extend beyond compliance to leverage the enhanced structure for clearer stakeholder communication. Key action points include: initiating a gap analysis on income/expense classification, inventorying and defining MPMs, reviewing disclosure policies for materiality, and planning for system and process updates to facilitate retrospective application.