{"id":3563,"date":"2026-07-02T18:53:22","date_gmt":"2026-07-02T10:53:22","guid":{"rendered":"https:\/\/ehluar.com\/main\/?p=3563"},"modified":"2026-07-03T18:59:06","modified_gmt":"2026-07-03T10:59:06","slug":"frs-118-a-new-era-of-presentation-and-disclosure-in-financial-statements","status":"publish","type":"post","link":"http:\/\/ehluar.com\/main\/2026\/07\/02\/frs-118-a-new-era-of-presentation-and-disclosure-in-financial-statements\/","title":{"rendered":"FRS 118 \u2014 A New Era of Presentation and Disclosure in Financial Statements"},"content":{"rendered":"

FRS 118, Presentation and Disclosure in Financial Statements<\/em>, will replace FRS 1 as the primary standard governing the presentation of financial statements. The new standard is aimed at improving comparability, transparency and the overall quality of financial reporting. It applies to annual reporting periods beginning on or after 1 January 2027<\/strong>, and comparative figures will need to be restated to maintain year-on-year comparability.<\/p>\n

For companies with a 31 December year-end<\/strong>, the first mandatory annual reporting period affected will be the year ending 31 December 2027<\/strong>. For companies with other financial year-ends, the first affected annual reporting periods will be 31 March 2028<\/strong>, 30 June 2028<\/strong> or 30 September 2028<\/strong>, depending on the entity\u2019s reporting date.<\/p>\n

Why FRS 118 Matters<\/h4>\n

The key driver behind FRS 118 is the need for more consistent and comparable financial performance reporting. Under existing practice, statements of profit or loss can differ significantly in content and structure, making it difficult for investors and other users to compare entities across industries. FRS 118 addresses this by introducing defined categories, mandatory subtotals and more structured disclosure requirements.<\/p>\n

The changes are presentation-focused rather than recognition-focused. In practice, this means many existing accounting measurements may not change, but the way income, expenses, subtotals and performance measures are presented and explained will need to be reviewed.<\/p>\n

Key Changes<\/h4>\n

FRS 118 introduces several significant changes to the statement of profit or loss. All income and expenses will be classified into one of five categories: operating, investing, financing, income tax and discontinued operations<\/strong>. The standard also introduces new requirements for management-defined performance measures<\/strong>, clearer expense breakdowns and standardised profit subtotals.<\/p>\n

Two new mandatory subtotals will be introduced:<\/p>\n

    \n
  1. Operating profit or loss<\/strong><\/li>\n
  2. Profit or loss before financing and income tax<\/strong><\/li>\n<\/ol>\n

    These subtotals are intended to provide a more consistent structure and improve analysis of financial performance.<\/p>\n

    Classification of Income and Expenses<\/h4>\n

    A major change under FRS 118 is that income and expenses must be classified based on the nature of the underlying asset, liability or transaction from which they arise, rather than simply the label of the income or expense itself. This requires entities to look behind each line item and assess the source of the related income or expense.<\/p>\n

    For example, foreign exchange differences will generally follow the category of the underlying item that gave rise to them. A foreign exchange difference on a trade receivable would be operating, while one relating to cash and cash equivalents may be investing, and one relating to a working capital loan may be financing, assuming the entity does not have a specified main business activity.<\/p>\n

    This will require more detailed analysis of transactions than many entities currently perform, especially where income or expense items are presently grouped into broad headings such as \u201cother income,\u201d \u201cfinance costs\u201d or \u201cother expenses.\u201d<\/p>\n

    Operating Category<\/h4>\n

    The operating category includes income and expenses related to an entity\u2019s main business activities, specified main business activities, supporting activities and items that do not meet the criteria for the investing, financing, income tax or discontinued operations categories. It functions as a residual category and is intended to provide a complete picture of the entity\u2019s operations.<\/p>\n

    Importantly, FRS 118 does not allow entities to exclude items from operating profit merely because they are volatile, unusual or non-recurring. For example, if property, plant and equipment used in the business is destroyed by fire, the resulting loss should still be classified within operating profit because the asset supported the entity\u2019s operations.<\/p>\n

    Investing Category<\/h4>\n

    Under the general requirements, income and expenses from non-operating assets are classified in the investing category. These include associates, joint ventures, unconsolidated subsidiaries, cash and cash equivalents, investment property, debt securities and equity investments that generate returns individually and largely independently of the entity\u2019s other resources.<\/p>\n

    Examples of income and expenses classified in the investing category include rental income from investment property, interest or dividend income from financial assets, fair value gains or losses, impairment losses or reversals, depreciation of investment property and incremental costs directly attributable to acquisition or disposal.<\/p>\n

    However, not all expenses connected with investment assets will automatically be investing. Staff costs for employees managing non-operating assets, repair and maintenance for investment properties, management fees and insurance costs may fall within the operating category unless otherwise specified.<\/p>\n

    Financing Category<\/h4>\n

    FRS 118 distinguishes between financing liabilities<\/strong> and other liabilities<\/strong>. Financing liabilities are liabilities arising from transactions that involve only the raising of finance, such as bank loans and bonds. Income and expenses relating to initial and subsequent measurement of these liabilities, including derecognition and incremental costs of issuing or extinguishing the liabilities, are included in the financing category.<\/p>\n

    Other liabilities include lease liabilities, defined benefit pension obligations and provisions. For these liabilities, interest expenses and the effect of changes in interest rates are included in the financing category. Entities whose main business activity is providing finance to customers may classify some of these income and expenses within operating profit instead.<\/p>\n

    Specified Main Business Activities<\/h4>\n

    FRS 118 introduces specific requirements for entities with specified main business activities<\/strong>. These include entities whose main business activity involves investing in assets, such as investment entities, investment property companies and insurers, or providing finance to customers, such as banks, lending institutions, lessors and entities providing customer financing.<\/p>\n

    For such entities, income and expenses that would normally be classified as investing or financing may instead be included in operating profit because they arise from the entity\u2019s core business. For example, an entity whose main business is investing in financial assets may classify fair value gains or losses and interest revenue in operating profit rather than investing.<\/p>\n

    The determination of whether an entity has a specified main business activity is a matter of fact, not merely management assertion. Relevant factors may include the use of internal or external subtotals to evaluate business performance and whether a reportable segment comprises a single business activity.<\/p>\n

    Expense Presentation and Additional Disclosures<\/h4>\n

    Operating expenses may be presented by nature<\/strong>, by function<\/strong> or using a mixed presentation<\/strong>. Where expenses are presented by function or mixed presentation, additional disclosures are required for the total amounts of specified expenses and the line items in which they are included. These specified expenses include depreciation, amortisation, employee benefits, impairment losses and reversals for non-financial assets, and write-downs or reversals of inventories.<\/p>\n

    This requirement is likely to create additional data-gathering and reconciliation work. Entities that currently allocate expenses across different functions will need to ensure they can still reconcile the total amount of expenses by nature in the notes.<\/p>\n

    Management-Defined Performance Measures<\/h4>\n

    FRS 118 introduces formal disclosure requirements for management-defined performance measures<\/strong>, or MPMs. MPMs are subtotals of income and expenses that are not required or specifically exempted by FRS, are included in public communications outside financial statements, and communicate management\u2019s view of the company\u2019s financial performance as a whole.<\/p>\n

    Examples of possible MPMs include operating profit excluding non-recurring expenses, adjusted operating profit and adjusted profit from continuing operations. A financial ratio itself is not an MPM, but a subtotal used as the numerator or denominator in a ratio may be an MPM if it qualifies on its own.<\/p>\n

    FRS 118 requires MPM disclosures to be presented in a single note. The disclosure must include a reconciliation back to an FRS-defined subtotal, an explanation of why the MPM is reported, how it is calculated, and any changes made to the MPM.<\/p>\n

    Certain measures are not MPMs, including financial ratios, liquidity or cash flow measures, non-financial measures, and subtotals of only income or only expenses. In addition, several FRS-defined or specified subtotals, such as gross profit or loss, profit before income taxes and profit from continuing operations, are not MPMs.<\/p>\n

    Other Consequential Changes<\/h4>\n

    FRS 118 also affects other parts of financial reporting. When using the indirect method for the statement of cash flows, entities will start with operating profit or loss<\/strong> when calculating cash flows from operating activities. The option for presenting cash flows related to interest and dividends received and paid will also be removed.<\/p>\n

    Goodwill will be presented as a separate line item in the statement of financial position, separate from other intangible assets. Additional earnings per share disclosures will only be allowed if the numerator is a subtotal specified in FRS 118 or an MPM.<\/p>\n

    Transition and Practical Challenges<\/h4>\n

    FRS 118 must be applied retrospectively. In the first financial statements in which FRS 118 is adopted, entities must disclose a reconciliation between the restated amounts presented under FRS 118 and the amounts previously presented under FRS 1.<\/p>\n

    For entities issuing interim financial reports, the new headings and subtotals must be used in the first interim report after adoption. Reconciliations between restated and previously reported figures will also be required for all comparative periods.<\/p>\n

    Implementation may be challenging, particularly for entities with diverse operations. Significant judgment may be required in classifying income and expenses, and smaller organisations may need to revise their financial reporting systems and procedures to meet the new presentation and disclosure requirements.<\/p>\n

    What Companies Should Do Now<\/h4>\n

    Companies should begin preparing for FRS 118 early. Key actions include assessing the impact of the new standard on current reporting, planning for necessary system and process changes, reviewing existing performance measures and disclosures, and engaging stakeholders early to ensure clear communication of upcoming changes.<\/p>\n

    In particular, management should consider:<\/p>\n

      \n
    • whether existing chart of account structures can support classification into operating, investing, financing, income tax and discontinued operations;<\/li>\n
    • whether systems can capture expenses by both function and nature where required;<\/li>\n
    • whether current \u201cadjusted profit\u201d or non-GAAP measures may fall within the MPM disclosure requirements;<\/li>\n
    • whether finance teams can produce the comparative reconciliations required on transition; and<\/li>\n
    • whether current financial statement templates will need to be redesigned.<\/li>\n<\/ul>\n

      Conclusion<\/h4>\n

      FRS 118 is not merely a formatting change. It introduces a more disciplined structure for performance reporting and requires management to explain how financial performance is presented, analysed and communicated. The most significant implementation challenge is likely to be the judgment required in classifying income and expenses and the systems work needed to produce reliable reconciliations.<\/p>\n

      Entities should not wait until the first year of mandatory application. Early impact assessment will allow management to identify data gaps, update reporting processes and align internal performance measures with the new disclosure framework before FRS 118 becomes effective.<\/p>\n","protected":false},"excerpt":{"rendered":"

      FRS 118, Presentation and Disclosure in Financial Statements, will replace FRS 1 as the primary standard governing the presentation of financial statements. The new standard is aimed at improving comparability, transparency and the overall quality of financial reporting. It applies to annual reporting periods beginning on or after 1 January 2027, and comparative figures will […]<\/p>\n","protected":false},"author":1,"featured_media":3565,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[7,6],"tags":[],"class_list":["post-3563","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting","category-techupdates"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/ehluar.com\/main\/wp-content\/uploads\/2026\/07\/ChatGPT-Image-Jul-3-2026-06_48_03-PM-e1783076315318.png?fit=1000%2C563","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/posts\/3563","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/comments?post=3563"}],"version-history":[{"count":1,"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/posts\/3563\/revisions"}],"predecessor-version":[{"id":3566,"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/posts\/3563\/revisions\/3566"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/media\/3565"}],"wp:attachment":[{"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/media?parent=3563"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/categories?post=3563"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/ehluar.com\/main\/wp-json\/wp\/v2\/tags?post=3563"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}