New, more prescriptive rules for how much detail belongs on the face of the statement versus in the notes
Classifying income and expenses into the right category, as we've covered across this series, only gets you halfway to a compliant IFRS 18 income statement. The second half of the job is deciding how much detail to actually show , do you present ‘employee benefits expense’ as one line, or break it into salaries, bonuses, and share-based payments? Do you show cost of sales as a single number, or disaggregate it? This is the domain of aggregation and disaggregation, and IFRS 18 introduces genuinely new, more prescriptive principles here that go well beyond what IAS 1 ever required.
Two Different Jobs: Primary Statements vs. Notes
IFRS 18 begins by explicitly defining the different roles played by the primary financial statements and the notes, something IAS 1 never actually did.
| Primary financial statements | Notes to the financial statements |
|---|---|
| Provide a structured, high-level summary of recognised assets, liabilities, equity, income, expenses and cash flows. | Provide material information needed to understand the line items in the primary statements, and to supplement them. |
| Support comparability, between entities, and between periods for the same entity. | Disaggregate the summarised information in the primary statements into more granular detail. |
| Help users identify areas where they may want to seek more detail in the notes. | Fulfil disclosure requirements from specific IFRS Accounting Standards, subject to materiality. |
The practical consequence: information in the primary statements should, by design, be more aggregated than information in the notes. If a single line item like ‘financial assets at fair value through profit or loss’ appears in the statement of financial position, a supporting note would typically disaggregate that balance into different classes of financial asset.
The Five-Part Aggregation and Disaggregation Test
IFRS 18.41 sets out a structured process entities must follow when deciding how to present and disclose information:
| Step | Requirement | Example | |
|---|---|---|---|
| 1 | Classify and aggregate items based on shared characteristics. | Presenting financial assets in the statement of financial position grouped by their IFRS 9 measurement category. | |
| 2 | Disaggregate items based on characteristics that are not shared. | Presenting operating expenses by nature, separating wages and benefits from depreciation. | |
| 3 | Aggregate or disaggregate to produce useful, structured summaries in the primary statements. | Combining steps 1 and 2 to arrive at a coherent set of primary statement line items. | |
| 4 | Aggregate or disaggregate to disclose material information in the notes. | Disclosing a disaggregation of an aggregated financial asset balance by asset class in the notes. | |
| 5 | Never let aggregation or disaggregation obscure material information. | Not combining an individually material expected credit loss on a single large receivable with a portfolio of smaller, immaterial credit losses. | |
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Key principle Material items must always be disaggregated somewhere, but not necessarily on the face of the primary statement. Whether disaggregation belongs in the statement itself or in a note depends on which of the two roles (structured summary vs. supplementary detail) is being served. This is not a free choice; entities must apply the defined roles of the primary statements and notes to decide. |
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Illustrative Examples of Items Warranting Separate Treatment
IFRS 18's application guidance gives practical examples of items with sufficiently different characteristics to justify separate presentation or disclosure:
| Statement of financial position | Statement of profit or loss |
|---|---|
| Property, plant and equipment disaggregated into classes (IAS 16). | Write-downs of inventories and reversals. |
| Receivables split between trade customers, related parties, prepayments and other amounts. | Impairment losses and reversals for property, plant and equipment. |
| Inventories disaggregated into merchandise, production supplies, materials, work in progress and finished goods (IAS 2). | Income and expenses from restructuring activities, and reversals. |
The Big Change: Nature and Function Analysis Moves to the Face of the Statement
Perhaps the single most impactful presentational change in IFRS 18 relates to operating expenses. Under IAS 1, entities could analyse operating expenses by nature or function in the notes if they wished. Under IFRS 18.78, this analysis must be presented in the statement of profit or loss itself, using whichever of the following characteristics, or combination, produces the most useful, structured summary:
- By nature, allocating expenses based on the type of economic resource consumed, without reference to what activity consumed it (e.g. salaries and wages, depreciation, raw materials expensed).
- By function, allocating expenses based on the activity the resources relate to (e.g. cost of goods sold, research and development, administrative expenses).
- Mixed presentation, some line items by nature, others by function, explicitly permitted for the first time under IFRS 18, provided each line item is based on only one characteristic and is clearly labelled.
This is not a free accounting policy choice
IFRS 18.B80 requires entities to weigh specific factors in choosing the presentation basis, rather than simply picking whichever looks best:
- Which line items best explain the main drivers of profitability (e.g. cost of sales for a retailer, to show margin).
- Which presentation most closely mirrors how the business is managed and reported internally.
- What is standard industry practice, to aid comparability.
- Whether allocating a particular expense to a function would be arbitrary, for example, allocating an impairment charge on a shared asset pool across multiple functions may not faithfully represent anything meaningful.
Practical Case: Presenting by Nature Doesn't Mean What You Think
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Worked example, nature presentation and inventory absorption A manufacturer presenting operating expenses by nature does not simply list total wages, electricity and depreciation incurred during the period, a portion of those costs may sit within the carrying amount of unsold inventory at year end. IFRS 18.B84 permits a reconciling 'change in carrying amount of inventories' line to bridge total costs incurred against costs expensed, illustrated as follows: Revenue AED300; Wages (AED100); Electricity (AED80); Depreciation (AED45); Change in carrying amount of inventories AED25; Operating profit AED100. This means the amounts presented by nature need not equal the raw costs incurred for the period, they are adjusted to reflect what was expensed. |
Extra Obligations for Entities Presenting by Function
If an entity presents any operating expense line item by function, IFRS 18.82 imposes two specific requirements:
- A separate cost of sales line item must be presented if the entity has a cost-of-sales function, and that line must include the total inventory expense described in IAS 2.38.
- A qualitative description of the nature of expenses within each function line item must be disclosed.
On top of this, IFRS 18.83 introduces a significant new disclosure: entities presenting by function (or using a mixed presentation) must provide a single note disclosing the totals of five specific expense types , depreciation, amortisation, employee benefits (including share-based payments), impairment losses and reversals, and inventory write-downs and reversals , broken down by how much of each relates to each operating category line item, plus a list of any line items outside operating that also include amounts from that total. This is new: IAS 1 only required this level of detail for depreciation, amortisation and employee benefits, and did not require the granular mapping back to specific line items.
A Full Worked Illustration: Nature vs. Function vs. Mixed
It's one thing to describe nature and function presentation in the abstract; it's another to see the same underlying expenses produce three genuinely different-looking statements. Consider an entity that has classified the following amounts into the operating category for the year (all figures AED 000s): salaries and wages 100; depreciation of property, plant and equipment 150; depreciation of right-of-use assets 85; inventories expensed 360; distribution expenses (shipping to customers) 40; share-based payments to employees 60; and revenue of 1,000.
Scenario A , presentation entirely by nature
| Line item | AED 000s |
|---|---|
| Revenue | 1,000 |
| Salaries and wages | (100) |
| Depreciation (PPE 150 + right-of-use assets 85) | (235) |
| Inventories expensed | (360) |
| Share-based payments to employees | (60) |
| Distribution expenses | (40) |
| Operating profit | 205 |
Because everything is presented by nature, this entity is not required to disclose how much of the depreciation, salaries and other costs are embedded within inventories expensed , the IFRS 18.83 functional-allocation note simply doesn't apply when nothing is presented by function.
Scenario B , presentation entirely by function
| Line item | AED 000s |
|---|---|
| Revenue | 1,000 |
| Cost of goods sold (inventories expensed 360 + distribution 40) | (400) |
| Gross profit | 600 |
| Research and development | (300) |
| Administration | (95) |
| Operating profit | 205 |
Same underlying costs, same AED 205 operating profit , but now research and development and administration absorb the salaries, depreciation and share-based payment costs across functional lines. Because one or more lines are function-based, the entity must now provide the IFRS 18.83 note: a single disclosure showing the totals for depreciation, amortisation, employee benefits, impairment, and inventory write-downs, mapped to which functional line each portion sits within.
Scenario C, mixed presentation (cost of sales by function, everything else by nature)
| Line item | AED 000s | |
|---|---|---|
| Revenue | 1,000 | |
| Cost of goods sold | (400) | |
| Gross profit | 600 | |
| Salaries not included in cost of goods sold | (100) | |
| Depreciation not included in cost of goods sold | (235) | |
| Share-based payments to employees | (60) | |
| Operating profit | 205 | |
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The takeaway from all three scenarios All three scenarios reconcile to the exact same AED 205 operating profit, IFRS 18 never changes the total, only how it is built up and disclosed. What changes is how much a reader can infer about cost structure at a glance, and how much supplementary disclosure the entity owes under IFRS 18.83 once any functional line item is used. This is precisely why IFRS 18.B80 requires entities to actively choose the presentation that provides the most useful, structured summary, rather than defaulting to habit. |
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What Happened to ‘Finance Costs’ as a Mandatory Line?
One quiet but important change: IAS 1.82(b) used to require ‘finance costs’ to be presented as a single mandatory line item. IFRS 18 does not carry this specific requirement forward, a natural consequence of the new financing category, where entities now apply the general IFRS 18 aggregation and disaggregation principles to decide how financing-category items are grouped. An entity might still choose to aggregate interest expense on bank loans and lease liabilities into one ‘interest expense’ line, with a supporting note breaking it down further if material , but that presentation is now a judgement applying general principles, not a stand-alone mandatory requirement.
Labels Matter: ‘Other’ Is Not a Free Pass
IFRS 18 also tightens up the use of generic labels like ‘other income’ or ‘other expenses’. A line item labelled ‘other’ should only include items that are genuinely dissimilar in nature and, individually, immaterial , it cannot be used as a catch-all for material items that are simply inconvenient to classify or explain elsewhere. If the ‘other’ line becomes large relative to the rest of the statement, that is itself a signal that further disaggregation is required.
Why This Matters for Comparability
Aggregation and disaggregation might sound like a technical footnote compared to the headline categorisation changes, but it directly affects how usable financial statements actually are. Two entities in the same industry, applying the same category classifications, could still produce very differently structured income statements depending on how much they aggregate. By requiring the nature/function analysis to sit on the face of the statement, mandating the new function-based disclosure note, and applying a materiality-driven test to disaggregation decisions throughout, IFRS 18 meaningfully narrows the room for entities to bury detail that users actually need.
Conclusion
Aggregation and disaggregation is where IFRS 18 moves from telling preparers what category an item belongs in, to telling them how visible that item needs to be. The shift of the nature/function analysis onto the face of the statement, the new mixed-presentation option, the expanded function-based disclosure note, and the tightened rules around generic ‘other’ labels collectively raise the bar on how much thought needs to go into statement design. Preparers should treat this as a genuine design exercise, revisiting, rather than simply carrying forward, decisions made under IAS 1 about what belongs on the face of the statement versus in the notes.
Deciding how much detail belongs on the face of your statement versus in the notes is as much a design exercise as it is a compliance one. CLA Emirates’ IFRS consultants in UAE can help you revisit these presentation choices with fresh eyes, building a statement structure that is fully compliant and genuinely useful to the people reading it.
In the next blog of this series, we look at how all of these IFRS 18 concepts, categorisation, specified main business activities, and aggregation and disaggregation, play out differently across specific industries, from banking and insurance to real estate and manufacturing.
