Accounting Changes Promise More Uniform Global Income Statements

The global accounting standard-setter on Tuesday published sweeping changes to income statement requirements designed to provide investors with more consistent and easily comparable information about companies’ financial health.

The new requirements adopted by the International Accounting Standards Board will define for the first time frequently used measures such as operating profit and ask companies to reconcile unofficial accounting information with their audited financials. The new standards will take effect starting in fiscal year 2027 and will replace International Accounting Standards 1 Presentation of Financial Statements, which was first issued in 1975.

“It plugs the gaps,” IASB chair Andreas Barckow said in an interview.

Countries that follow international accounting standards must approve the new rules for national use. More than 140 countries require companies to use IFRS accounting standards, including most major economies outside of the US.

The rules, published as IFRS 18, call for new income statement subtotals covering operating, investing, and financing. This will bring uniformity to how companies calculate operating profit, which is sales after operating costs, but is not fully defined under existing accounting rules.

Under the changes, the IFRS accounting standard tells companies what items to classify as investing and financing. Everything else, except for taxation and discontinued operations, will go into operating profit.

The rules are intended to bring consistency to companies’ existing approach. National regulators in countries such as China and Japan already define operating profit in their own accounting standards, Barckow said, and firms from those countries use national definitions in their accounts. But the national definitions vary, leading to inconsistent reporting that is hard for investors to understand.

The new standard also offers more detailed guidance on when companies should explain expenses in financial statements or in footnotes, so that investors can understand important performance indicators. Barckow gave the example of airlines’ fuel costs, which fluctuate according to global prices, as something that the new rules would lead companies to highlight for investors in the financial statement.

IASB also spelled out how companies should report widely used, informal financial measures that don’t comply with generally accepted accounting principles—known as non-GAAP measures. One such informal measure is earnings before interest and tax.

For the first time, non-GAAP measures must now be explained in the notes to the accounts and reconciled back to the audited financials. The requirement to explain the components of non-GAAP measures is designed to give investors a better understanding of these measures and more confidence over their accuracy.

The changes will not affect companies’ stated profits, and Barckow said they were designed to balance extra work for companies against investors’ information needs.

Long-Awaited Overhaul

The IASB has been working on these income statement changes since 2016, with a draft proposal published in 2019.

Steve Cooper, a financial analyst who served on IASB from 2007 to 2017 called the accounting changes “fundamental.” The changes will give investors more comparable and consistent information. However, he told Bloomberg Tax that in some ways they didn’t go far enough.

IASB had been looking at income statement changes for more than 20 years, Cooper said, with nothing happening until now. In 2011, it abandoned as too complex a joint project with the US Financial Accounting Standards Board to overhaul not just the income statement but also the balance sheet and cash flow statement. The US board separately has focused on income statement expense items.

The IASB is at the early stages of researching cash flow statement changes but doesn’t have a proposal in the pipeline for changing balance sheet presentation. “It would be useful,” Cooper said.

Sheffield University accounting professor Richard Murphy also said he supported the latest changes and the extra consistency and detail they would bring. “The income statement has been short of visibility and detail for 20 years,” he said by phone.