Ind AS 118: Redefining the presentation of financial performance

The National Financial Reporting Authority (NFRA) has recommended Ind AS 118, Presentation and Disclosure in Financial Statements, for notification. Based on the recommendation, Ind AS 118 is expected to apply to financial years beginning on or after April 1, 2027, with restatement of comparative information. In practical terms, implementation will need to begin at least one year earlier. Listed companies publishing quarterly financial results will need to publish their June 2027 results, with restated comparative information, using the new format. Companies planning an IPO in FY28 will need to restate financial information for three years.

Ind AS 118 is expected to address investors’ demand for clearer information about companies’ financial performance. While Ind AS 118 does not change the computation of net profit or profit after tax, it is likely to significantly change how companies present their statement of profit and loss (P&L) and communicate financial performance. The standard is intended to help companies present profit or loss-related information in a way that is more useful to users of financial statements when assessing future prospects for net cash inflows and management’s stewardship of the company’s economic resources.

Five categories in the statement of profit and loss

One of the key features of Ind AS 118 is that it requires companies to classify all items of income and expenses into one of five categories: operating, investing, financing, income taxes, and discontinued operations. The first three categories are new. Ind AS 118 provides specific guidance to help companies identify the items to be classified in each category.

The standard also recognises the business models of companies such as investment property companies and banking or non-banking finance companies (NBFCs). Such companies will need to assess whether their specified main business activities are, or include, investing in assets and/or providing finance to customers. If yes, these companies will be subject to classification requirements that are significantly different from those applicable to other companies, such as manufacturing or services companies.

These categories are supported by the requirement to present subtotals and totals for “operating profit or loss,” “profit or loss before financing and income taxes”, and “profit or loss”.

Nature-wise vs. function-wise vs. mixed classification of expenses

Currently, most Indian companies present expenses in the P&L using nature-wise classification. Ind AS 118 allows companies to present expenses classified in the operating category using nature-wise, function-wise or mixed classification. However, nature vs. function vs. mixed classification is not an accounting policy choice. Each company needs to select the most appropriate classification methodology after considering factors such as standard industry practices, alignment with internal profitability drivers, and alignment with internal MIS. Companies using function-wise or mixed classification will also need to make additional disclosures about nature-wise expenses for certain expenses in the notes.

Management-defined performance measures (MPMs)

Another important feature of Ind AS 118 is management-defined performance measures (MPMs). An MPM is a subtotal of income and expenses that is neither listed in Ind AS nor specifically required to be presented or disclosed by an Ind AS. Companies use MPMs in public communications outside financial statements to communicate management’s view of an aspect of the company’s financial performance as a whole.

Ind AS 118 requires companies to disclose information about all their MPMs in a single note to the financial statements. It also requires disclosure of how each measure is calculated, why it provides useful information to users and a reconciliation to the most directly comparable subtotal specified by Ind AS.

Because MPMs will be required disclosures under Ind AS, they will be subject to audit. The disclosure requirements are also expected to enhance transparency and make a company’s communication of financial performance more effective.

Aggregation and disaggregation

Ind AS 118 contains specific requirements for aggregation and disaggregation of items of assets, liabilities, equity, revenue, expenses and cash flows, based on shared characteristics. Companies are required to aggregate or disaggregate items to present line items in the primary financial statements, with additional information disclosed in the notes.

Ind AS 118 requires an entity to cross-refer each item in the primary financial statements to any related information in the notes. It also requires that, if an amount disclosed in a note is included in one or more line items in the primary financial statements, the note should disclose the line item or line items in the primary financial statements where the amounts are included. The requirement to cross-refer from the notes to the primary financial statements will be new for most companies.

Key implications

When Ind AS 118 becomes effective, the new guidance and requirements on categories and subtotals are expected to enhance comparability across companies. For example, disclosure of operating profit or loss by all companies will allow users to better understand the performance of a company’s operations and compare operating profit or loss across companies. Ind AS 118 also gives companies an opportunity to revisit their financial performance communication strategy and determine the MPMs they will use going forward.

Successful implementation of Ind AS 118 will require companies to update their financial statement close process and make necessary changes to their information systems. They will also need to consider the information needs of users of financial statements, especially investors.

Between now and the date of initial application, companies will need to redesign their statement of profit and loss, re-evaluate the disclosures to be included in the notes, restate comparatives for both annual financial statements and quarterly financial results, and prepare reconciliations for transition disclosure purposes. Companies should plan ahead, as the process could take considerable time and involve financial reporting, legal and investor relations personnel, among others.

(The authors are partners, Indian member firm of EY Global. Views are personal.)