PFRS 18: New Accounting Standard for Philippine Financial Reporting

Fundamentally, PFRS 18 aims to address one of the prevalent challenges in modern financial reporting — and that is the inconsistencies in the presentation of financial performance across businesses.

Under the current PAS 1, companies had flexibility in presenting their subtotals, such as operating profit. Hence, this leniency often tends to have variations that make it difficult for stakeholders and investors to compare companies, even within the same industry. 

As a result, PFRS 18 introduces a more structured framework for presenting financial performance — to ensure that users of financial statements gain transparent insights into how businesses generate their results across the activities they engage in. Some of the notable key changes are the following:

1. New Structure for the Statement of Profit or Loss

One of the most crucial changes is the requirement for companies to classify income and expenses into five categories, namely:

• Operating – income and expenses from the usual business activities
• Investing – returns from investments and non-core assets
• Financing – costs and income related to funding and borrowing
• Income taxes – tax-related expenses and income
• Discontinued operations – results from operations that have been terminated

The structured classification helps stakeholders & investors to distinguish core business operations from secondary financial activities.

For companies, this means that the presentation of profits and expenses will become less discretionary and more standardized.

2. New Subtotals for Better Comparability

Furthermore, PFRS 18 also establishes two mandatory subtotals that will become key indicators for financial analysis:

• Operating Profit or Loss – it pertains to the income and expenses strictly related to the business’s common operations.
• Profit or Loss Before Financing and Income Taxes is the subtotal that combines operating and investing performance, providing a clearer view of profitability before financing costs and taxes. 

For investors, analysts, and even regulatory bodies, these subtotals improve the efficiency of comparing financial data across companies and industries. 

However, for businesses, these changes may affect internal performance metrics, management incentives, loan covenants, and key profitability indicators.

3. Disclosure of Management-Defined Performance Measures (MPMs) in Financial Statements

Another reconstructive feature of PFRS 18 is the implementation of Management-Defined Performance Measures (MPMs)

Many organizations use customized metrics such as “adjusted profit” and “normalized earnings,” among others, in investor presentations or annual management reports. These are often undisclosed or unclear in most reports because they lack in-depth detail or transparency.

Thus, to address this, PFRS 18 mandates the disclosure of MPMs directly in the financial statements, attaching:

• explanations of how they are calculated
• Why management considers them useful
• reconciliations to official PFRS totals

This change increases transparency and accountability in reporting, as regulators and investors will now be able to review these measures.

4. Stronger Presentation Requirements

Lastly, PFRS 18 also reinforces guidance on how companies shall present information in their financial statements. 

Thus, entities will need to:

• Avoid vague labels such as “other” unless absolutely necessary
• clearly describe line items and performance measures
• Provide more detailed explanations in financial statement notes

Hence, the result will be structured, more informative, and easier to interpret financial statements.