IFRS 18 introduces a New framework for presenting and disclosing information in financial statements, replacing parts of IAS 1. It aims to improve the Clarity, Consistency, and Comparability of ‘Financial Performance Reporting’ across companies.
- 01 What is IFRS 18? →
- 02 The Three Defined Income & Expense Categories →
- 03 Required Subtotals in the Statement of Profit or Loss →
- 04 Management-Defined Performance Measures (MPMs) →
- 05 Enhanced Aggregation & Disaggregation Guidance →
- 06 IFRS 18 vs IAS 1: Key Differences →
- 07 IFRS 18 Implementation Timeline →
- 08 Who Is Most Affected by IFRS 18? →
- 09 How to Prepare for IFRS 18 →
- 10 Frequently Asked Questions →
What is IFRS 18?
IFRS 18 Presentation and Disclosure in Financial Statements is the new IASB accounting standard issued in April 2024. It replaces IAS 1, a standard that has governed financial statement presentation for more than 20 years and introduces three transformative new requirements designed to make financial performance reporting more transparent, comparable, and decision-useful for investors.
While much of IAS 1’s existing guidance has been carried forward, IFRS 18 introduces material changes to the structure of the income statement, introduces mandatory disclosures around management-defined performance measures, and provides enhanced principles for aggregating and disaggregating information across primary financial statements and notes.
The standard is effective for annual reporting periods beginning on or after 1 January 2027, with early application permitted. Comparative periods will require retrospective restatement under IAS 8, making early preparation essential.
“IFRS 18 represents the most significant change to companies’ presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago.”
International Accounting Standards Board (IASB)
The Three Defined Income & Expense Categories
Currently, IFRS Accounting Standards provide no specified structure for the income statement. Companies choose their own subtotals, leading to inconsistency that reduces comparability for investors. IFRS 18 addresses this directly by mandating that all income and expense must be classified into one of three defined categories: Operating, Investing, and Financing.
The residual category; captures income and expenses from a company’s main business activities that do not fall within the investing or financing categories.
- Revenue from goods and services
- Cost of sales and operating expenses
- Depreciation of operating assets
- Impairment losses on trade receivables
Income and expenses from assets that generate a return individually and largely independently of the entity’s other resources i.e. assets held separately from main operations.
- Dividends from equity investments
- Interest from short-term deposits
- Gains/losses on investment disposals
- Returns on equity-accounted investments
Income and expenses arising from the entity’s financing activities which specifically related to liabilities arising from financing, and assets arising from cash management activities.
- Interest on borrowings
- Fees on credit facilities
- Interest on lease liabilities
- Foreign exchange gains on borrowings
Important: For entities whose business activities include investing (e.g. banks, insurance companies, investment holding entities) IFRS 18 provides specific guidance on how to classify income and expenses that would otherwise fall into the investing or financing categories, these may instead be presented in the operating category.
Required Subtotals in the Statement of Profit or Loss
IFRS 18 mandates that all entities present two new defined subtotals in the income statement, in addition to existing required line items. These subtotals give investors consistent anchor points for analysis and financial modelling.
Companies that already present an “Operating profit” subtotal may still need to change how they calculate it to conform to the new IFRS 18 definition. This is a critical area of implementation that requires early analysis.
Management-Defined Performance Measures (MPMs)
Many companies communicate company-specific financial metrics to investors, often referred to as Alternative Performance Measures (APMs) or non-IFRS measures. Examples include Adjusted EBITDA, Underlying Operating Profit, or Adjusted EPS. Investors find these useful, but currently companies provide insufficient information to understand how these measures are derived.
IFRS 18 introduces mandatory disclosures for a subset of these: Management-Defined Performance Measures (MPMs) specifically, subtotals of income and expenses used in public communications that convey management’s view of the company’s performance and are not required or specified by IFRS.
What Qualifies as an MPM?
A subtotal of income and expenses that: (1) management uses in public communications outside the financial statements, and (2) communicates management’s view of financial performance. The MPM must relate to the income statement.
Required MPM Disclosures
For each MPM, entities must disclose: a labelled reconciliation to the most directly comparable IFRS subtotal; the income tax effect; the reason management believes the MPM provides useful information; and a description of how it is calculated.
What is NOT an MPM?
Measures disclosed only in the financial statements, measures required by other IFRS standards, and operating segment measures disclosed under IFRS 8 are not classified as MPMs and do not require the new disclosures.
Investor Communications Impact
Companies must re-examine how alternative performance measures are communicated in earnings releases, analyst presentations, and investor materials since these public communications determine whether a measure qualifies as an MPM.
Enhanced Aggregation & Disaggregation Guidance
Investor analysis of companies’ performance is hampered when information is either too summarised or too detailed. IFRS 18 introduces enhanced general principles for aggregation and disaggregation guiding entities on how to organise information and decide whether it belongs in the primary financial statements or the notes.
Key Principles
Items should be aggregated if they share characteristics and can be described with a single label that faithfully represents all items in the group. Items with different characteristics should be disaggregated. The overarching goal is to ensure information presented is both complete and understandable.
Operating Expense Disaggregation
For entities that present operating expenses by function (e.g. cost of sales, distribution costs, administrative expenses) rather than by nature, IFRS 18 introduces a new mandatory note disclosure requiring disaggregation of operating expenses by nature. This gives investors visibility into the underlying cost structures of the business.
Location Flexibility with Enhanced Discipline
IFRS 18 provides more explicit guidance on whether information should appear on the face of the primary financial statements or be disclosed in the notes. This replaces the relatively permissive IAS 1 approach with a more structured framework, improving consistency across reporting entities.
IFRS 18 vs IAS 1: Key Differences
While IFRS 18 carries forward much of the existing guidance from IAS 1, the following table summarises the most significant changes and new requirements:
| Topic | IAS 1 (current) | IFRS 18 (from Jan 2027) | Status |
|---|---|---|---|
| Income statement structure | No specified categories; entities choose own subtotals | Three mandated categories: Operating, Investing, Financing | New |
| Operating profit subtotal | Not required; voluntary and inconsistently defined | Mandatory; defined consistently across all entities | New |
| Profit before financing & tax | Not required | Mandatory new required subtotal | New |
| Alternative performance measures | No specific IFRS disclosure requirements | MPM disclosures required including reconciliation and rationale | New |
| Aggregation principles | Limited guidance | Enhanced principles; explicit guidance on primary statements vs notes | Enhanced |
| Operating expense by nature (for function presenters) | Not required in notes | Mandatory note disclosure required | New |
| Going concern, materiality, offsetting | Detailed requirements in IAS 1 | Retained with limited changes; largely carried forward | Retained |
| OCI classification | Required in IAS 1 | Carried forward to IFRS 18 | Retained |
| Consequential amendments | — | IAS 7 Cash Flows, IAS 33 Earnings per Share, IAS 34 Interim Reporting | Consequential |
IFRS 18 Implementation Timeline
The IASB officially issued IFRS 18 Presentation and Disclosure in Financial Statements, completing its project to improve financial performance reporting.
Entities assess impact, update systems, train teams, and begin classifying income and expenses under the new framework. Early adoption permitted, disclose in notes if adopted early.
All entities reporting under IFRS must apply IFRS 18 for annual periods beginning on or after this date.
Comparative periods (2026) must be restated. A reconciliation between IAS 1 and IFRS 18 amounts must be disclosed for the comparative period.
Why Start Preparing Now?
Because IFRS 18 requires retrospective restatement, entities effectively need to apply the standard to their 2026 financial data even before it becomes mandatory. The complexity of classifying all income and expenses, identifying MPMs and updating systems means that early action, ideally in 2024–2025 is strongly recommended by all major accounting bodies.
Companies with complex business activities, multiple reporting segments, or widely-used alternative performance measures in their investor communications will likely face the highest implementation burden.
Under IFRS 18 transition rules, entities are not required to restate quantitative IAS 8 adjustments for each line item in the current period, only a comparative period reconciliation is required.
Who Is Most Affected by IFRS 18?
While IFRS 18 affects all entities reporting under IFRS, the degree of impact varies significantly by industry and entity characteristics.
Special rules apply when investing or financing activities form part of core business operations. Banks must carefully assess whether interest income belongs in operating or investing. Overlapping IFRS 9 amendments add further complexity.
Companies with function-based P&Ls must introduce new note disclosures for operating expenses by nature. Classification of JV income and treasury activities requires careful judgement under the new framework.
Heavy users of Adjusted EBITDA and other APMs in investor communications will likely have significant MPM disclosure requirements. Stock-based compensation classification and R&D disaggregation require close attention.
Entities whose primary activity is holding and managing investments have specific guidance under IFRS 18 that may reclassify rental income and fair value movements from what would otherwise be the investing category into operating.
Entities with complex financial instruments, hedging programmes, and commodity contracts need to map each item of income and expense to the new categories (a potentially extensive exercise for large energy groups).
Multiple business activities and diverse revenue streams require more judgement in determining category classification. System and ERP updates to track new subtotals across multiple subsidiaries represent a significant project scope.
How to Prepare for IFRS 18
Given the Pervasive nature of IFRS 18’s requirements; touching the income statement, notes, systems, and external communications a structured implementation approach is essential. Below is a practical preparation checklist based on guidance from leading accounting bodies.
- 1Perform an impact assessment. Map all current income and expense line items to the three new IFRS 18 categories. Identify items that require judgement particularly those that could be classified as operating, investing, or financing depending on the entity’s specific business model.
- 2Review current operating profit presentation. Even if your entity already presents an operating profit subtotal, assess whether your current calculation aligns with the IFRS 18 definition. Many entities will need to recalculate.
- 3Identify all Management-Defined Performance Measures. Review all public communications; earnings releases, investor presentations, annual reports, press releases to identify any income/expense subtotals communicated outside the financial statements that will qualify as MPMs.
- 4Prepare MPM disclosure templates. For each identified MPM, develop reconciliation schedules, explanations of why the measure is useful to management, and calculation methodologies. Engage investor relations teams early in this process.
- 5Assess function vs nature presentation. If you present operating expenses by function in the income statement, design the new required note that disaggregates those expenses by nature. This may require changes to your chart of accounts or cost tracking.
- 6Update financial reporting systems. Assess whether your ERP, consolidation system, and financial reporting tools can capture the new subtotals and category information required by IFRS 18. System changes can take considerable time.
- 7Train finance teams and auditors. Ensure accounting, reporting, and audit teams understand the new requirements. The classification of items particularly for entities with investing activities requires judgement that needs consistent application across the group.
- 8Communicate with stakeholders. Brief the board, audit committee, and investor relations on the expected impact. Changes to key reported metrics (especially operating profit and any MPMs) should be communicated proactively to investors ahead of the first IFRS 18 reporting period.
IFRS 18 — FAQ
What is the effective date of IFRS 18?
Does IFRS 18 apply to all companies using IFRS?
What happens to IAS 1 when IFRS 18 comes into effect?
What are Management-Defined Performance Measures (MPMs)?
Is retrospective application required?
Does IFRS 18 impact the cash flow statement?
What’s the difference between IFRS 18 and IFRS 19?
Can entities choose to present expenses by function or by nature under IFRS 18?
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia