IFRS 18: What Every Business Needs to Know

FRS 18, which replaces IAS 1, introduces significant changes to the presentation and disclosure of financial statements, particularly in the statement of profit or loss.

While IAS 1 provided broad principles, IFRS 18 mandates specific structures, categories, and disclosures, aiming for enhanced clarity and comparability.

Why IFRS 18

• Enhance comparability & transparency of financial performance
• Address investor concerns about inconsistent performance reporting
• Standardize the definition and disclosure of ‘Operating Profit or Loss’.
• Introduce disclosures for Management-Defined Performance Measures (MPMs)

Summary of Key Changes

Area	IAS 1 (Old)	IFRS 18 (New)
Structure of Profit or Loss	Flexible format; varies by entity	Standardized categories & subtotals
Subtotals in P&L	User-defined and inconsistent	Prescribed subtotals: Operating profit, Profit before Finance & Tax
MPMs Disclosure	Not addressed	Required with reconciliation & explanation
Aggregation / Disaggregation	Only general guidance	Detailed principles to avoid obscuring material information

Structure of the Statement of Profit or Loss

Five Mandatory Categories:

1. Operating
2. Investing
3. Financing
4. Income Taxes
5. Discontinued Operations

Required Subtotals:

• Operating Profit or Loss
• Profit Before Financing and Income Taxes
• Profit Before Income Tax
• Profit for the Period

MPMs – Management-Defined Performance Measures

• Sometimes, management uses their its performance measures, called “Alternative performance measures (‘APMs’)”.
• IFRS 18 defines a subset of these measures that relate to an entity’s financial performance as management-defined performance measures (‘MPMs’).
• Information related to these measures should be disclosed in the financial statements in a single note, including a reconciliation between the MPM and the most similar specified subtotal in IFRS.

MPMs – Management-Defined Performance Measures (Contd)

• Management performance measure (MPM) – a subtotal of income and expenses that:
  • is used in public communications outside financial statements;
  • is used to communicate management’s view of an aspect of the financial performance of the entity as a whole to users of financial statements; and
  • is not listed in IFRS 18 or specifically required to be presented or disclosed by IFRS Accounting Standards.
• The IASB analysed the 2017–18 annual reports of 100 listed companies applying IFRS Accounting Standards from 26 jurisdictions and 12 industries.

MPMs – Disclosure Requirements

• Definition and why it’s useful
• Reconciliation to the nearest IFRS subtotal
• Consistency of calculation
• Tax & non-controlling interest (NCI) effects
• Clear labelling – avoid confusion with IFRS figures

Aggregation and Disaggregation

• IFRS 18 gives clearer rules on how to group or separate financial information.
• Items should be grouped (aggregated) if they have similar characteristics, and separated (disaggregated) if they are different in important ways.
• These rules apply to both the primary financial statements and the notes, and they help in defining:
  • What line items should be shown separately in the main statements
  • What details are to be disclosed further in the notes

Effective Date & Next Steps

Effective Date:

• IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.
• Entities that have early adopted IFRS 18 are required to disclose that fact in the notes.

What Entities Should Do Now:

• Review internal systems & processes
• Identify MPMs used externally
• Educate teams on the new structure
• Plan for comparative restatement

Common Questions

Q1: Will IFRS 18 change recognition or measurement?
A: No. Only presentation and disclosure are affected.

Q2: Are all APMs treated as MPMs?
A: No. Only those used in public communication and based on IFRS subtotals.

Q3: Is ‘Operating Profit’ now mandatory?
A: Yes. IFRS 18 requires it with clear classification rules.

Q4: Do we need to restate prior year figures?
A: Yes, comparative information must comply with IFRS 18.

Q5: What’s the biggest implementation challenge?
A: System changes, identifying MPMs, and training teams.

Conclusion

IFRS 18 marks a major step forward in improving the clarity, consistency, and comparability of financial performance reporting. By replacing the flexibility of IAS 1 with a structured and disciplined approach, the new standard directly responds to investor concerns around inconsistent presentation, unclear operating performance, and the use of non-standard performance measures.

While IFRS 18 does not change how transactions are recognized or measured, its impact on how performance is presented and explained is significant. Mandatory categories and subtotals in the statement of profit or loss, along with robust disclosure requirements for Management-Defined Performance Measures (MPMs), will require entities to rethink current reporting practices, systems, and internal controls.

Early preparation will be critical. Businesses that begin identifying their MPMs, assessing system readiness, and training finance teams well ahead of the 2027 effective date will be better positioned for a smooth transition. Ultimately, IFRS 18 is not just a compliance exercise—it is an opportunity to enhance transparency, strengthen investor confidence, and communicate financial performance more effectively to stakeholders.