What’s the issue?
In April 2024, the IASB issued IFRS 18, ‘Presentation and Disclosure in Financial Statements’ in response to investors’ concerns about comparability and transparency of entities’ performance reporting. The new presentation requirements introduced in IFRS 18 aim to increase comparability of the financial performance of similar entities, especially related to how ‘operating profit or loss’ is defined. New disclosure requirements for ‘management-defined performance measures’ (“MPM”) will enhance transparency.
IFRS 18 will:
apply for reporting periods beginning on or after 1 January 2027 (with a requirement to restate comparative information) subject to endorsement for use in the EU*;
replace IAS 1, but with many of the existing principles in IAS 1 retained with limited changes; and
not impact the recognition or measurement of items in the financial statements but might change what an entity reports as its ‘operating profit or loss’.
The level of operational change required by the new standard should not be underestimated, and entities should start thinking about the operational challenges as soon as possible.
Key changes imposed by IFRS 18
Structure of the statement of profit or loss
IFRS 18 introduces a defined structure for the statement of profit or loss. The goal of the defined structure is to reduce diversity in the reporting of the statement of profit and loss, helping users of financial statements to understand the information and to make better comparisons between companies. The structure is composed of categories and required subtotals:
Items in the statement of profit or loss will need to be classified into one of five categories: operating, investing, financing, income taxes and discontinued operations. IFRS 18 provides general guidance for entities to classify the items among these categories – the three main categories are:
Operating Category
Not defined by IFRS 18, this is the ‘residual’ category for income and expenses that are not classified in other categories. This will typically include the entity’s results from its main business activities.
Investing Category
This category typically includes:
- Results of associates and joint ventures;
- Results of cash and cash equivalents;
- Assets that generate a return individually and largely independently of other resources.
Financing Category
This category includes:
- All income and expenses from liabilities that involve only the raising of finance (such as typical bank borrowings);
- Interest expense and the effects of changes in interest rates from other liabilities (such as unwinding of the discount on a pension liability).
IFRS 18 requires entities to present specified totals and subtotals: the main change relates to the mandatory inclusion of ‘operating profit or loss’. The other required subtotals are ‘Profit or loss’ and ‘Profit or loss before financing and income taxes’, with some exceptions (for example, where a financing institution has financing as a main business activity and has made specific presentation choices).
IFRS 18 includes additional requirements for entities that provide financing to customers (for example, banks) or that invest in assets with specific characteristics (for example, an investment entity) as a main business activity. Some income and expenses that might ordinarily have been classified in the investing or financing category, when applying the general principles, will be presented in the operating category for these entities. The result of this is that operating profit will include the results of an entity's main business activities
1. Disclosures related to the statement of profit or loss
IFRS 18 introduces specific disclosure requirements related to the statement of profit or loss:
Management might define its own measures of performance, sometimes referred to as ‘alternative performance measures’ or ‘non-GAAP measures’. IFRS 18 defines a subset of these measures which relate to an entity’s financial performance as management-defined performance measures (‘MPMs’). The new standard will require information related to these measures to be disclosed in the financial statements in a single note, including a reconciliation between the MPM and the most similar specified subtotal in IFRS® Accounting Standards. This will effectively bring a portion of non-GAAP measures into the financial statements.
Entities will present expenses in the operating category by nature, function or a mix of both. IFRS 18 includes guidance for entities to assess and determine which approach is most appropriate, based on the facts and circumstances. Where items are presented by function, an entity is required to disclose information by nature for specific expenses.
2. Aggregation and disaggregation (impacting all primary financial statements and notes)
IFRS 18 provides enhanced guidance on the principles of aggregation and disaggregation which focus on grouping items based on their shared characteristics. These principles are applied across the financial statements, and they are used in defining which line items are presented in the primary financial statements and what information is disclosed in the notes.
The new enhanced guidance will likely require entities to reconsider their chart of accounts to evaluate whether their existing presentation is still appropriate or whether improvements can be made to the way in which line items are grouped and described in the primary financial statements.
3. Other limited changes
IFRS 18 will make some other limited changes to presentation and disclosure in the financial statements. For example, IAS 7, ‘Statement of cash flows’, is amended to:
- specify ‘operating profit or loss’ as the starting point for reconciling cash flows from operating activities; and
- remove the existing options for the presentation of interest and dividends paid and received.
Who is impacted?
All entities reporting under IFRS Accounting Standards will be impacted, regardless of industry. The same requirements apply for both public and private entities, including the identification and disclosure of MPMs.
The classification among categories for the statement of profit or loss is performed at the reporting entity level – there might therefore be differences in classification between an entity’s individual financial statements and the consolidated financial statements.
* status as at August 2025
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