IFRS 18
Presentation and Disclosure in Financial Statements
The Strategic
Shift In Financial
Transparency
In April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements, a landmark standard that officially supersedes IAS 1.
This shift represents the most significant overhaul of financial performance reporting in decades, addressing long-standing investor grievances regarding the lack of standardized subtotals and the "flexibility" that previously obscured cross border comparability.
For leadership, this transition is not a mere compliance exercise; it is a fundamental change in how profitability is communicated to the market. The days of bespoke performance narratives are being replaced by a standardized "language" of profit or loss, requiring CFOs to re-evaluate how they present their business model to global stakeholders.
Objective
The objective of IFRS 18 is focused: it mandates a disciplined structure to help users assess an entity's prospects for future net cash inflows and evaluate management's stewardship of economic resources. By moving from the relatively loose framework of IAS 1 to a highly structured architecture, the IASB has essentially brought "management's story" into a rigorous, audited regulatory fold.
The New Architecture of the Statement of Profit or Loss
The core of IFRS 18 is the requirement for all entities to categorize income and expenses into five distinct categories within the statement of profit or loss. This standardization is designed to eliminate the significant diversity in practice that has historically hindered peer-to-peer analysis.
- The Five Categories of Income and Expenses
- Mandatory Subtotals
Adaptation for Specified Main Business Activities
The "architecture" changes for entities that have investing in assets or providing financing to customers as a main business activity (such as banks, insurers, or investment entities).
These entities are required to classify into the operating category certain income and expenses that would otherwise be in the investing or financing categories.
The Five Mandatory Categories
Operating Category
This is the default category. It includes all income and expenses not classified elsewhere. Critically, it is intended to capture the results of an entity's main business activities.
Investing Category
This includes returns (both income and expenses) from assets that generate returns individually and largely independently of the entity's other resources.
Financing Category
This captures income and expenses from transactions that involve only the raising of finance (e.g., loans, bonds), alongside the interest effects on other liabilities like lease liabilities or pension obligations.
Income Taxes Category
Consists of taxes recognized under IAS 12 and related foreign exchange differences.
Discontinued Operations
Discontinued Operations as required by IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations).
Mandatory Subtotals
IFRS 18 introduces two new mandatory subtotals to the statement of profit or loss in addition to the final profit or loss for the period, which was already required under the previous standard (IAS 1).
To ensure consistency, IFRS 18 mandates three specific subtotals:
Management
Defined
Performance
Measures
(MPMs)
One of the most transformative elements of IFRS 18 is the codification of Management Defined Performance Measures (MPMs). For the first time, "alternative performance measures" move from the unaudited management review into the audited notes of the financial statements.
Management Defined Performance Measures
An MPM is a subtotal of income and expenses that meets three specific criteria:
Public Communication:
It is used in public communications outside the financial statements, such as press releases, management commentary, or investor presentations. However, oral communications, transcripts of speeches, and social media posts are excluded.
Management's View:
It is used to communicate management's view of an aspect of the entity's financial performance as a whole.
Not an IFRS-Defined Measure:
It is not a subtotal specifically required by IFRS 18 or other IFRS Accounting Standards.
Presumption of
Management View
If an entity uses a subtotal in its public communications, it is presumed to represent management's view of performance. This presumption can only be rebutted with reasonable and supportable information, such as evidence that the subtotal is communicated without prominence or is only provided to satisfy a specific external request.
Exclusions from MPMs
Certain measures are explicitly excluded from the definition of MPMs, even if used in public communications.
Gross profit, operating profit or loss, profit or loss before financing and income taxes, and profit or loss from continuing operations.
Items that are not subtotals of income and expenses, such as financial ratios (e.g., return on assets), measures of liquidity or cash flow (e.g., free cash flow), and non-financial measures.
A subtotal that relates only to a specific reportable segment and does not represent the performance of the entity as a whole.
MPMs Disclosure Requirements
All information regarding MPMs must be disclosed in a single note to the financial statements. This note must include:
Useful Information Statement
A description of why management believes the MPM provides useful information and the aspect of performance it communicates.
Calculation Method
A description of how the measure is calculated.
Reconciliation
A reconciliation between the MPM and the most directly comparable IFRS-defined subtotal (e.g., reconciling "Adjusted Operating Profit" to "Operating Profit").
Tax and NCI Effects
For every reconciling item, the entity must disclose the income tax effect and the effect on non-controlling interests. The tax effect must be calculated using the statutory tax rate or another reasonable pro rata allocation.
Comparability Warning
A statement that the measures may not be comparable to similar measures provided by other entities.
Presentation of expenses classified in the operating category
The standard clarifies that the role of primary financial statements is to provide "useful structured summaries," while the notes provide "material information." A central directive is that material information must not be obscured by either excessive aggregation or inappropriate disaggregation.
IFRS 18 is centered on providing the most useful structured summary of an entity's expenses. An entity must choose between presenting expenses by using one or both of these characteristics: their nature or their function.
By Nature
The logic behind presenting expenses by nature is to provide information about the economic resources consumed to accomplish an entity's activities.
Focus
It categorizes expenses based on what they are, without referring to the specific activity for which they were used. Type of resource (e.g., raw materials, employee benefits, depreciation).
Strategic Consideration
This is often preferred when the relationship between revenue and specific activities is less direct. Often simpler for service-based entities.
By Function
The logic for presenting by function is to aggregate expenses according to the activity to which the consumed resource relates.
Focus
It combines multiple "natures" of expenses into functional line items, such as cost of sales, research and development, or administrative activities.
Strategic Consideration
This is often selected when it aligns with how the business is managed and how performance is reported internally. Typically the most useful summary for retail or manufacturing entities where cost of sales is a primary driver.
Practical Implications and Application Challenges
Preparers
The strategic imperative is a General Ledger redesign.
Capturing the "investing" and "financing" split and the five mandatory nature items for those using the "Function" method requires robust system updates and a rigorous audit trail for MPMs used by Investor Relations.
Auditors
The audit scope expands as MPMs, and their tax/NCI reconciliations move into the audited notes.
Expect increased scrutiny over the "main business activity" assessment.
Stakeholders
Standardized subtotals will enhance cross border modeling, but analysts must be prepared for a period of transition where historical "Operating Profit" may not align with the new IFRS 18 definition.
For financial institutions, insurers, and lessors, IFRS 18 introduces critical accounting policy choices. Entities that provide financing to customers as a main business activity must choose whether to classify income/expenses from cash and cash equivalents and certain liabilities in the "Operating" category or the "Investing/Financing" categories. This choice must be applied consistently and represents a major implementation decision for the Board.
Transition, Effective Date, and Regulatory Focus
Mandatory Reconciliations
In the first year of application, entities must provide a reconciliation for each line item in the statement of profit or loss for the comparative period. This reconciliation must show the bridge between the amounts previously presented under IAS 1 and the restated amounts under IFRS 18.
Retrospective Application
Entities must apply the standard retrospectively in accordance with IAS 8. This ensures that financial information is comparable across reporting periods.
Interim Reporting
If an entity prepares condensed interim financial statements (applying IAS 34) during its first year of IFRS 18 application, it must present the new mandatory headings and subtotals required by the standard, even if it has not yet issued its first annual report under IFRS 18.
The transition to IFRS 18
The transition to IFRS 18 is a marathon, not a sprint.
Early preparation is essential, as the data requirements for the 2026 comparative year must be captured in real-time starting 1 January 2026.
As your strategic technical partner, we offer the expertise required to navigate this multi-year transition without disrupting your market narrative.
We invite you to contact our Financial Reporting Advisory team today for a specialized consultation to secure your firm's reporting excellence in this new era.
Strategic
Advisory for
IFRS 18
How BAM can assist you
Impact Assessment and P&L Restructuring
Identify the specific gaps between the current reporting and the new requirements of transition to the new five-category structure for the statement of profit or loss: operating, investing, financing, income taxes, and discontinued operations.
Management Defined Performance Measures (MPMs) Compliance
Assist in formalizing your management metrics, ensuring all public communications are supported by the robust reconciliations now required for audit.
Financial Statement Redesign
Guide the drafting of the new five-category statement of profit or loss and the complex "Nature" expense disclosures. Preparing both standalone and consolidated Financial Statements as per IFRS 18.
Transition and Comparative Data Support
Assist the transition to IFRS 18 by restating the comparative period's financial statements in the new format and preparing the required reconciliations that clearly show how each line item has moved from its previous IAS 1 presentation to its updated IFRS 18 classification.
Interim Reporting Readiness
Assist in preparing interim reports in the first year of IFRS 18 adoption (2027) by ensuring their condensed financial statements comply with the standard's requirements, including the incorporation of all mandated IFRS 18 headings and subtotals.
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