IFRS 18 Presentation and Disclosure in Financial Statements, issued by the International Accounting Standards Board in April 2024, establishes a comprehensive framework for how entities present and disclose information in their financial statements. The standard replaces IAS 1 Presentation of Financial Statements and is effective for annual reporting periods beginning on or after 1 January 2027, with early application permitted. IFRS 18 does not introduce new rules for recognition or measurement of assets, liabilities, income, or expenses, instead, its primary objective is to enhance the structure, consistency, and transparency of financial reporting, particularly in the statement of profit or loss.

When a company adopts IFRS 18 for the first time, it must apply the new rules retrospectively in line with IAS 8 – meaning prior-year (comparative) figures are restated as if IFRS 18 had always been applied. However, the standard provides relief from some of the detailed quantitative disclosures normally required by IAS 8 (and similar relief applies to entities using IFRS 19). Despite this relief, companies must still meet a key reporting requirement – in the first year of adoption, they must present a line-by-line reconciliation of the statement of profit or loss for the immediately preceding comparative period, showing the difference between amounts previously reported under IAS 1 and the restated amounts under IFRS 18.

To be prepared for this, companies should start early by identifying how IFRS 18 changes the structure and classification of income and expenses, mapping old IAS 1 line items to the new categories, adjusting internal reporting systems to capture the revised presentation, and documenting all reclassifications and adjustments. This preparation ensures that comparative figures can be restated accurately and that the required reconciliation is clear and complete.

A company preparing financial statements for FY 2027 (1 Jan 2027–31 Dec 2027) applies IFRS 18 for the first time, with FY 2026 presented as the comparative year.

The company presents its 2027 profit or loss statement using the new IFRS 18 structure, and reclassifies 2026 comparative figures so both years are comparable.

Under IFRS 18, entities are still required to present a complete set of financial statements, including the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, comparative information in respect of the preceding period and accompanying notes. However, the most significant innovation lies in the restructuring of the statement of profit or loss, where income and expenses must now be classified into clearly defined categories – operating, investing, and financing, with income taxes and discontinued operations presented separately. The operating category acts as a default category and includes items arising from the entity’s main business activities. The investing category includes income and expenses from investments that generate returns independently of the entity’s core operations, while the financing category includes items related to funding the entity, such as interest expenses on borrowings. This structured classification reduces diversity in presentation and improves comparability across entities.

A key feature introduced by IFRS 18 is the requirement to present specific mandatory subtotals in the statement of profit or loss, mainly operating profit and profit before financing and income taxes. These subtotals are intended to provide consistent benchmarks for evaluating financial performance, addressing long-standing concerns about the lack of comparability in profit measures across entities. By mandating these subtotals, IFRS 18 ensures that users of financial statements can more easily compare performance between companies without relying on entity-specific definitions of profit.

Another major development is the introduction of stricter requirements for Management-Defined Performance Measures (MPMs). These are subtotals of income and expenses that are not specified by IFRS but are used by management in public communications. IFRS 18 requires entities to disclose MPMs in a single dedicated note, provide a reconciliation between the MPM and the most directly comparable IFRS-defined subtotal, and explain why the measure provides useful information to users. This enhances transparency and prevents the misleading use of non-GAAP measures, which has historically been a concern for regulators and investors.

IFRS 18 also strengthens guidance on aggregation and disaggregation of information. Entities are required to present material items separately and avoid grouping dissimilar items in a way that obscures relevant information. This means that line items such as ‘other expenses’ must be broken down if they include material components of different nature or function. The standard emphasizes that financial statements should provide a faithful representation of financial performance by ensuring that relevant details are not hidden through excessive aggregation.

Overall, IFRS 18 represents a significant advancement in financial reporting by introducing a standardized structure for performance reporting, improving the transparency of management-defined measures, and enhancing the clarity and usefulness of financial statements for users such as investors and analysts.

Comparison: IFRS 18 vs IAS 1

Practical Use Cases

Example 1: Operating vs Investing classification

• A technology company earns revenue from software subscriptions (core business), but also earns interest income from large cash reserves and short-term investments.
• Under IFRS 18, subscription revenue is presented in operating profit, because it reflects the main business activity.
• Interest income from cash and investments is shown in the investing category, since it is not part of the core operations.
• This separation helps users clearly assess how much profit comes from actual business performance versus returns on surplus funds.

Example 2: Mandatory Subtotals

• A company first presents operating profit (e.g. – 200) from its core business activities.
• It then adds items like investment income (e.g. – 20) to arrive at a required subtotal such as profit before financing and income taxes (220).
• This subtotal must be shown consistently in the income statement, regardless of how management prefers to present performance.

Example 3: Management-Defined Performance Measure

• A company may present an alternative profit figure (e.g. – ‘Adjusted operating profit’) that excludes items like restructuring costs or one-off expenses.
• This measure must be clearly defined and explained, including why management believes it is useful for users.
• It must be reconciled back to the nearest IFRS-defined subtotal, usually operating profit, so users can see exactly what was adjusted.
• This reduces the risk of misleading reporting, as investors can compare management’s preferred measure with standard IFRS performance figures.

Example 4: Disaggregation Requirement

• A company can no longer group large, mixed items under broad captions like ‘other expenses’ if the amount is material.
• Components within such totals (e.g. – legal settlements, restructuring costs, impairment losses) must be shown separately when they are significant.
• This improves transparency by helping users understand what is driving expenses rather than seeing one lump-sum figure.

Sample Formats for Statement of Financial Position and Financial Performance