IFRS 18 Explained: What It Is, Why It Exists, and What Changes
IFRS 18 'Presentation and Disclosure in Financial Statements' is the IASB's most significant overhaul of income statement presentation in a generation. Issued in April 2024, it replaces IAS 1 with the same title and is mandatory for annual periods beginning on or after 1 January 2027. If your entity reports under IFRS, this standard changes how you structure the income statement, what subtotals you must show, and, critically, how you disclose the adjusted metrics you use with investors.
Key takeaway: IFRS 18 does not change what you recognise or measure. It changes how you present and disclose it, and it brings your non-GAAP metrics into the audited financial statements for the first time.
What Is IFRS 18 in Simple Terms?
IFRS 18 is a presentation and disclosure standard. It tells entities how to structure the statement of profit or loss, what subtotals to show, and what to disclose in the notes about performance measures used in investor communications. It does not alter recognition or measurement rules under any other IFRS standard, so profit or loss totals will not change. What changes is how items are categorised, labelled, and explained.
Why Did the IASB Create IFRS 18?
The short answer: investors couldn't compare companies' performance. IAS 1 set no structure for the income statement, so companies chose their own subtotals, and "operating profit" was calculated differently from one company to the next. Company-specific performance measures multiplied, with too little explanation of how they were calculated or how they tied to the income statement.
The IASB's response has three pillars, as set out in its April 2024 announcement:
- Comparability in the income statement: defined categories for income and expenses and new required subtotals, including operating profit.
- Transparency of management-defined performance measures: company-specific measures tied to the income statement are explained in the notes and become subject to audit.
- More useful grouping of information: stronger guidance on aggregation and disaggregation, and more transparency about operating expenses.
IASB Chair Andreas Barckow called IFRS 18 "the most significant change to companies' presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago." He added that it "will give investors better information about companies' financial performance and consistent anchor points for their analysis."
Is IFRS 18 Replacing IAS 1?
Yes. IFRS 18 fully supersedes IAS 1 'Presentation of Financial Statements' from 1 January 2027. IAS 1 was originally issued in 1997 and last substantively revised in 2007, meaning the framework it replaces is nearly 20 years old. The IASB project that produced IFRS 18, then called 'Primary Financial Statements', ran for approximately seven years from initial research in 2017 to final issuance in April 2024, which reflects how contested and complex the reforms were.
The standard applies to all entities that prepare financial statements under IFRS Accounting Standards. There are no size exemptions. IFRS Accounting Standards are required or permitted in more than 140 jurisdictions, so IFRS 18 has genuinely global reach. The EU has formally endorsed IFRS 18, meaning all EU-listed companies preparing consolidated IFRS statements must apply it from 1 January 2027.
Early application is permitted. Some entities are already adopting ahead of the mandatory date, though the practical complexity of the management-defined performance measure (MPM) regime means most are waiting for clearer market practice to emerge.
What Are the Five Categories of Income and Expenses Under IFRS 18?
IFRS 18 requires all entities to classify every item of income and expense into one of five mandatory categories in the statement of profit or loss. This replaces the largely unstructured format IAS 1 permitted, where entities had wide discretion over what to show and where.
The five categories are:
| Category | What goes here | Key test |
|---|---|---|
| Operating | All income and expenses not classified elsewhere | Residual category, defined by exclusion |
| Investing | Returns from assets that generate income independently of the main business | 'Integral vs incidental' test |
| Financing | Income and expenses from financing liabilities and cash equivalents | Arises from liabilities used solely to raise finance |
| Income taxes | Tax income and expense under IAS 12 | Defined by IAS 12 |
| Discontinued operations | Income and expenses from discontinued operations under IFRS 5 | Defined by IFRS 5 |
The Operating Category: A Residual, Not a Definition
The operating category is defined as a residual. It captures everything not classified in the other four categories. This is an important practical point: you cannot simply relabel your existing 'operating profit' line and move on. You must work through the investing and financing classification rules first, then everything left over is operating.
The IASB deliberately chose not to create a separate category for 'unusual' or 'one-off' items. Instead, unusual items must be classified within the appropriate category and may be disaggregated as a separate line if they are material. This was a deliberate design choice to prevent entities from using an 'unusual items' bucket to obscure recurring performance.
The Investing Category: The Integral vs Incidental Test
The investing category is where most classification difficulty arises. It captures income and expenses from assets that generate a return independently of the entity's main business activities. The key question is whether an asset is 'integral' to the main business (operating) or 'incidental' to it (investing).
Concrete examples of what falls in investing:
- Interest and dividends from equity or debt investments held as simple financial investments
- Rental income and depreciation on investment properties (properties not used in operations)
- Fair value gains and losses on financial assets measured at FVTPL that are not part of the main business
- Share of profit or loss of associates and joint ventures accounted for using the equity method, even when investing in them is a main business activity (IFRS 18.55(a))
- Interest income on cash and cash equivalents, for entities without a specified main business activity (IFRS 18.53(b))
What does not fall in investing: interest income on trade receivables for a manufacturer, because extending credit to customers is integral to how that business operates. That income stays in operating. The IASB's Illustrative Examples document works through several of these scenarios and is an essential implementation resource.
For banks and financial institutions, the rules work differently. Lending and taking deposits are the main business, so interest income and expense from those activities fall in the operating category, not financing. This sector-specific treatment is critical for banking preparers.
Here's how the specified-main-business-activity rules move common items:
| Item | Most non-financial entities | Entity that invests in financial assets or provides financing to customers as a main business |
|---|---|---|
| Interest income on cash and cash equivalents | Investing (IFRS 18.53(b)) | Operating for an investor in financial assets; a financing provider puts cash tied to financing customers in operating and makes a policy choice, operating or investing, for the rest (IFRS 18.56) |
| Interest and dividends from investments held for return | Investing (IFRS 18.53(c)) | Operating, if investing in those assets is a main business activity (IFRS 18.58) |
| Interest expense on borrowings | Financing (IFRS 18.60) | Operating if the borrowing relates to financing customers; otherwise a policy choice, operating or financing, consistent with the cash choice (IFRS 18.65(a)) |
| Interest expense on lease liabilities and other non-finance liabilities | Financing (IFRS 18.61) | Financing (IFRS 18.65(b)(i)) |
| Share of profit of equity-accounted associates and joint ventures | Investing (IFRS 18.55(a)) | Investing, whatever the business model (IFRS 18.55(a)) |
| Associates and joint ventures measured at fair value or cost | Investing (IFRS 18.53(a)) | Operating, if investing in them is a main business activity (IFRS 18.55(b)) |
| Foreign exchange differences on trade receivables | Operating, following the item that gave rise to them (IFRS 18.B65 to B66) | Operating |
The Financing Category
The financing category captures income and expenses from liabilities that arise from transactions involving only the raising of finance. It also takes interest, and the effect of interest-rate changes, on other liabilities such as lease liabilities and decommissioning provisions, where other IFRS Accounting Standards identify those amounts (IFRS 18.59 to 61). Interest expense on bank loans, bond liabilities, and lease liabilities under IFRS 16 will generally fall here, while interest income on cash and cash equivalents belongs in investing for most entities (IFRS 18.53(b)).
Entities that currently classify interest paid as an operating cash flow under IAS 7 will need to reassess their presentation under IFRS 18's consequential amendments to IAS 7.
What Are the Two New Mandatory Subtotals?
IFRS 18 requires all entities to present two new mandatory subtotals in the income statement, regardless of their current format:
- Operating profit or loss (the result of the operating category)
- Profit or loss before financing and income taxes (operating plus investing)
Both subtotals must be presented even if they are equal. This matters for entities in real estate, financial services, and investment management that have historically not presented an 'operating profit' line, or have used a different label as their primary headline metric. Those entities will need to restructure their income statement face, not just add a note.
Gross profit and profit before income taxes are not mandatory subtotals under IFRS 18, though many entities will continue to present them as useful additional lines.
What Is a Management-Defined Performance Measure (MPM)?
An MPM is a subtotal of income and expenses that you use in public communications outside the financial statements to communicate management's view of an aspect of the entity's overall financial performance, and that IFRS Accounting Standards don't already list or require (IFRS 18.117). Any such subtotal is presumed to communicate management's view unless you can rebut that with reasonable and supportable information (IFRS 18.119 to 120).
Adjusted EBITDA, adjusted operating profit and similar measures used in earnings releases or investor presentations will usually qualify. Some common subtotals are carved out, including gross profit, operating profit before depreciation, amortisation and IAS 36 impairments, and profit before income taxes (IFRS 18.118). Ratios aren't subtotals of income and expenses, so they fall outside the definition.
All MPMs go in a single note with a reconciliation to the most directly comparable IFRS subtotal, the tax and non-controlling interest effect of each reconciling item, and an explanation of why the measure is useful (IFRS 18.122 to 123). Because that note sits in the financial statements, it's audited. See Finrep's IFRS 18 presentation and disclosure requirements guide for the full note requirements and the IFRS 18 MPM reconciliation guide for a worked example.
What Are the Disaggregation Requirements?
IFRS 18 sets a stronger principle for aggregation and disaggregation across the primary statements and the notes. You group items on shared characteristics, split them where characteristics differ, and disaggregate whenever the resulting information is material (IFRS 18.41 to 42). A material goodwill impairment, for example, shouldn't sit inside administrative expenses.
If you present any operating expenses by function, you also disclose in a single note the totals for depreciation, amortisation, employee benefits, impairments and inventory write-downs, with the amount in each operating line item (IFRS 18.83). The IFRS 18 practical guide works through both requirements line by line.
What Does IFRS 18 Not Change?
It helps to be precise about scope. IFRS 18 does not:
- Change recognition or measurement under any IFRS standard
- Alter the other comprehensive income (OCI) framework from IAS 1 (the IASB has a separate project on OCI)
- Apply to recognition or measurement of financial instruments, leases, revenue, or any other substantive accounting area
- Require any change to the statement of financial position or statement of cash flows beyond the consequential amendments to IAS 7
Profit or loss totals will be identical before and after IFRS 18 adoption. What changes is the structure of the income statement, the subtotals presented, and the note disclosures.
When Does IFRS 18 Apply and What Is the Timeline?
IFRS 18 is mandatory for annual reporting periods beginning on or after 1 January 2027. For a December year-end entity, that means the first mandatory IFRS 18 financial statements will be published in early 2028. But the real pressure point is 2026.
IFRS 18 requires retrospective application under IAS 8. Every comparative period presented must be restated. For a December year-end entity adopting on 1 January 2027, the 2026 comparative income statement must be restated under IFRS 18 categories, and any MPMs disclosed in 2027 communications must be reconciled using 2026 restated figures.
As PwC's IFRS In Brief states directly: "Companies need to start their IFRS 18 implementation now. The 2026 comparative period is the real deadline, not 2027. Entities that wait until 2027 to begin will face significant pressure to restate comparatives under time constraints."
IFRS 18 also applies to interim reports prepared under IAS 34 for periods beginning on or after 1 January 2027. For entities with non-December year-ends, the first IFRS 18 interim report may arrive before the first annual report.
For a phased implementation roadmap with specific milestones, see Finrep's IFRS 18 Transition Plan: A Phased Practitioner Roadmap for 2026.
Consequential Amendments to Other Standards
IFRS 18 amends several other IFRS standards as a consequence of its introduction. The most significant are:
- IAS 7 (Statement of Cash Flows): Entities that currently classify interest paid as an operating cash flow may need to reassess, given the new financing category definition.
- IAS 33 (Earnings per Share): The EPS calculation may be affected by the new income statement categories, which is material for companies with complex capital structures.
- IFRS 7 (Financial Instruments: Disclosures): Consequential amendments affect how certain financial instrument income and expenses are presented.
Preparers must review these consequential amendments as part of implementation planning. They are not cosmetic.
IFRS 18 and ESMA's APM Guidelines: A Dual Disclosure Question
EU-listed companies face a question that no ranking article currently addresses: does compliance with IFRS 18's MPM regime satisfy ESMA's existing Guidelines on Alternative Performance Measures, or do both obligations apply in parallel?
The short answer is that both regimes apply, but they overlap substantially. ESMA's APM Guidelines require disclosure of definitions, reconciliations, and explanations for non-GAAP measures used in regulated information. IFRS 18's MPM requirements cover similar ground but apply specifically to subtotals of income and expenses and are anchored in the audited financial statements. A company that builds a rigorous MPM note under IFRS 18 will satisfy most of the ESMA APM requirements for the same measures, but the ESMA guidelines have a broader scope (covering all APMs, not just income statement subtotals) and apply to a wider range of documents. Finance teams should map both regimes against their current APM inventory rather than assuming one satisfies the other.
FAQ
Does IFRS 18 apply to companies that report under US GAAP? No. IFRS 18 applies only to entities that prepare financial statements in accordance with IFRS Accounting Standards. US GAAP reporters are subject to a separate but related reform, ASU 2024-03 (DISE), which requires disaggregation of income statement expenses but does not introduce the five-category structure or MPM regime. See Finrep's IFRS 18 vs ASU 2024-03 comparison for a side-by-side analysis.
Will IFRS 18 affect our adjusted EBITDA calculation? IFRS 18 does not change how you calculate adjusted EBITDA. It requires you to disclose it in the notes with a reconciliation to the nearest IFRS subtotal, explain why it is useful, and have that note audited. The calculation methodology itself is your choice, but it must now be formally defined and consistently applied.
Can we early adopt IFRS 18 before 2027? Yes. Early application is permitted and must be disclosed. Some entities are already adopting, though the MPM regime requires careful preparation, particularly around auditor alignment and investor communication sequencing.
Does IFRS 18 apply to sustainability-linked KPIs like carbon-adjusted EBITDA? IFRS 18 doesn't single them out. If a sustainability-linked metric is a subtotal of income and expenses and is used in public communications, it could qualify as an MPM. Companies integrating financial and sustainability reporting should assess their sustainability KPIs against the MPM definition now, before the 2027 effective date.
Where can I find illustrative examples of IFRS 18 financial statements? The IASB published an Illustrative Examples document alongside IFRS 18, covering income statement formats, MPM reconciliation notes, and the integral/incidental test. The IFRS Foundation has also published free 'IFRS 18 in Focus' webcasts on its website. EY's July 2025 guide runs to over 200 pages and is the most detailed Big-4 resource currently available.
How does IFRS 18 interact with CSRD and ESRS sustainability reporting? IFRS 18 and CSRD/ESRS operate in parallel. IFRS 18 governs the financial statements; CSRD/ESRS governs sustainability disclosures. They do not directly overlap, but companies integrating their reporting should be alert to the MPM question for sustainability-linked financial metrics, as noted above.
For a deep dive into how to classify every P&L line under the five categories, see Finrep's IFRS 18 Operating, Investing and Financing Categories guide. For the governance and audit committee implications of the MPM regime, see the IFRS 18 Management-Defined Performance Measures practitioner walkthrough.
