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.

The standard responds directly to a problem investors and analysts had been flagging for years: IAS 1's flexibility let companies present income statements in ways that made comparison difficult. Companies could bury or highlight items inconsistently, and the proliferation of company-specific non-GAAP subtotals made it hard to benchmark performance across entities. The IASB's Basis for Conclusions on IFRS 18 puts it plainly: the new standard "responds to investors' calls for more comparable and transparent information about companies' financial performance."

IFRS Chair Andreas Barckow described it at issuance as "the most significant change to the income statement in a generation" that will require companies to "fundamentally rethink how they present financial performance, not just in the financial statements, but in all their investor communications."

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:

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

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.

The Financing Category

The financing category captures income and expenses from liabilities that arise solely from financing activities, plus income and expenses from cash and cash equivalents. Interest expense on bank loans, bond liabilities, and lease liabilities under IFRS 16 will generally fall here. 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:

1. Operating profit or loss (the result of the operating category)
2. 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 an entity uses in public communications outside the financial statements to communicate management's view of financial performance. If your entity uses such a measure publicly, IFRS 18 requires you to disclose it in the notes to the financial statements, with a full reconciliation.

This is the most operationally significant element of IFRS 18 for most listed companies. As EY's July 2025 implementation guide puts it: "For the first time, the metrics that companies use to tell their performance story to investors will be subject to audit and will need to be reconciled to IFRS figures in the financial statements."

Does Our Adjusted EBITDA Qualify as an MPM?

Almost certainly, yes, if you use it in earnings releases, investor presentations, or the front half of your annual report. IFRS 18 explicitly states that if a company uses 'adjusted EBITDA' or a similar measure in its public communications, and it is a subtotal of income and expenses, it qualifies as an MPM.

The IASB has clarified through its Transition Resource Group that 'public communications' is interpreted broadly. It includes earnings press releases, investor presentations, management commentary, website KPI pages, and investor day materials. It does not apply to internal management accounts or analyst consensus estimates.

What Does Not Qualify as an MPM?

Not every KPI becomes an MPM. The regime specifically excludes:

• Measures required by other IFRS standards (for example, earnings per share under IAS 33)
• Measures used only internally and not disclosed publicly
• Measures that are not subtotals of income and expenses, such as ratios (return on equity, net debt to EBITDA) or balance sheet metrics

This is a common source of confusion. A company's leverage ratio or return on capital employed is not an MPM under IFRS 18, even if it is prominently disclosed. The MPM definition is specifically about subtotals of income and expenses.

What Must the MPM Note Contain?

For each MPM, the notes must include:

1. A label and definition of the measure
2. An explanation of why it provides useful information about financial performance
3. A reconciliation to the most directly comparable IFRS subtotal or total required by IFRS 18 or another standard
4. The income tax effect and effect on non-controlling interests of each reconciling item
5. A description of how the MPM is calculated

The reconciliation note is subject to audit. That single fact raises the governance bar substantially. Audit committees need to formally approve the definition and calculation methodology of each MPM before the 2027 financial statements are signed. Companies that have historically been loose with how they define 'adjusted' items will face scrutiny from auditors on consistency and completeness.

For a full worked example of the MPM reconciliation note, see Finrep's IFRS 18 MPM Reconciliation: A Step-by-Step Practitioner Guide.

What Are the Disaggregation Requirements?

IFRS 18 enhances the general requirements for aggregation and disaggregation across all primary financial statements and notes. Entities must disaggregate information when the resulting line items have different characteristics that are relevant to users. This is designed to address 'excessive aggregation', where material items are obscured by being bundled into a single line.

For example, a goodwill impairment loss does not share characteristics with general and administrative expenses. If material, it must be shown separately. Similarly, entities using the 'nature of expense' method for operating expenses must provide functional information in the notes, and vice versa.

KPMG's IFRS 18 implementation guide notes that meeting these requirements will often require changes to chart of accounts and consolidation processes to capture the new category classifications at transaction level, not just at reporting level. This is a systems and process change, not just a disclosure exercise.

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? This is an open question the IASB's TRG has not yet definitively resolved. 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.