IFRS 18 Explained: What It Is, Why It Exists, and What Changes

IFRS 18 'Presentation and Disclosure in Financial Statements' is the most significant overhaul of income statement presentation in decades. Issued by the IASB in April 2024, it replaces IAS 1 in its entirety and is mandatory for annual reporting periods beginning on or after 1 January 2027. For a December year-end company, that means the first IFRS 18 financial statements land in early 2028.

This article is the canonical reference for what IFRS 18 actually is: what it requires, why the IASB created it, and what the core concepts mean in practice. For implementation planning and transition checklists, see our IFRS 18 transition plan walkthrough. For the detailed income statement subtotals mechanics, see IFRS 18 subtotals on the income statement.

Key takeaway: IFRS 18 is not a formatting tweak. It restructures the income statement, brings non-GAAP measures into the audited financial statements for the first time, and applies to listed companies in more than 140 jurisdictions.

What Is IFRS 18?

IFRS 18 is the IASB standard that governs how entities present and disclose information in their general purpose financial statements. It sets out the requirements for a complete set of financial statements, the structure of the statement of profit or loss, and the rules for grouping and disaggregating information. It also introduces an entirely new concept: management-defined performance measures (MPMs).

The standard was issued by the IASB in April 2024 as the culmination of its 'Primary Financial Statements' project, which ran for approximately eight years from 2016. Early application is permitted from the date of issue, so entities could have adopted IFRS 18 as early as their 2024 financial statements.

IFRS 18 applies to all entities that prepare financial statements in accordance with IFRS Accounting Standards. That covers listed companies in more than 140 jurisdictions, including the EU (where the endorsement process was completed, making IFRS 18 applicable for EU-listed companies from 2027), the UK, Australia, and Canada.

Why Did the IASB Create IFRS 18?

The short answer: investors could no longer compare companies, and the IASB had the evidence to prove it.

Over the past two decades, the proliferation of alternative performance measures (APMs) in earnings releases made it increasingly difficult for investors and analysts to assess and compare financial performance across entities. Companies were defining 'adjusted EBITDA,' 'underlying operating profit,' and similar non-GAAP measures in inconsistent ways, with no requirement to reconcile them to audited IFRS figures in the financial statements themselves.

As IASB Chair Andreas Barckow put it at the standard's launch: "IFRS 18 is the most significant change to the presentation of financial performance in decades. It responds to a clear demand from investors for more consistent, comparable information, particularly around how companies define and communicate their performance."

The IASB's response has three pillars:

1. A structured income statement with mandatory categories and a required subtotal
2. Formal rules for MPMs that bring non-GAAP measures into the audited notes
3. A stronger principle for grouping and disaggregating information

What Does IFRS 18 Replace?

IFRS 18 replaces IAS 1 'Presentation of Financial Statements' in its entirety. IAS 1 had governed financial statement presentation since 1997 and had been amended many times, but it never required a structured income statement or addressed non-GAAP measures.

The overall structure of a complete set of financial statements is retained: statement of financial position, statement of profit or loss and OCI, statement of changes in equity, statement of cash flows, and notes. The statement of cash flows requirements are largely unchanged. What changes fundamentally is the income statement and the disclosure requirements around performance measures.

IFRS 18 also triggered consequential amendments to IFRS 7 (Financial Instruments: Disclosures) and IAS 33 (Earnings per Share), reflecting the new income statement structure.

For a detailed side-by-side of what changed versus IAS 1, see our IFRS 18 vs IAS 1 comparison.

The Three Mandatory Income Statement Categories

IFRS 18 requires all income and expenses in the statement of profit or loss to be classified into one of three categories: operating, investing, or financing. A fourth category, discontinued operations (carried over from IFRS 5), and a fifth for income taxes complete the structure.

The classification rules are specific, and several common items land in counterintuitive places.

Operating Category

The operating category is defined by exclusion, not by a positive definition. The IASB's Basis for Conclusions deliberately chose this approach: operating profit is a residual that captures everything not classified in the investing or financing categories. This is one of the most counterintuitive aspects of the standard and a frequent source of preparer confusion.

In practice, operating income and expenses will include revenue, cost of sales, selling and administrative expenses, depreciation on property, plant and equipment, impairment losses on goodwill, and foreign exchange gains or losses on operating receivables.

Investing Category

The investing category covers income and expenses from assets that generate a return largely independently of the entity's main business activities. For a non-financial entity, this typically includes:

• Dividends and interest from equity or debt investments held for investment purposes
• Rental income and depreciation on investment properties
• Fair value gains and losses on financial assets held for investment
• Share of profit or loss of associates and joint ventures accounted for using the equity method (unless the investment is integral to the entity's main business activities, in which case it goes in operating)

The associate/joint venture classification is a significant judgment call for many entities. If a retailer holds a 30% stake in a logistics company that is central to its supply chain, that share of profit may belong in operating, not investing.

Financing Category

The financing category covers income and expenses from liabilities arising from financing activities. This includes:

• Interest expense on bank loans and bonds
• Interest expense on lease liabilities (IFRS 16) and the unwinding of discount on decommissioning provisions
• Dividends declared on shares classified as financial liabilities (e.g., redeemable preference shares)

One classification that surprises many preparers: interest income on cash and cash equivalents goes in the financing category for non-financial entities, not in investing. The logic is that it offsets financing costs rather than representing a return from an investment held independently of the business.

How Financial Institutions Differ

Financial institutions face fundamentally different rules. For entities whose main business is lending, investing, or providing financial services, income and expenses from those main business activities, including interest income and expense, are classified in the operating category. This reflects the fact that interest is the product for a bank, not a side return on idle cash.

This distinction matters enormously for sector-specific implementation. For a deep dive on the classification of every common P&L line item, see our IFRS 18 operating, investing, and financing categories guide.

The Required Subtotal: Profit or Loss from Operating Activities

IFRS 18 mandates a single required subtotal in the income statement: 'profit or loss from operating activities.' This is a defined, IFRS-calculated figure. Entities cannot relabel it, substitute it, or present a different figure in its place.

This is where many preparers face a practical problem. Their existing internal definition of 'operating profit' almost certainly differs from the IFRS 18 subtotal, because the IFRS 18 figure is determined by the standard's classification rules, not by management's view of what is operating. The mandatory subtotal will include items that some companies currently exclude from their reported operating profit (such as certain restructuring charges or impairment losses), and will exclude items some companies currently include.

Communicating this change to analysts and investors without triggering confusion requires careful preparation. The subtotal is not negotiable; the investor communication strategy is.

Key takeaway: The IFRS 18 'profit or loss from operating activities' subtotal is defined by exclusion. It captures everything not in the investing or financing categories. It is not the same as your current operating profit KPI, and it cannot be relabelled.

What Are Management-Defined Performance Measures (MPMs)?

An MPM is a subtotal of income and expenses that (a) is used in public communications outside the financial statements, (b) communicates management's view of an aspect of financial performance, and (c) is not a subtotal specified by IFRS Standards.

In plain terms: if your company discloses adjusted EBITDA, adjusted operating profit, or any similar non-GAAP measure in an earnings release, investor presentation, or annual report narrative, it will almost certainly qualify as an MPM under IFRS 18.

For each MPM, IFRS 18 requires disclosure in the notes to the financial statements of:

1. A description of why the MPM provides useful information about financial performance
2. A reconciliation to the most directly comparable IFRS subtotal, with each reconciling item labelled and its tax effect and non-controlling interest effect shown
3. An explanation of any changes in the MPM from the prior period

This is a structural shift. As EY's Global IFRS technical team noted in their July 2025 guide: "The new standard will bring non-GAAP measures into the financial statements for the first time, subjecting them to audit and requiring a formal reconciliation to IFRS figures. This is a fundamental shift in how companies will need to think about their investor communications."

MPMs Are Subject to Audit

Because MPM disclosures sit in the notes to the financial statements, they fall within the scope of the statutory audit. This is a significant change from the current environment, where APMs in earnings releases are typically outside audit scope. Auditors will assess whether each MPM disclosure meets the standard's requirements: is the reconciliation complete, is the labelling consistent, and does the description of usefulness hold up?

Finance teams that have historically treated non-GAAP disclosures as a communications exercise will need to treat them as a disclosure control. For the interaction between MPMs and existing regulatory APM frameworks (including ESMA's Guidelines on APMs for EU-listed companies), see our IFRS 18 management-defined performance measures walkthrough.

The New Grouping and Disaggregation Principle

IFRS 18 introduces a new principle for grouping items in financial statements: items must be grouped on the basis of shared characteristics. This replaces the more general IAS 1 aggregation guidance and is intended to improve the usefulness of both primary statements and notes.

The practical implication: a goodwill impairment loss does not share characteristics with general and administrative expenses. If material, it must be presented as a separate line item, not buried in an aggregate. Similarly, entities that present expenses by function (cost of sales, selling expenses, administrative expenses) must provide additional disclosure of expenses by nature in the notes, a requirement that existed under IAS 1 but is now more explicitly enforced.

This disaggregation requirement is consistently underestimated in implementation projects. It requires a systematic review of every aggregated line item in the current income statement and notes against the new shared-characteristics test.

Effective Date and Transition

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with early application permitted from April 2024. The standard requires retrospective application, meaning entities must restate comparative periods.

For a December year-end company adopting on 1 January 2027, this means restating 2026 as the comparative year in the new format. That restatement requires historical income statement data reclassified into the three new categories, MPM reconciliations prepared for prior periods, and disaggregation disclosures rebuilt from source data. As KPMG's implementation guidance notes, the retrospective restatement requirement is one of the most operationally challenging aspects of the standard, often requiring system changes and manual analysis of prior-period transactions.

For a phased project plan covering what your team needs to do in 2026 to be ready, see our IFRS 18 transition plan. For the technology stack implications, see DISE and IFRS 18 reporting technology.

What Stays the Same

Not everything changes. IFRS 18 retains:

• The overall structure of a complete set of financial statements (statement of financial position, statement of profit or loss and OCI, statement of changes in equity, statement of cash flows, notes)
• The statement of cash flows requirements (largely unchanged)
• Flexibility in how line items are presented within each income statement category (IFRS 18 does not prescribe specific line items beyond the required categories and subtotal)
• The discontinued operations category from IFRS 5
• The income taxes category (IAS 12 continues to govern tax accounting)

FAQ

What is IFRS 18 in simple terms? IFRS 18 is the new IASB standard that replaces IAS 1 and changes how companies present their income statement and disclose performance measures. It requires all income and expenses to be classified into operating, investing, or financing categories, mandates a new 'operating profit' subtotal, and brings non-GAAP measures like adjusted EBITDA into the audited financial statements for the first time.

What are the main changes in IFRS 18? Three changes stand out: (1) a structured income statement with three mandatory categories and one required subtotal; (2) new MPM rules that require non-GAAP measures disclosed publicly to be reconciled and explained in the audited notes; and (3) a stricter principle for grouping and disaggregating information based on shared characteristics.

How is IFRS 18 different from IAS 1? IAS 1 had no required income statement categories and no required subtotals below profit before tax. It also had no rules governing non-GAAP measures. IFRS 18 introduces all three. The overall financial statement structure and cash flow requirements are largely unchanged. See our IFRS 18 vs IAS 1 comparison for the full breakdown.

What is the objective of IFRS 18? To improve how financial performance information is communicated in financial statements, with a focus on comparability across entities and transparency around management-defined performance measures that were previously outside the audited financial statements.

Does IFRS 18 apply to US companies? Not directly. IFRS 18 applies to entities that prepare financial statements under IFRS Accounting Standards. US domestic issuers use US GAAP (governed by FASB). However, foreign private issuers filing with the SEC under IFRS, and dual reporters, will be affected. The US GAAP equivalent for income statement disaggregation is ASU 2024-03 (DISE). See our IFRS 18 vs ASU 2024-03 comparison.

Can we early adopt IFRS 18? Yes. Early application has been permitted since April 2024. Early adopters gain a head start on systems changes and investor communication, but face the burden of being first movers without broad peer benchmarks. The decision depends on your implementation readiness and whether your auditors and investors are prepared for the change ahead of the 2027 mandatory date.