IFRS 18 Mandatory Subtotals: Operating Profit, Profit Before Financing and Income Taxes, and Profit or Loss Explained

If your income statement currently shows an "adjusted EBIT" or "underlying operating profit" as the headline number, IFRS 18 is about to complicate your life. The standard, issued by the IASB in April 2024 and mandatory for periods beginning on or after 1 January 2027, introduces three defined subtotals that every entity must present on the face of the profit or loss statement. This article explains exactly what those subtotals are, how they differ from each other, what gets reclassified to produce them, and what the knock-on effects are for covenants, remuneration, and investor communications.

Key takeaway: IFRS 18 does not change how much profit you report. It changes how that profit is structured and labelled on the face of the income statement, and it forces every company-defined metric that adjusts those subtotals into a formal reconciliation regime.

What Are the Three IFRS 18 Mandatory Subtotals?

IFRS 18 requires every entity to present three specific subtotals in the statement of profit or loss: Operating profit or loss; Profit or loss before financing and income taxes; and Profit or loss. These must appear on the face of the income statement, not just in the notes, and they must be presented even if two of them produce the same figure.

The IASB's stated rationale is comparability. A pre-issuance survey of 100 companies' income statements found that some entities presented no subtotals at all, while others presented up to seven, each defined differently. The mandatory subtotals create a common anchor point across all IFRS reporters in more than 140 jurisdictions.

Two points worth flagging immediately:

• Gross profit and profit before income taxes are no longer mandatory subtotals under IFRS 18. Many entities will still present them as additional subtotals where they provide a useful summary, but they are not required.
• The three mandatory subtotals are derived from a new five-category structure for the income statement: operating, investing, financing, income taxes, and discontinued operations. You cannot derive the subtotals correctly without first getting the category classification right.

How the Five-Category Structure Produces the Subtotals

The five categories are the engine; the subtotals are the output. Here is how they connect:

The gap between the first and second subtotals is the investing category. The gap between the second and third is the financing category plus income taxes (and discontinued operations where applicable).

This means the two subtotals are the same number only when the entity has no items in the investing category. For most entities, they will differ.

The Operating Category: A Residual, Not a Positive List

This is the most important conceptual shift in IFRS 18. The operating category is defined as a residual: it captures everything not classified in the investing, financing, income taxes, or discontinued operations categories. There is no positive list of what belongs in operating profit.

The practical implication: your IFRS 18 operating profit will be defined by what you exclude from it, not by what you include. That is a fundamentally different logic from how most companies currently construct their non-GAAP "operating profit" or "adjusted EBIT."

The Investing Category

The investing category captures income and expenses from:

• Investments in associates and joint ventures accounted for under the equity method (the share of profit or loss)
• Assets that generate a return individually and largely independently of the entity's other resources, typically debt and equity investments and investment properties
• Cash and cash equivalents

For investment properties specifically, this means rental income, depreciation, fair value gains and losses, and disposal gains and losses all move into the investing category. For a real estate-heavy entity that currently reports investment property income within operating profit, this reclassification can be material.

The Financing Category

The financing category captures income and expenses from liabilities that arise from raising finance (bank loans, loan notes), plus interest and unwinding of discount on other liabilities including lease liabilities and decommissioning provisions. Dividends declared on shares classified as liabilities (such as redeemable preference shares) also sit here.

The key point for leasing-heavy businesses: interest on lease liabilities moves to the financing category under IFRS 18. If your current operating profit includes lease interest (which it does under many current presentations), that figure will fall out of operating profit from 2027.

What Gets Reclassified: A Line-by-Line Summary

The table below shows the most common reclassifications finance teams encounter when mapping their current income statement to the IFRS 18 category structure.

Note that IFRS 18 includes a specific exception for entities whose main business activity is investing (such as investment entities, banks, or insurers). These entities may classify certain items differently, recognising that the standard's investing category definition is designed primarily for non-financial entities.

For a deeper walkthrough of how to classify every P&L line, see IFRS 18 Operating, Investing and Financing Categories: How to Classify Every P&L Line.

Operating Profit vs. Profit Before Financing and Income Taxes: A Worked Example

This is the distinction that most practitioners find confusing, and it is the gap that the top-ranking articles leave open.

Consider a manufacturing group with the following simplified income statement:

Operating profit (120) and profit before financing and income taxes (145) are different numbers because the entity has investing-category items: the associate profit and the investment property income. Both subtotals must be presented even though they differ.

If this entity had no investing-category items at all, both subtotals would show 120 and both would still need to be presented.

Note also that profit before income taxes (120) is not a mandatory subtotal under IFRS 18, even though it appears here as a useful additional line. Many entities will continue to show it, but it is optional.

The MPM Regime: The Other Half of the Story

The mandatory subtotals are only half the compliance picture. IFRS 18 also introduces a formal disclosure regime for management-defined performance measures (MPMs): subtotals of income and expenses that are not specified in IFRS Accounting Standards, are presented in the primary financial statements, and communicate management's view of performance.

If your entity presents an "adjusted operating profit" or "underlying EBITDA" on the face of the income statement, that metric is now an MPM. It must be reconciled to the most directly comparable IFRS 18 mandatory subtotal in the notes, with each adjustment explained and its tax effect calculated.

Two scoping points that preparers frequently misunderstand:

1. The MPM regime applies to metrics on the face of the income statement, not to metrics disclosed only in earnings releases or management commentary. If you move your adjusted metric off the face of the P&L and into the narrative, it falls outside the MPM definition. Many IR teams will need to decide whether to keep adjusted metrics on the face (triggering MPM disclosure) or move them to the front-end narrative.
2. The mandatory subtotals themselves are excluded from the MPM definition. Operating profit, profit before financing and income taxes, and profit or loss are IFRS-defined; they are not MPMs. Only adjustments to those subtotals create MPMs.

For a full step-by-step guide to identifying and disclosing MPMs, see IFRS 18 Management-Defined Performance Measures: 2026 Practitioner Walkthrough.

Covenant and Remuneration Implications

This is the area most implementation guides skip, and it is where the real financial exposure sits.

Many debt covenants and executive remuneration schemes are written with reference to "operating profit" or "EBIT." If the IFRS 18 definition of operating profit differs materially from the figure those agreements were negotiating around, the entity may face:

• Covenant headroom changes: An entity that currently includes associate income in its operating profit will see that figure fall under IFRS 18. If a leverage or interest cover covenant is tested against operating profit, the headroom calculation changes.
• Remuneration scheme resets: A bonus scheme tied to "operating profit growth" may produce a different payout under the IFRS 18 definition than under the current non-GAAP definition. Remuneration committees will need to decide whether to rebase the target or redefine the metric.

The practical step is to run a gap analysis now: calculate what your IFRS 18 operating profit would have been for the last two years using the new category rules, compare it to the figure referenced in your covenants and remuneration schemes, and assess whether renegotiation or redefinition is needed before 2027.

Retrospective Application and the Comparative Period

IFRS 18 requires retrospective application, meaning entities must restate comparative periods. For a calendar-year entity adopting on 1 January 2027, the 2026 financial year becomes the comparative period that must be restated under the new structure.

This has a direct implication for 2026 reporting work: the category classification decisions you make now will need to be applied consistently to 2026 transactions when you prepare the 2027 financial statements. Finance teams that wait until late 2026 to finalise their classification policy will face a much harder restatement exercise.

Early adoption is permitted from the April 2024 issuance date. Entities that want to align investor communications ahead of the mandatory date, or that are implementing a broader finance transformation, may find early adoption worthwhile. The practical requirement is the same: retrospective application with restated comparatives.

IFRS 18 Implementation Sequencing: The Logical Order

Based on the implementation challenges above, the logical sequencing for a finance team preparing for 2027 is:

1. Design the category classification policy. Decide how each material income and expense line maps to operating, investing, or financing. Document the judgements, particularly for items like pension net interest, lease interest, and foreign exchange differences.
2. Identify all reclassifications. Run the classification policy against the current income statement and quantify the impact on operating profit and profit before financing and income taxes.
3. Assess covenant and remuneration impacts. Compare the new operating profit figure to the definitions in debt agreements and bonus schemes. Initiate renegotiation or redefinition where needed.
4. Redesign the income statement template. Build the five-category structure with the three mandatory subtotals. Decide which additional subtotals (gross profit, profit before income taxes) to retain.
5. Update systems and ERP. Ensure the general ledger can capture the five-category classification at transaction level. This is often the longest lead-time item.
6. Prepare the comparative restatement. Apply the classification policy to 2026 data to produce the restated comparative.
7. Update the MPM policy. Identify which company-defined metrics will remain on the face of the income statement (triggering MPM disclosure) and which will move to the narrative.

For a phased roadmap with milestones, see IFRS 18 Implementation Guide: Phased Roadmap for 2027 Compliance.

FAQ

Do we have to show all three mandatory subtotals even if two of them are the same number? Yes. ACCA's technical guidance confirms that operating profit and profit before financing and income taxes must both be presented even if they produce the same amount. The only exception noted by PwC applies where an entity has only operating and discontinued operations categories, in which case the subtotals may coincide and specific exceptions apply.

Is gross profit still required under IFRS 18? No. Gross profit is not a mandatory subtotal under IFRS 18. Many entities will continue to present it as an additional subtotal where it provides a useful structured summary, but it is no longer required.

When does IFRS 18 take effect? IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted. Retrospective application is required, so the 2026 year becomes the comparative period for calendar-year entities.

How does IFRS 18 operating profit differ from our current non-GAAP operating profit? The IFRS 18 operating category is a residual: it excludes investing and financing items. Your current non-GAAP operating profit may include items that IFRS 18 moves to investing (associate income, investment property income) or financing (lease interest, unwinding of discount on provisions). The two figures will often not be the same, which is precisely why the MPM reconciliation regime exists.

What happens to our adjusted EBITDA under IFRS 18? If adjusted EBITDA is presented on the face of the income statement, it becomes an MPM and must be reconciled to the most directly comparable mandatory subtotal (typically operating profit) in the notes. If it is disclosed only in earnings releases or management commentary, it falls outside the MPM regime, though investors and analysts will still expect clarity on how it relates to the new IFRS 18 operating profit line.

Does IFRS 18 affect earnings per share? EPS under IAS 33 is calculated on profit or loss attributable to ordinary equity holders, which corresponds to the third mandatory subtotal. EPS presentation is therefore unaffected by IFRS 18. Some analysts may begin tracking an EPS figure derived from operating profit as a supplementary metric, but this is not required by the standard.