IFRS 18 Management Performance Measures Reconciliation: A Step-by-Step Practitioner Guide

If your finance team uses adjusted EBITDA, underlying profit, or any other income-and-expense subtotal in an earnings release or investor presentation, the IFRS 18 management performance measures reconciliation requirement is the single most demanding new compliance task you face before 1 January 2027. This guide walks through exactly how to build it correctly, what the tax-effect mechanics actually require, and where teams go wrong.

Key takeaway: The MPM reconciliation is not a reformat of your existing APM disclosure. It is an audited, note-level bridge between your management measure and an IFRS-defined subtotal, with per-item tax effects and NCI effects disclosed separately. Getting the mechanics wrong is a material misstatement risk.

For background on what qualifies as an MPM and how to run the identification process, see the IFRS 18 Management-Defined Performance Measures: 2026 Practitioner Walkthrough. This article assumes you have already identified your MPMs and focuses entirely on building the reconciliation note.

What the IFRS 18 MPM Reconciliation Must Contain

The reconciliation note is the technical centrepiece of IFRS 18's MPM framework. Per the IFRS 18 standard issued by the IASB in April 2024, every MPM disclosure in the single dedicated note must include:

• A clear label and description of the MPM
• An explanation of what aspect of financial performance the MPM communicates and why it enhances users' understanding
• Details of how the MPM is calculated
• A reconciliation from the MPM to the closest relevant IFRS-defined subtotal in the statement of financial performance, with each reconciling line item identified
• The income tax effect on each individual reconciling item (not just the total tax effect)
• The non-controlling interest (NCI) effect on each individual reconciling item
• An explanation of how each reconciling item and its associated income tax effect was determined
• Comparative period information

As RSM UK summarises: "A reconciliation showing how the MPM links to the closest relevant IFRS subtotal with each related line item in the financial performance statement identified. The effects of income tax and non-controlling interests on each reconciling item [must also be disclosed]."

All of this sits inside the audited financial statements. "For audited entities, disclosed MPMs will fall within the scope of the statutory audit" -- a fundamental shift from the current landscape where APMs are largely unaudited.

Step 1: Identify the Closest Relevant IFRS Subtotal

The anchor point for your reconciliation is the IFRS-defined subtotal that is most directly comparable to your MPM. This is not always obvious, and choosing the wrong anchor is a common error.

IFRS 18 introduces two new mandatory subtotals that will serve as the primary anchor points for most entities:

• Operating profit or loss -- the subtotal of all income and expenses in the operating category
• Profit or loss before financing and income tax -- operating profit plus all items in the investing category

For an overview of how these mandatory subtotals work and how items are classified into the five P&L categories, see the dedicated guide on IFRS 18 mandatory subtotals.

The selection logic in practice:

1. Start with your MPM. What does it purport to measure -- operating performance, pre-financing performance, or something else?
2. Identify which IFRS 18 P&L category the excluded items fall into. If your MPM excludes restructuring charges (operating category items), the closest IFRS subtotal is likely operating profit or loss.
3. If your MPM excludes items spanning multiple categories (e.g. both operating and investing items), the closest subtotal is the one that captures all the categories your MPM touches -- typically profit or loss before financing and income tax.
4. If your MPM is several steps removed from any IFRS-defined line, work upward through the P&L hierarchy. The IASB's Basis for Conclusions confirms the intent is to anchor to the subtotal that minimises the number of reconciling items, not to always reconcile to the bottom line.

Practical rule: If your adjusted measure excludes only operating-category items, reconcile to IFRS 18 operating profit. If it also excludes investing-category items, reconcile to profit before financing and income tax. Avoid reconciling to profit before tax unless there is no closer anchor.

Step 2: Structure the Reconciling Items

Each reconciling item must be individually identified, described, and quantified. A single line labelled "adjustments" does not meet the standard.

For each item excluded from (or added to) the IFRS subtotal to arrive at the MPM:

• Give it a specific, descriptive label (e.g. "Restructuring costs -- UK manufacturing closure", not "Exceptional items")
• State the pre-tax amount
• State the income tax effect (see Step 3)
• State the NCI effect where applicable
• Provide a brief explanation of how the item and its tax effect were determined

The direction of the reconciliation matters. IFRS 18 requires the note to show how the MPM links to the IFRS subtotal -- so the reconciliation runs from the MPM down to the IFRS subtotal, or from the IFRS subtotal up to the MPM. Either direction is acceptable provided it is clear and consistent.

Step 3: Calculate the Tax Effect on Each Individual Reconciling Item

This is the most technically demanding element of the reconciliation, and the one most existing guidance glosses over.

Entities cannot simply apply the group effective tax rate to the total of all adjustments. IFRS 18 requires the income tax effect to be determined for each reconciling item individually, with an explanation of how that effect was calculated. This requires close coordination between financial reporting and tax teams.

The mechanics depend on the tax treatment of each specific adjustment:

The key principle: use the actual tax treatment of each item, not a blended rate. Where an item is partly deductible, split the effect. Where timing differences arise, use the deferred tax rate. The explanation required by IFRS 18 must be sufficient for a reader to understand why the tax effect is what it is.

A practical approach:

1. For each reconciling item, ask the tax team: "Is this deductible? When? At what rate? In which jurisdiction?"
2. Document the answer in a tax-effect memo that supports the note disclosure.
3. Reconcile the sum of individual item tax effects to the total tax impact of all MPM adjustments -- this is your internal consistency check.
4. Where the sum does not reconcile cleanly (due to rate differences or non-deductible items), the explanation in the note must account for the difference.

Step 4: Handle Non-Controlling Interest Effects

Where the entity has non-controlling interests, each reconciling item must also show its NCI effect.

The NCI effect is the portion of each reconciling item attributable to non-controlling shareholders, calculated based on the NCI's ownership percentage in the relevant subsidiary. This mirrors the approach used for the tax effect:

• Calculate the NCI's share of each pre-tax reconciling item
• Apply the NCI's share of the tax effect on that item
• The net NCI effect on each reconciling item is the pre-tax NCI share minus the NCI's share of the tax effect

For most entities with simple NCI structures, this is straightforward. For entities with multiple subsidiaries at different NCI percentages, or where the reconciling item arises in a specific subsidiary, the calculation must be done at subsidiary level and aggregated.

Worked Example: Adjusted EBITDA to Operating Profit

The following illustrates a compliant MPM reconciliation note for a manufacturing group that discloses "Adjusted EBITDA" in its earnings releases. The closest IFRS 18 subtotal is operating profit or loss.

Note X: Management-Defined Performance Measures

Adjusted EBITDA is a management-defined performance measure that reflects the group's operating performance before depreciation, amortisation, and items management considers non-recurring. It is used in investor communications to facilitate comparison of underlying performance across periods. Adjusted EBITDA is not comparable to similarly labelled measures used by other entities.

Tax effects on reconciling items:

(a) Depreciation and amortisation: tax effect calculated at the applicable UK statutory rate of 25%, reflecting the capital allowances available on the relevant assets.

(b) Restructuring costs: the UK plant closure costs are tax-deductible in the period incurred. Tax effect calculated at 25% statutory rate.

(c) Impairment of manufacturing equipment: the impaired assets have no remaining tax base following prior-year capital allowances claimed in full. Tax effect is therefore nil.

NCI effects reflect the 12% non-controlling interest in the relevant manufacturing subsidiary.

This structure -- starting with the MPM, reconciling each item individually, and then providing a separate tax-and-NCI table with explanations -- is what IFRS 18 requires. The IASB published illustrative examples alongside IFRS 18 that follow this general structure.

Step 5: Handle Changes to MPMs and Comparative Restatement

If you change how an MPM is calculated, add a new MPM, or discontinue one, IFRS 18 requires explanation, justification, and restated comparative information.

What "restatement" means in practice:

• The prior year reconciliation note must be restated on the new basis, showing what the MPM and each reconciling item would have been under the revised definition
• The change must be explained and justified -- "we refined our definition" is not sufficient; the note must explain why the change better communicates financial performance
• If an MPM is discontinued, the note must explain why

As BDO's IFRS 18 resources confirm, IFRS 18 requires retrospective application, so comparative periods must be restated across the board. For MPMs specifically, this means the prior year reconciliation note is restated in full, not just the headline figure.

This creates a significant ongoing compliance burden for entities that frequently update their KPI frameworks. The practical implication: treat MPM definitions as semi-permanent. Every change triggers a restatement cycle and requires audit committee sign-off.

Step 6: Govern the MPM Trigger Before It Fires

The biggest compliance risk is not a poorly constructed reconciliation -- it is an MPM that gets created accidentally, without the finance team's knowledge.

As RSM UK warns: "Set up a governance process to mitigate the risk of inadvertently creating an MPM when communicating performance."

The trigger is broad. "Public communications outside the financial statements" includes:

• Earnings press releases
• Investor day presentations
• Analyst call transcripts where management references a subtotal
• Management commentary and strategic reports in the annual report
• Debt covenant communications citing income/expense subtotals
• Sustainability reports where financial performance subtotals appear
• Potentially social media posts referencing specific income/expense figures

Note that oral communications and written transcripts of oral communications are excluded from the trigger -- but prepared slides shown during an earnings call are not.

A practical governance framework:

1. Designate an MPM register owner -- typically the group financial controller or head of external reporting. Every measure on the register requires a completed MPM disclosure note before it can be used externally.
2. Pre-clearance process for all external communications. Any document referencing a financial performance figure must be reviewed against the MPM register before publication. IR teams, communications teams, and the CEO's office need to understand this requirement.
3. Quarterly communications audit. Pull every external document published in the quarter and check for income/expense subtotals not on the MPM register.
4. Board and audit committee briefing. The audit committee needs to understand that MPMs are now in statutory audit scope. Brief them on the governance process and the restatement risk.

Warning: If a CFO mentions "adjusted EBITDA" in an earnings call using prepared slides, but the finance team has not set up the required MPM note, the entity is in breach of IFRS 18. The governance process must be in place before the first external communication under the new standard.

The Audit Scope Shift: What Finance Teams Must Prepare For

MPMs are now inside the statutory audit -- a major change from the current APM landscape.

Under current practice, APMs and non-GAAP measures are largely outside audit scope. Auditors may read them for consistency with the financial statements, but they do not audit the reconciliation itself. Under IFRS 18, the MPM note is part of the audited financial statements, and auditors must obtain sufficient appropriate audit evidence over:

• Whether the MPM definition meets the IFRS 18 criteria
• Whether the reconciling items are correctly identified and quantified
• Whether the tax effect on each item is correctly calculated and explained
• Whether the NCI effects are correct
• Whether comparative information has been correctly restated

For audit committees, this means MPM governance is no longer just an IR or communications matter -- it is a financial reporting control. The MPM register, the pre-clearance process, and the tax-effect memo all become audit evidence. Build them accordingly.

KPMG's First Impressions publication on IFRS 18 is one of the most comprehensive technical guides available on the MPM requirements and is worth working through alongside the standard itself.

The IAS 33 Amendment: Supplemental EPS Measures

IFRS 18 amends IAS 33 to close a loophole on adjusted EPS disclosures.

Previously, entities could disclose supplemental EPS figures ("adjusted EPS", "underlying EPS") with limited constraints. Under the amended IAS 33, additional EPS disclosures are only permitted if the numerator is either:

• A total or subtotal specified by IFRS 18, or
• An MPM (with the full MPM disclosure note in place)

This means any entity currently disclosing "adjusted EPS" or "underlying EPS" must either:

1. Ensure the numerator qualifies as an IFRS 18-specified subtotal (e.g. operating profit), or
2. Formally designate the numerator as an MPM and build the full reconciliation note

Entities that cannot satisfy either condition must discontinue the supplemental EPS disclosure. Review your current EPS disclosures against this test now -- the 2026 shadow year is the right time to identify and resolve any conflicts before the 2027 mandatory date.

ESMA APM Guidelines vs. IFRS 18 MPM Requirements

Compliance with ESMA's existing APM Guidelines does not satisfy IFRS 18's MPM requirements.

ESMA's Guidelines on Alternative Performance Measures have applied to European listed entities since 3 July 2016. They require reconciliation and explanation of APMs in regulated information documents. But they sit outside the audited financial statements.

IFRS 18 goes further on two dimensions:

As Grant Thornton's IFRS 18 guidance notes, IFRS 18 creates a "two-tier" APM landscape: MPMs (regulated, audited, in the notes) and other APMs (unregulated under IFRS 18, though still subject to ESMA guidelines for European listed entities). Entities need to clearly distinguish between these two categories in their disclosure frameworks.

FAQ

Does using a measure in an earnings call make it an MPM? Oral communications are excluded from the MPM trigger under IFRS 18. But prepared slides shown during the call, or a written earnings release published alongside it, are not excluded. If the slides reference an income/expense subtotal not specified by IFRS, and that subtotal communicates management's view of overall group performance, it is an MPM.

What is the effective date for IFRS 18 MPM requirements? IFRS 18 is mandatory for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. Entities adopting early must disclose that fact. The standard applies retrospectively, so 2026 comparatives must be restated for 2027 first-time adopters.

Is EBITDA an MPM under IFRS 18? It depends on how it is defined. The IASB explicitly excluded "operating profit before depreciation, amortisation and specified impairments" from the MPM definition -- provided all of the entity's earnings are included in operating profit. But "adjusted EBITDA" that also excludes restructuring costs, share-based payments, or other items will typically qualify as an MPM, because those exclusions take it beyond the carved-out subtotal.

Do we need to restate the prior year reconciliation note if we change an MPM? Yes. IFRS 18 requires comparative information to be restated when an MPM changes. This means the prior year reconciliation note must be presented on the revised basis, with an explanation of the change and why it better communicates financial performance.

Can we have different MPMs for different markets? If your entity uses "adjusted EBITDA" in UK investor presentations and "adjusted operating income" in US investor day materials, both measures may qualify as MPMs -- and both require the full disclosure note. The MPM register must capture every income/expense subtotal used in any external communication, regardless of the audience or geography.

What happens if we miss an MPM in our note? The omission is a breach of IFRS 18 and falls within statutory audit scope. Auditors are required to assess whether all MPMs used in external communications are captured in the note. A missed MPM identified during audit will require the note to be updated before sign-off, and may require a broader review of external communications governance.