IFRS 18 Presentation and Disclosure Requirements: Practical Guide (2026)

IFRS 18 replaces IAS 1 on 1 January 2027 and is the most significant overhaul of income statement presentation in decades. This guide is for CFOs, group controllers, and technical accountants who need to move beyond the summary and make the hard classification calls before the mandatory effective date arrives.

Key takeaway: IFRS 18 is mandatory for annual periods beginning on or after 1 January 2027, with full retrospective application required. Most large IFRS reporters are targeting 2027 first-time application, but the comparative period means your systems need to capture data in the new structure from 1 January 2026 at the latest.

What IFRS 18 Replaces and What Stays the Same

IFRS 18 replaces IAS 1 Presentation of Financial Statements in its entirety. It was issued by the IASB on 9 April 2024 after a decade-long project that began with the Primary Financial Statements research agenda item in July 2014. The Exposure Draft followed in December 2019, and the final standard took another four years to land.

The general framework for a complete set of financial statements carries over: annual presentation, comparative amounts, the statement of financial position, statement of changes in equity, and statement of cash flows all remain. What changes materially is the structure of the statement of profit or loss, the disclosure requirements for non-IFRS performance measures, and the aggregation and disaggregation rules across all primary statements and notes.

The IASB's Effects Analysis identifies three investor concerns that drove the standard: income statements vary too much in content and structure between companies; management-defined measures lack transparency; and material information is routinely buried in catch-all line items. IFRS 18 addresses each one directly.

The Five Income and Expense Categories: How to Classify Borderline Items

IFRS 18 requires all income and expenses in the statement of profit or loss to be classified into one of five categories: operating, investing, financing, income taxes, and discontinued operations. The IASB workshop presentation confirms two new mandatory subtotals sit above profit or loss: 'operating profit' (the sum of all items in the operating category) and 'profit before financing and income taxes' (operating profit plus the investing category). There is no opt-out.

The operating category is a residual: it captures everything not classified elsewhere. The investing and financing categories have specific, asset- and liability-driven definitions that catch most of the hard calls.

Investing category: what belongs here

The investing category captures income and expenses from assets that generate a return individually and largely independently of the entity's other resources. In practice this means:

• Interest and dividends from investments not related to the main business
• Rental income and remeasurements of investment property
• Gains and losses on disposal of investments
• Share of profit or loss of associates and joint ventures (for most entities)
• Fair value changes on equity instruments held as investments

The key test is independence. A machine on the factory floor does not generate a return independently of the production process around it, so depreciation on it stays in operating. An investment property rented to a third party does generate a return independently, so rental income and depreciation on it go to investing.

Foreign exchange differences follow the underlying item. FX gains and losses on trade receivables go to operating; FX gains and losses on a loan liability go to financing. This is an explicit IFRS 18 rule and resolves a common classification question.

Financing category: what belongs here

The financing category captures income and expenses from liabilities arising from financing activities and from cash and cash equivalents. Specifically:

• Interest expense on bank borrowings and bonds
• Interest expense on lease liabilities (IFRS 16)
• Unwinding of discount on provisions and pension liabilities
• Fair value changes on financial liabilities designated at FVTPL

Note what does not go here: borrowing costs capitalised under IAS 23 are excluded (they go to the asset, not the income statement). Current and past service costs on defined benefit pension plans go to operating, not financing, even though the unwinding of the discount on the pension liability goes to financing.

The classification decision in practice

For most items the classification is straightforward. The genuinely hard calls tend to cluster around a few recurring fact patterns:

IFRS 18 also provides a relief from some classification requirements where they would result in undue cost or effort. This is not a blanket exemption: it applies to specific classification decisions, and entities using it must disclose that fact and explain why the relief was applied. For mid-size preparers with limited ERP granularity, this relief may be relevant for certain interest income streams on working capital balances, but it should be documented carefully before the auditors arrive.

Specified Main Business Activities: The Sector Exception That Changes Everything

For entities with 'specified main business activities', the classification rules flip for certain items. IFRS 18 paragraphs 49 to 66 define two types of specified main business activity:

1. Investing as a main business activity (investment entities, real estate companies, asset managers): items that would otherwise go to investing are reclassified to operating. A real estate company presents rental income and investment property remeasurements in operating profit, not below it.
2. Providing financing to customers as a main business activity (banks, finance companies, some lessors): interest income from loans to customers goes to operating, not investing. If the bank also borrows to fund those loans, the related interest expense also moves to operating.

This is not a minor adjustment. For a retail bank, the entire net interest margin sits in operating profit under IFRS 18. The EY Closer Look updated April 2026 is currently the most detailed Big-4 treatment of the bank-specific application, including an illustrative statement of profit or loss for a retail and investment banking group.

One item that does not move regardless of main business activity: share of profit or loss of associates and joint ventures always goes to the investing category.

What Is a Management-Defined Performance Measure (MPM)?

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 or defined by IFRS Accounting Standards. All three conditions must be met simultaneously.

This definition is narrower than the ESMA APM Guidelines, which apply to listed EU companies and cover any non-GAAP measure. Not all APMs are MPMs. The practical distinction:

• Adjusted EBITDA presented in earnings releases: almost certainly an MPM (it is a subtotal of income/expenses, used publicly, communicates management's view of performance, and is not an IFRS subtotal).
• Organic revenue growth rate: likely not an MPM, because it is a growth rate, not a subtotal of income and expenses.
• Underlying operating profit: almost certainly an MPM if used in investor presentations.
• Operating profit as defined by IFRS 18: explicitly excluded, because it is now an IFRS-required subtotal.
• Earnings per share calculated per IAS 33: excluded, because it is IFRS-defined.

The practical MPM identification test to run across your current KPI library:

1. Is it a subtotal (i.e. a sum or difference of income and expense line items)? If no, stop: it is not an MPM.
2. Does management use it in earnings calls, press releases, investor presentations, or annual reports outside the financial statements? If no, stop.
3. Does it communicate management's view of financial performance (as opposed to, say, a balance sheet ratio)? If yes to all three, it is an MPM and the full disclosure note is required.

Companies subject to both IFRS 18 and ESMA APM Guidelines will need to map their existing APM disclosure against the new MPM note requirements. The two regimes overlap but are not identical, and the MPM note in the financial statements will need to be consistent with the APM disclosures in the management report.

What the MPM Disclosure Note Must Contain

Every MPM must be disclosed in a single dedicated note in the financial statements. IFRS 18 paragraphs 122 to 123 require the note to include:

1. Why the MPM provides useful information about the entity's financial performance
2. How the MPM is calculated, including the accounting policies applied to reconciling items
3. A reconciliation to the most directly comparable IFRS subtotal or total, showing each reconciling item separately
4. The income tax effect of each reconciling item
5. An explanation of any changes to the MPM or its calculation from the prior period

The income tax effect requirement is the one that catches most preparers off guard. You cannot simply show a pre-tax reconciliation and apply a blended effective rate at the bottom. Each reconciling item needs its own tax effect.

IFRS 18 provides two simplified approaches to reduce the cost of this calculation:

• Statutory rate approach: apply the applicable statutory tax rate to each reconciling item.
• Grouping approach: group reconciling items with similar tax characteristics and apply a single rate to each group.

For a company with a single jurisdiction and a straightforward tax profile, the statutory rate approach is usually sufficient. For multinationals with reconciling items that span jurisdictions or have permanent differences, the grouping approach gives more flexibility. Either way, the methodology must be disclosed and applied consistently.

The MPM note requirements apply to interim financial statements under IAS 34, not just annual reports. If your half-year report includes adjusted EBITDA, the full MPM note is required from the first interim period in 2027.

Specified Expenses by Nature: What Function Presenters Must Now Disclose

Entities that present operating expenses by function (cost of sales, selling expenses, G&A) must disclose five specified expense categories by nature in a single note, per IFRS 18 paragraph 83.

The five categories are:

This disclosure can be based on cost incurred rather than expense recognised in profit or loss, which mitigates some of the cost for entities that capitalise a portion of these amounts (e.g. employee costs capitalised as internally generated intangibles).

The IASB's illustrative XYZ Group example shows a manufacturer using a mixed presentation approach: some operating expenses by function, some by nature, with goodwill impairment presented separately because allocation to functional lines would be arbitrary. This mixed approach is explicitly permitted and may be preferable for entities with material items that do not fit neatly into a functional line.

Entities that already present expenses by nature (the alternative to function presentation) are not required to provide this additional note, since the nature information is already on the face of the income statement.

Aggregation, Disaggregation, and the 'Other' Line Item Problem

IFRS 18 introduces explicit rules on aggregation and disaggregation that apply across all primary financial statements and notes, not just the income statement. The core principle: information must be disaggregated if it has different predictive value, or if combining it would obscure material information.

The most targeted new requirement addresses a widespread practice: items labelled 'other' must not be so large that they obscure the nature of the underlying items. If your 'other operating income' line is material, IFRS 18 requires you to break it down. This is a direct response to the investor concern that material items are routinely buried.

IFRS 18 also provides explicit guidance on the roles of primary statements versus notes: primary statements provide a structured summary; notes provide additional detail. This is intended to reduce 'note overload', the accumulation of boilerplate disclosures that bury the material information investors actually need.

For preparers working through the IASB's Disclosure Initiative projects alongside IFRS 18, the interaction is complementary: IFRS Practice Statement 2 on materiality judgements provides the framework for deciding what level of disaggregation is required, and IFRS 18's specific rules on 'other' line items and category classification sit on top of that general framework.

Consequential Amendments: IAS 7, IAS 33, and IAS 34

IFRS 18 makes targeted consequential amendments to three other standards:

• IAS 7 (Statement of Cash Flows): when using the indirect method, the starting point for the operating section shifts from 'profit for the period' to 'operating profit' as defined by IFRS 18. The previous option to classify interest and dividends received as either operating or investing cash flows is removed: interest and dividends received go to investing; interest and dividends paid go to financing.
• IAS 33 (Earnings per Share): the EPS calculation is now linked to the new IFRS 18 subtotals, ensuring consistency between the income statement structure and per-share metrics.
• IAS 34 (Interim Financial Reporting): the MPM note requirements apply in full to interim financial statements. This is a point many preparers miss: the new disclosure regime applies to half-year reports from 2027, not just annual reports.

The EY Closer Look (April 2026) covers these consequential amendments in detail, including IFRS Interpretations Committee agenda decisions on contested application questions.

Retrospective Application: The Transition Burden Is Real

IFRS 18 requires full retrospective application. For a 31 December 2027 year-end, that means restating the 2026 comparative period in the new category structure. Where retrospective adjustments affect retained earnings at the beginning of the earliest comparative period, IFRS 18 paragraph 37 requires a third statement of financial position as at 1 January 2026.

The systems challenge is significant and is systematically underestimated in most published commentary. Most ERP general ledgers do not currently tag income and expense transactions to the IFRS 18 category structure. Preparers face three practical options:

1. Build new chart-of-accounts mapping: add category tags to existing GL accounts and reprocess historical data. This is the cleanest approach but requires ERP configuration work.
2. Manual reclassification: extract historical trial balance data and reclassify to the new categories outside the ERP. Manageable for simpler entities; operationally heavy for complex groups.
3. Apply the 'undue cost or effort' relief: where specific classification decisions would require disproportionate effort to apply retrospectively, the relief permits an alternative approach. The entity must disclose that it has used the relief and explain why.

For XBRL filers, the IFRS Accounting Taxonomy 2024 Update 1 reflects the new category structure and mandatory subtotals. Entities filing iXBRL-tagged financial statements under the EU Transparency Directive or other structured data regimes will need to update their tagging to the new taxonomy elements.

Should You Early-Adopt IFRS 18?

Early adoption is permitted, and entities that early-adopt must disclose that fact. PwC's 2025 Illustrative Financial Statements feature early adoption, making them a practical reference for preparers modelling what their 2027 statements will look like.

Early adoption makes practical sense in specific circumstances:

• The entity is already restructuring its financial reporting or ERP systems, and the incremental cost of adopting IFRS 18 simultaneously is low.
• The income statement is relatively simple (few borderline classification items, no complex MPMs), so the transition effort is manageable.
• The entity wants to avoid a 2027 'big bang' transition alongside other reporting changes (CSRD, IFRS S1/S2).
• Investor relations considerations favour early adoption: if analysts already model the entity using a measure that will become the new 'operating profit', early adoption aligns the financial statements with existing market expectations.

For entities with complex income statements, multiple MPMs, or significant systems dependencies, 2027 mandatory adoption with a well-planned transition is usually preferable to a rushed early adoption.

EU Endorsement and Global Status

EFRAG has assessed IFRS 18 as meeting all EU endorsement criteria. The EFRAG Draft Endorsement Advice Letter to the European Commission concludes that IFRS 18 meets the qualitative characteristics of relevance, reliability, comparability, and understandability, and raises no issues regarding prudent accounting or adverse effects on European financial stability.

Globally, most large IFRS reporters are targeting 2027 first-time application. The standard applies in all jurisdictions that have adopted IFRS Accounting Standards, covering companies in more than 140 countries.

For companies already preparing CSRD disclosures or IFRS S1/S2 sustainability reports, the interaction with IFRS 18 MPM requirements deserves attention. Both frameworks require disclosure of performance measures, and companies subject to both will need to ensure consistency between their IFRS 18 MPM note and any climate-related financial metrics disclosed under IFRS S2. Our IFRS S1 and S2 disclosure requirements guide covers the ISSB framework in detail.

Your 2026 Readiness Timeline

With the mandatory effective date 18 months away, here is where implementation effort should be focused right now:

By end of Q3 2026 (September)

• Complete income statement classification analysis: map every current P&L line item to the five IFRS 18 categories and identify all borderline items.
• Identify all current APMs/KPIs that meet the three-part MPM test. Document the conclusion for each.
• Assess whether the 'specified main business activities' exceptions apply to your business model.
• Identify contracts, covenants, or remuneration policies linked to existing profit metrics that may need amendment.

By end of Q4 2026 (December)

• Complete ERP/chart-of-accounts mapping to the new category structure. Begin capturing 2026 data in the new format to build the comparative period.
• Draft the MPM disclosure note for the most significant measures. Test the income tax effect calculation methodology.
• Prepare a draft statement of profit or loss in the new format and share with the audit committee and external auditors.
• Develop the investor relations communication plan: how will you explain the new 'operating profit' subtotal to analysts who currently model a different EBIT or adjusted EBIT?

By end of Q1 2027 (March)

• Finalise the five specified expenses by nature note for function presenters.
• Complete the IAS 7 cash flow restatement (new starting point, revised interest/dividend classification).
• Confirm XBRL taxonomy update requirements with your filing agent.
• Ensure the first interim report (half-year 2027) includes the full MPM note.

For IR teams preparing to communicate the income statement restructuring to equity analysts, our IR disclosure best practices playbook covers proactive communication strategies for structural reporting changes.

FAQ

Does IFRS 18 affect the balance sheet and notes, or only the income statement? IFRS 18 affects all primary financial statements and notes through its enhanced aggregation and disaggregation requirements. The income statement changes are the most significant, but the rules on 'other' line items and the principle-based guidance on primary statements versus notes apply across the board.

Is our adjusted EBITDA definitely an MPM? Almost certainly yes, if it is used in earnings releases or investor presentations. It is a subtotal of income and expenses, used in public communications, and communicates management's view of performance. It is not an IFRS-defined subtotal. All three MPM conditions are met.

Does the MPM note apply to our half-year report? Yes. The MPM disclosure requirements apply to interim financial statements under IAS 34. If your half-year report includes an MPM, the full note is required from the first interim period in 2027.

We are a bank. Does IFRS 18 change our income statement structure significantly? Yes, materially. Under the 'specified main business activities' exception, interest income from loans to customers and related interest expense move to the operating category. The EY Closer Look (April 2026) includes an illustrative statement of profit or loss for a retail and investment banking group and is the most current reference for bank-specific application.

What happens if we cannot classify a historical item retrospectively without undue cost or effort? IFRS 18 provides a relief from some classification requirements where retrospective application would result in undue cost or effort. The entity must disclose that it has used the relief, explain why, and describe the alternative approach applied. This is not a blanket exemption and should be documented carefully.

How does IFRS 18 interact with ESMA APM Guidelines for listed EU companies? The two regimes overlap but are not identical. ESMA APMs cover any non-GAAP measure; IFRS 18 MPMs are narrower (subtotals of income and expenses only). A listed EU company subject to both must ensure its IFRS 18 MPM note is consistent with its ESMA APM disclosures in the management report, but the two sets of requirements are not duplicative.

The IASB's Illustrative Examples remain the most authoritative practical reference for seeing all of these requirements in action, including the XYZ Group manufacturer example and the bank-specific Part II illustrations.