IFRS 18 Subtotals on the Income Statement: A Practitioner Walkthrough
IFRS 18 introduces two mandatory subtotals to the statement of profit or loss, and for many group reporting teams the classification logic behind them is more disruptive than it first appears. This walkthrough is for controllers, group finance directors, and CFOs who need to understand exactly what the new subtotals require, where specific items land, and what to do right now to be ready for 2027.
For a broader overview of what IFRS 18 is and why the IASB issued it, see IFRS 18 Explained: What It Is, Why It Exists, and What Changes. This article goes deeper on the subtotals mechanics and the classification decisions that will consume most of your implementation time.
Key takeaway: IFRS 18 is effective for annual periods beginning on or after 1 January 2027. For December year-end companies, the 2026 income statement is the comparative period that must be restated. The classification work is happening now, not in 2027.
What Are the Two Mandatory IFRS 18 Subtotals?
IFRS 18 requires every entity to present two new defined subtotals on the face of the statement of profit or loss: 'operating profit or loss' and 'profit or loss before financing and income tax.' There are no size or sector exemptions for this requirement. Both subtotals must appear even if they are equal in amount.
As the IFRS Foundation states, the standard "aims to improve financial reporting by requiring an entity to present two new defined subtotals in the statement of profit or loss, operating profit or loss, and profit or loss before financing and income tax."
Here is how the two subtotals sit within the income statement structure:
| Subtotal | What it captures |
|---|---|
| Operating profit or loss | All income and expenses classified in the operating category (the residual, everything not in investing, financing, or income tax) |
| Profit or loss before financing and income tax | Operating profit PLUS income/expenses from the 'financing from integral associates and JVs' category |
The gap between the two subtotals is narrow for many entities but significant for groups with material associate or joint venture income from businesses closely related to their main activities.
How IFRS 18 Defines 'Operating Profit' (and Why That Definition Is the Key Change)
Operating profit under IFRS 18 is a residual: it captures everything not classified into the investing, financing, or income tax categories. The IASB deliberately chose this approach rather than a positive list. As explained in the Basis for Conclusions, the residual definition ensures no income or expense falls through the cracks, and it avoids the IASB having to classify every conceivable item.
This is the single most consequential conceptual shift for preparers. Under IAS 1, there was no standard definition of operating profit at all. Companies drew the line wherever they chose. IFRS 18 anchors it in the standard itself, and the consequences are real:
- Items currently shown 'below operating profit' in voluntary presentations, restructuring charges, impairments of goodwill, fair value movements on contingent consideration, will in many cases be pulled up into operating profit under IFRS 18. They do not qualify for the investing or financing categories, so the residual catches them.
- Share of profit from associates and JVs is always classified in the investing or financing-from-integral-associates category, never in operating profit. For companies that currently include associate income above their operating profit line, this is a structural change.
- Interest income on cash and short-term deposits held for liquidity management goes into the investing category for non-financial entities, not into operating profit. Teams that currently include treasury interest in operating results will need to reclassify it.
As PwC notes, the residual definition means that items many companies currently exclude from their voluntary 'operating profit' presentation will now be required inside it.
The Five Categories: What Goes Where
The two subtotals are driven by a five-category classification structure. EY's April 2026 update confirms that three of the five categories are new relative to IAS 1.
| Category | What it captures | Feeds into |
|---|---|---|
| 1. Operating | Residual, everything not in another category; main business income and expenses | Operating profit |
| 2. Investing | Income/expenses from assets that generate returns independently of main business: interest on cash deposits, dividends and gains on investments, share of profit from non-integral associates/JVs | Profit before financing and income tax |
| 3. Financing from integral associates/JVs | Income/expenses from associates/JVs whose activities are closely related to the entity's main business | Profit before financing and income tax (but NOT operating profit) |
| 4. Financing | Interest on borrowings, gains/losses on financial liabilities at fair value that are part of the financing structure, interest on lease liabilities and provisions | Below both required subtotals |
| 5. Income tax | Tax income/expense under IAS 12; discontinued operations | Below both required subtotals |
Note: the categories in the income statement do not map directly to the similarly named sections of the cash flow statement. Do not rely on existing cash flow classifications to populate the new P&L categories.
The Integral vs. Non-Integral Associate Distinction
This is the classification decision that trips up the most preparers, and it is largely absent from high-level IFRS 18 summaries.
Associates and JVs are split into two buckets under IFRS 18, and the bucket determines which subtotal their income feeds into.
- Integral associates/JVs: Those whose activities are closely related to the entity's main business. Their income goes into category 3 (financing from integral associates/JVs), which sits between operating profit and profit before financing and income tax. It is excluded from operating profit but included in the second required subtotal.
- Non-integral associates/JVs: Those whose activities are not closely related to the main business. Their income goes into category 2 (investing), also excluded from operating profit but included in profit before financing and income tax.
A practical example: a food retailer that equity-accounts for a logistics JV that exclusively serves its supply chain would likely treat that JV as integral. The same retailer's minority stake in an unrelated fintech would be non-integral. Both are excluded from operating profit, but the label on the line and the category it sits in differs.
The distinction requires judgment and documentation. Auditors will scrutinise it. Establish your entity's position for each associate and JV now, before the comparative period closes.
Where Does Interest on Cash Deposits Go?
For non-financial entities, interest income on cash and short-term deposits held for liquidity management is classified in the investing category, not in operating profit.
This catches many treasury teams off guard. If your current income statement includes bank interest in operating results, that line moves. The classification is based on the nature of the underlying asset: cash and cash equivalents generate a return independently of the main business, so they sit in investing.
The Financial Institution Exception
For banks, insurers, and other entities whose main business activity involves financial instruments, the rules invert. Interest income and expense that are part of the main business are classified as operating, not financing. This is the opposite of the general rule for non-financial entities. IFRS Foundation guidance and PwC's illustrative examples both address this sector-specific treatment in detail.
Can You Add Voluntary Subtotals Beyond the Two Required Ones?
Yes, but with conditions. IFRS 18 permits entities to present additional subtotals on the face of the income statement, provided they meet all of the following:
- The additional subtotal is relevant to understanding financial performance.
- It is not misleading.
- It is presented consistently from period to period.
- It is not given more prominence than the two required subtotals.
- It is clearly labelled.
The IASB's guidance on labels for additional subtotals is restrictive. An entity cannot simply relabel an existing voluntary metric and call it compliant. The IFRS Foundation's IFRIC materials address the narrow range of acceptable labels for additional subtotals. If you plan to present gross profit or EBIT as an additional subtotal, document why it meets the conditions above.
How Your Existing APMs Interact With the MPM Rules
This is where the subtotals requirement has a sting in the tail for IR teams and CFOs.
If your company communicates a subtotal of income and expenses in public documents outside the financial statements, and that subtotal is not required by IFRS, it is likely a management-defined performance measure (MPM) under IFRS 18. MPMs must be disclosed in a dedicated note in the financial statements, with a reconciliation to the most directly comparable IFRS subtotal and an explanation of why the measure provides useful information.
Common metrics that will qualify as MPMs:
- Adjusted EBIT or adjusted EBITDA
- Underlying operating profit
- Adjusted profit before tax
- Core earnings
The MPM rules apply only to entities whose securities are publicly traded or that are in the process of issuing securities in public markets. But for listed groups, this is a significant compliance step. The note must sit within the audited financial statements, bringing these metrics into audit scope for the first time.
For a step-by-step guide to building the MPM reconciliation note, see IFRS 18 MPM Reconciliation: A Step-by-Step Practitioner Guide.
Key takeaway: If your earnings release or investor presentation includes an 'adjusted' P&L metric that is a subtotal of income and expenses, plan for it to become an MPM. Start the inventory now.
What Must Appear on the Face vs. in the Notes?
IFRS 18 does not prescribe a specific format or order for the income statement beyond the two required subtotals and the five-category structure. Deloitte's IAS Plus commentary confirms that entities retain flexibility in how they present line items within each category.
The face of the statement must show:
- The two required subtotals (operating profit; profit before financing and income tax)
- Line items that are material or that IFRS 18 specifically requires
- The five-category structure (items within each category)
Further disaggregation of line items can go in the notes, subject to IFRS 18's new disaggregation principles. The standard also introduces new requirements for aggregation and disaggregation more broadly, not just for the income statement.
The Restatement Urgency: Why the Work Is Happening Now
IFRS 18 requires retrospective application. For a December 31 year-end company adopting IFRS 18 for the year ending 31 December 2027, the 2026 comparative income statement must be restated to show the new subtotals and five-category classification.
That means every income and expense line in your 2026 accounts needs to be classified into one of the five categories before the 2026 year closes, or reconstructed from source data afterwards. Neither option is trivial.
As of September 2026, the practical steps your team should be working through:
- Complete the classification assessment. Map every material P&L line to one of the five categories. Document the judgment calls, especially for associates/JVs, treasury income, and items currently excluded from your voluntary operating profit.
- Identify the gaps in your chart of accounts. Your ERP likely does not capture the data at the granularity IFRS 18 requires. Foreign exchange differences, for example, must be classified in the same category as the underlying item they relate to, which may require transaction-level coding changes.
- Inventory your APMs. List every subtotal of income and expenses used in public communications. Determine which qualify as MPMs. Begin drafting the reconciliation note.
- Assess the impact on existing operating profit subtotals. Run a parallel income statement for a recent period under IFRS 18 classification. Quantify the difference between your current voluntary operating profit and the IFRS 18-defined figure. This number will matter to investors and analysts.
- Engage auditors early. Classification judgments, particularly the integral/non-integral associate distinction and the treatment of items currently below your operating profit line, will be subject to audit challenge. Agree positions before the comparative period is locked.
- Plan investor communications. Equity analysts are accustomed to your current operating profit definition. The IFRS 18 figure may differ materially. IR teams need a communication plan for the transition year.
For a phased project plan covering systems, governance, and stakeholder management, see IFRS 18 Transition Plan: A Phased Practitioner Roadmap for 2026.
Should You Early Adopt?
Early adoption is permitted for periods beginning on or after April 2024. The case for early adoption is strongest for entities that:
- Have a relatively simple P&L structure with few classification edge cases
- Want to get ahead of peer comparisons before 2027 mandates the change for everyone
- Are already restructuring their ERP or chart of accounts for other reasons
The case against early adoption is the restatement burden and the risk of getting classification judgments wrong before IFRIC has issued authoritative guidance on edge cases. The IFRS Interpretations Committee is actively receiving and addressing implementation questions on IFRS 18; monitor IFRIC agenda decisions before locking in positions on contested items.
FAQ
What are the format requirements for an IFRS 18 income statement? IFRS 18 does not prescribe a fixed format. It requires the two mandatory subtotals (operating profit; profit before financing and income tax) and the five-category classification structure to be visible on the face of the statement. Line items within each category, and further disaggregation, can appear on the face or in the notes depending on materiality and entity-specific circumstances.
Does IFRS 18 change how revenue or expenses are measured? No. IFRS 18 changes presentation and disclosure only. Revenue recognition under IFRS 15, lease accounting under IFRS 16, and all other measurement standards remain unchanged. What changes is where items appear in the income statement structure.
Will our EBITDA metric become an MPM? EBITDA is a subtotal of income and expenses. If it is used in public communications outside the financial statements and is not required by IFRS, it meets the MPM definition. Listed companies should assume it will be an MPM and plan the note disclosure accordingly.
Do the five categories align with the cash flow statement categories? No, and this is a common source of confusion. The operating, investing, and financing categories in the income statement are defined differently from the equivalent sections of the cash flow statement. Do not use cash flow classifications as a proxy for P&L classification under IFRS 18.
What happens to restructuring charges and impairments under IFRS 18? Most restructuring charges and impairments of operating assets (PPE, goodwill) will fall into the operating category under IFRS 18's residual definition. They do not qualify for investing or financing. Companies that currently exclude these items from their voluntary operating profit will find them inside the IFRS 18-defined operating profit line.
When is the IFRS 18 effective date, and can we adopt early? IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted. Entities that early adopt must disclose that fact in the notes. IFRS 18 applies in more than 140 jurisdictions where IFRS Accounting Standards are required.
