IFRS 18: understanding the new presentation of financial performance

• IFRS 18 replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027.
• The standard mainly addresses presentation and disclosure in the financial statements.
• The statement of profit or loss is structured around defined categories, including operating, investing and financing.
• Two key subtotals are introduced to improve the comparability of performance between companies.
• Certain management-defined performance measures (MPMs) must now be explained and reconciled in the financial statements.
• Changes also affect the statement of cash flows and the principles for aggregating and disaggregating information.

IFRS Accounting Standards already governed the recognition of revenue, expenses, assets and liabilities. The presentation of performance, however, was far less consistent.

IAS 1 did not require a single definition of operating profit. Companies could therefore design their own subtotals and organise their statement of profit or loss in different ways.

This flexibility reflected the diversity of business models, but it made comparisons between groups harder. Two companies in the same sector could use different presentations or definitions to report on their operating performance.

The IASB developed IFRS 18 to bring more structure to this presentation and make financial statements more comparable.

One of the most visible changes concerns the statement of profit or loss. IFRS 18 organises income and expenses into defined categories to better distinguish the different sources of performance.

For a company whose main business activity is neither investing in assets nor providing financing to customers, the three categories that primarily shape how profit is read are operating, investing and financing.

The income taxes and discontinued operations categories complete the presentation.

IFRS 18 introduces an operating profit or loss subtotal, derived from the new classification requirements.

This creates a common reference point that did not exist in such a structured form under IAS 1.

A second subtotal, profit or loss before financing and income taxes, is also required when the standard's requirements lead to its presentation.

These subtotals should make it easier for users of financial statements to compare performance across companies without relying solely on measures defined by each management team.

Companies regularly use their own measures to explain their performance: adjusted operating profit, adjusted EBIT or other adjusted subtotals.

IFRS 18 introduces the concept of Management-defined Performance Measures, or MPMs. It covers certain subtotals of income and expenses used in public communications to convey management's view of the performance of the company as a whole.

When a measure meets the definition of an MPM, it must be disclosed in a dedicated note to the financial statements. The company explains, among other things, how it is calculated, why management believes it provides useful information and how it reconciles to the most comparable IFRS subtotal.

This creates a more direct link between management's communication and the audited financial statements.

EBITDA remains widely used in financial communication, but IFRS 18 does not create a general, mandatory definition of EBITDA.

The standard defines certain specific subtotals and, in particular, provides for a measure of operating profit before certain depreciation, amortisation and impairment.

An EBITDA calculated using a different method may, depending on the circumstances and how it is used in public communication, fall within the scope of MPMs.

IFRS 18 also strengthens the principles of aggregation and disaggregation. Items grouped together in the financial statements must share sufficiently similar characteristics, while items with different characteristics may need to be presented separately.

This applies to both the primary financial statements and the notes.

The aim is to prevent overly broad groupings from obscuring material information and, conversely, to avoid an excessive number of line items making the financial statements hard to read.

IFRS 18 brings amendments to IAS 7 on the statement of cash flows.

For companies using the indirect method, operating profit or loss becomes the starting point for reconciling to cash flows from operating activities.

The options for classifying interest and dividends also change. For entities with no specified main business activity, interest and dividends received are generally classified as investing, while interest and dividends paid are classified as financing.

Specific requirements apply to certain companies, particularly when their main business activity is investing or providing financing to customers.

IFRS 18 applies to companies that prepare their financial statements in accordance with IFRS Accounting Standards, subject to the endorsement arrangements in their jurisdiction.

In the European Union, IFRS 18 has been endorsed for annual reporting periods beginning on or after 1 January 2027.

The impact can, however, vary widely depending on the business. A bank, an investment company and an industrial company will not necessarily apply certain classification requirements in the same way.

IFRS 18 is applied retrospectively. For a group with a 31 December year-end presenting one comparative period, the 2027 financial statements will therefore have to include 2026 comparative information presented under the new requirements.

This requirement directly links understanding the standard to implementing it in practice. Companies must be able to take the prior-year data and reclassify it according to the new presentation.

The structure defined by IFRS 18 must then be embedded in the company's financial processes. Account mapping, data reported by subsidiaries, 2026 comparatives, MPMs, the statement of cash flows and consolidation controls may all be affected.

This work is a separate undertaking from understanding the standard itself. It requires an assessment of the current set-up, classification decisions and an organisation capable of reproducing the new statements at every close.

Our IFRS 18 implementation guide details these steps, the transition timeline and the main points to secure before the first publications.