IFRS 18 is here - Your primary financial statements will look different from 2027

On 9 April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements, a new financial statements presentation standard to replace IAS 1 Presentation of Financial Statements. You can read more about this in our recent publication.

Effective date

The effective date of IFRS 18 is for annual periods beginning on or after 1 January 2027, which coincides with mandatory sustainability reporting for many entities around the globe. Comparatives must also be restated. As the main impact is on the statement of profit or loss, entities need to have adjusted or upgraded systems ready by 1 January 2026 (for December balancing entities) or 1 July 2026 for June balancing entities. In the first year, for the immediately preceding period, entities must also present a reconciliation for each line in the statement of profit or loss between amounts previously presented applying IAS 1 and restated amounts applying IFRS 18.

What to expect?

The main change will be in your statement of profit or loss, with mandatory subtotals required for ‘operating profit’ and ‘profit or loss before financing and income tax’. Entities must also disclose information in the notes about management-defined financial performance measures used outside the financial statements.

Why the change?

The aim of IFRS 18 is to improve the comparability of financial performance between entities. For example, some entities present ‘operating profit’ in their statement of profit or loss, and others do not, while those that do may define it differently. In addition, some entities disclose management financial performance measures outside the financial statements, which may be defined differently from statutory profit measures.

Classification of income and expenses

IFRS 18 changes how income and expenses are classified in profit or loss. IAS 1 does not require income and expenses to be classified into particular ‘classes’ or ‘categories’.

To enhance consistency, IFRS 18 requires income and expenses to be classified into five categories:

  • Investing
  • Financing
  • Income taxes
  • Discontinued operations
  • Operating (this is a residual category if income and expenses are not classified into any of the above categories).

There is no explicit alignment between the investing, financing and operating categories stated above for the statement of profit or loss and the corresponding categories in the statement of cash flows as required by IAS 7 Statement of Cash Flows. However, they may be classified similarly for both statements in many cases.

The classification of income and expenses may also not be identical for all entities because IFRS 18 requires entities to assess their ‘main business activities’. For example, a manufacturer investing excess cash in publicly traded shares is not a main business activity, and it will likely classify any income received as investing. Contrast this with a bank actively trading a portfolio of publicly traded shares. This may be a main business activity for the bank, and it is likely to classify income as operating.

More line items and sub-totals in the statement of profit or loss

IFRS 18 introduces two new mandatory sub-totals:

  • Operating profit or loss – this is a sub-total of all income and all expenses classified as operating
  • Profit or loss before financing and income taxes – this is the sub-total of operating profit or loss, and all income and expenses classified as investing.

Labelling, aggregation and disaggregation

IFRS 18 has stricter requirements regarding aggregation and disaggregation than IAS 1. Items must be aggregated based on shared characteristics and disaggregated if the resulting disaggregation is material. The use of ‘other’ to describe a group of items will also be restricted in certain circumstances. It would help if you used the most informative label instead of ‘other’. If classifying expenses by function, additional information regarding expenses by nature, such as depreciation, amortisation, employee benefits, impairment, etc., must also be provided in a single note.

Amendments to IAS 7

The release of IFRS 18 also brings consequential amendments to IAS 7, including:

  • When the indirect method is used, the starting point for operating cash flows in the statement of cash flows will be the newly introduced mandatory sub-total, operating profit or loss
  • In general, it will no longer be an accounting policy choice to classify interest and dividend cash inflows and interest cash outflows. Interest and dividend cash inflows will be shown as investing activities and interest cash outflows as financing activities.  However, exceptions may exist if these form part of the entity’s main business activities
  • Dividend cash outflows will be classified as financing cash outflows.

Management-defined performance measures

There are also new disclosure requirements for ‘management-defined performance measures’ such as earnings before interest, taxes, depreciation and amortisation (EBITDA), ‘adjusted profit’, operating profit excluding recurring items, etc.

They apply to ‘management-defined performance measures' if they are used in public communications outside the financial statements, to communicate to users of financial statements, management’s view of an aspect of the entity’s financial performance.

The new disclosures will not apply:

  • To certain specific sub-totals in the statement of profit or loss such as gross profit
  • To social media posts and oral communications
  • If an entity makes no public communications (as may be the case for private companies)
  • To non-IFRS information based on financial measures that are not performance-related, such as measures based only on the financial position of the entity.

The new disclosures must be included in a single note to the financial statements, and include:

  • A description of why the management-defined- performance measure communicates management’s view of an aspect of the entity’s financial performance
  • How the management-defined performance measure is calculated
  • A reconciliation to the most directly comparable total or subtotal specified by IFRS Accounting Standards (e.g. reconcile ‘adjusted operating profit’ to ‘operating profit’ as defined by IFRS 18 and explain the adjustments)
  • The income tax effect and effect on non-controlling interest for each reconciling item disclosed above.

Staying the same

IFRS 18 does not change the following IAS 1 requirements:

  • The four primary financial statements to be included in financial statements
  • Frequency of reporting
  • Comparative information
  • Offsetting
  • Most statement of financial position requirements
  • Classification of assets and liabilities as current versus non-current
  • Most statement of cash flows requirements
  • Statement of comprehensive income requirements
  • Statement of changes in equity requirements
  • Capital disclosures.

What do these changes mean in practice?

Entities may need to adjust accounting systems to appropriately ‘tag’ and categorise income and expenses into the new IFRS 18 categories. This process may be complex for groups with diverse operations (various main business activities) and multiple reporting systems.

Investor relations teams will also need to be aware of these changes, as any new management-defined performance measures used in public communications must be disclosed and reconciled within the financial statements.

More information

Please read our recent publication for more information about the IFRS 18 changes to the presentation of financial statements.

Need help?

IFRS 18 brings about significant changes to financial statements, requiring adjustments to current reporting systems and processes. Please contact our IFRS & Corporate Reporting team if you need help with this.