The IASB's replacement for IAS 1 — IFRS 18 Presentation and Disclosure in Financial Statements — is effective for annual periods beginning on or after 1 January 2027, with mandatory retrospective application. That means entities will need to restate their 2026 comparative figures, making preparation a 2025 and 2026 priority, not a 2027 one.
IFRS 18 is the most significant change to financial statement presentation in a generation. It will touch the income statement structure, the notes, and the way management's non-GAAP measures are communicated to investors. Here is what you need to understand.
The Five Mandatory Income Statement Categories
The most visible change under IFRS 18 is the introduction of five defined categories into which all income and expenses must be classified in the statement of profit or loss:
- Operating — the default category; all income and expenses not required to be classified elsewhere
- Investing — returns from assets not related to the main business activity (e.g., dividends from associates, interest on cash held for investment)
- Financing — the cost of financing the entity's activities (e.g., interest on borrowings under IAS 23 scope)
- Income taxes — income tax expense under IAS 12
- Discontinued operations — results of discontinued operations under IFRS 5
The investing and financing categories introduce strict classification rules that differ significantly from how many entities currently present their income statement. For example, for entities whose main business activity is not investing, income from equity-accounted associates and joint ventures will move into the investing category — a significant change for groups with material stakes in associates.
Two Required Subtotals
IFRS 18 requires all entities to present two new defined subtotals in the income statement:
- Operating profit or loss — a new defined subtotal that explicitly excludes investing and financing items
- Profit or loss before financing and income taxes — combining the operating and investing categories
For many entities, the new "operating profit" subtotal will differ materially from the line they currently label as operating profit. Entities that include net interest income or fair value gains in their current operating profit will need to restructure their presentation.
"IFRS 18 does not just change how the income statement looks — it changes what it means. Operating profit will have a defined, comparable meaning across all IFRS reporters for the first time."
Management Performance Measures: A New Disclosure Requirement
Perhaps the most consequential new requirement is the treatment of Management Performance Measures (MPMs). An MPM is a subtotal of income and expenses that is used in public communications outside the financial statements and is not defined by IFRS Standards.
Common examples include Adjusted EBITDA, Adjusted operating profit, and Underlying earnings per share. Under IFRS 18, entities that use such measures in earnings releases, investor presentations, or management commentary must now disclose them in a note to the financial statements, including:
- A description of the MPM and why it gives useful information
- A reconciliation to the most directly comparable subtotal required by IFRS 18
- An income tax effect for each adjustment in the reconciliation
- The effect of the adjustment on non-controlling interests
This brings non-GAAP measures inside the audited financial statements for the first time — a significant governance and audit implication.
Aggregation and Disaggregation Guidance
IFRS 18 also introduces new principles for aggregation and disaggregation of line items. Entities must disaggregate items that have different characteristics relevant to understanding financial performance, and must not obscure material information through excessive aggregation. The standard provides guidance on what makes items "similar" for aggregation purposes, which may require entities to revisit how they currently group revenue streams and expense categories.
What Finance Teams Should Do Now
With 2027 effective date requiring 2026 restated comparatives, preparation should begin immediately:
- Map your current income statement to the five new categories and identify reclassifications
- Determine whether any current line items would be split across categories under IFRS 18
- Identify all MPMs used in investor communications and assess disclosure requirements
- Update accounting policy documentation and brief the audit committee
- Engage your external auditors early — MPM disclosures will be within the audit scope
- Assess system and reporting tool changes needed to generate the new income statement structure
Entities that delay until 2026 will find themselves restating comparatives under time pressure, briefing auditors on complex new disclosures, and managing investor expectations around a changing operating profit definition — all simultaneously. The time to prepare is now.