IFRS 18 explained: the new income statement, MPMs and what to do before 2027

For two decades IAS 1 told companies what an income statement had to contain and left them largely free to decide how to arrange it. The result was familiar to every analyst: two companies in the same industry, both reporting under IFRS, with operating profit defined two different ways and an adjusted profit figure in the press release that appeared nowhere in the accounts.

IFRS 18 Presentation and Disclosure in Financial Statements, issued by the IASB in April 2024, ends that freedom. It replaces IAS 1 for annual periods beginning on or after 1 January 2027, with earlier application permitted, and it applies retrospectively. This guide explains what changes, where the work really sits, and what an organisation should be doing while the comparative year is still open.

The five categories#

Every item of income and expense in the statement of profit or loss is classified into one of five categories:

• Operating — the residual category: everything that is not classified elsewhere, which for most companies means the results of their main business activities.
• Investing — for most entities, income and expenses from investments in associates and joint ventures, from cash and cash equivalents, and from assets that generate a return individually and largely independently of other resources.
• Financing — income and expenses from liabilities that only raise finance, such as borrowings, and interest on other liabilities, such as the unwinding of discount.
• Income taxes.
• Discontinued operations.

Two subtotals follow from the categories. Operating profit is required for every entity. Profit before financing and income taxes is required for most; an entity that provides financing to customers as a main business activity and makes a particular accounting policy choice does not present it.

The judgement that comes first: main business activities#

The categories are not applied the same way by every company. An entity that invests in particular types of assets, or provides financing to customers, as a main business activity classifies the related income and expenses in operating rather than in investing or financing. An insurer’s investment returns, a lessor’s finance income and a bank’s interest margin therefore stay inside operating profit.

This assessment is a matter of fact, made at the level of the reporting entity, and it is the decision that moves the largest amounts. Groups that combine an industrial business with a captive finance arm, a treasury centre or an investment portfolio have the hardest version of it, because the answer can differ between the group and its subsidiaries.

Management-defined performance measures#

The most visible change for investors is the treatment of adjusted measures. A management-defined performance measure, or MPM, is a subtotal of income and expenses that an entity uses in public communications outside its financial statements to communicate management’s view of an aspect of its financial performance, and that IFRS does not itself define.

Adjusted EBITDA, underlying profit and profit before exceptional items are typical. A few common subtotals, gross profit among them, are specified by IFRS 18 itself and are not MPMs; ratios are not MPMs in their own right.

Every MPM is disclosed in a single note: what it is and why management finds it useful, how it is calculated, a reconciliation to the most directly comparable subtotal or total specified by IFRS, the income tax and non-controlling-interest effect of each reconciling item, and any change in definition. The note sits inside the audited financial statements.

A number that was once explained in a press release now has to be defended in the audited accounts.

Aggregation, labels and expenses by nature#

IFRS 18 also sets principles for grouping items: aggregate on shared characteristics, disaggregate on dissimilar ones, in the primary statements and the notes alike. Items labelled other are allowed only where no more informative label can be found, and the entity has to say what they contain. An entity that presents operating expenses by function must disclose, in a single note, specified expenses by nature: depreciation, amortisation, employee benefits, impairment losses and inventory write-downs.

The knock-on changes#

Three other standards move with IFRS 18. Under IAS 7 the indirect cash flow method starts from operating profit, and most entities lose the choice over where interest and dividends are classified.

Under IAS 33, additional per-share amounts are restricted to totals and subtotals specified by IFRS or disclosed as MPMs. Under IAS 34, interim reports carry the new structure and the MPM disclosures from the first interim period of the year of adoption.

Where implementation goes wrong#

• Treating it as a presentation exercise for the year-end. Because the standard is retrospective, the comparative year has to be captured in the new categories, and for many organisations that year is already well under way.
• Leaving the main-business-activity assessment to the end. It decides where the largest amounts sit and drives every downstream design choice.
• Finding the MPMs in the accounts instead of in the communications. The inventory starts with investor presentations, press releases, board packs and remuneration schemes.
• Building the new structure in a workbook beside the ledger. A transition that depends on manual reclassification becomes a second set of books, with the control risk that brings.
• Forgetting the contracts. Loan covenants, bonus schemes and guidance that reference an old subtotal need re-basing before the first IFRS 18 numbers are published.

An implementation plan for the comparative year#

1. Assess — re-map the current income statement line by line into the five categories, estimate the new subtotals and list the open judgements.
2. Decide — settle the main-business-activity assessment, the classification policies and the MPM inventory with the finance leadership, and document the reasoning for the auditor.
3. Build — design chart-of-accounts tagging that produces the new presentation, management reporting and any regulatory returns from one ledger, then re-capture the comparative year and run in parallel.
4. Report — draft the MPM note and transition disclosures, prepare the first interim report, brief the audit committee, and re-base covenants, remuneration metrics and investor guidance.

BIZENIUS IFRS 18 Implementation advisory works through these four steps with finance teams in any sector, and the IFRS 18 Implementation Masterclass for Banks & Financial Institutions gives finance executives and practitioners two days on the judgements, the MPM note and the transition.