Introduction
The introduction of IFRS 18, Presentation and Disclosure in Financial Statements, marks one of the most significant changes to financial statement presentation in recent years notwithstanding the fact that IFRS 18 does not impact the recognition or measurement requirements of any financial statement line items but impacts only the way these line items are presented in the financial statements. Replacing IAS 1’s existing presentation requirements, IFRS 18 aims to improve consistency, comparability, and transparency in how entities present financial performance — particularly within the statement of profit or loss. Entities are required to apply IFRS 18 for annual reporting periods beginning on or after 1 January 2027.
For multinational groups, investors, lenders, regulators, and audit committees, the changes extend far beyond formatting. IFRS 18 introduces a structured approach to income statement categorisation that will fundamentally reshape how performance is communicated and analysed.
Why IFRS 18 Was Introduced
One of the longstanding criticisms of financial reporting has been the lack of comparability in income statement presentation. Entities operating in the same industry frequently reported operating profit differently, classified similar income and expenses inconsistently, and used internally defined subtotals that lacked standardisation.
IFRS 18 seeks to address these challenges by:
The Five Categories in the Statement of Profit or Loss
Under IFRS 18, entities must classify income and expenses into five categories (IFRS 18.47):
-
Operating
-
Investing
-
Financing
-
Income taxes
-
Discontinued operations
-
Operating Category — The Default Classification (Residual category)
The operating category serves as the residual or default category and will likely remain the most significant subtotal for most entities.
It includes:
-
Items not classified in the investing, financing, tax, or discontinued operations categories (for all other entities).
The operating category effectively captures the results of activities that constitute the core business operations of the entity.
The introduction of a defined operating profit subtotal is particularly significant because many entities previously used customised definitions of operating profit. IFRS 18 standardises this measure, improving comparability across industries and jurisdictions.
For a manufacturing entity: revenue from sale of goods, cost of sales, employee costs, depreciation, and foreign exchange differences relating to trade receivables would generally fall within the operating category.
-
Investing Category — Returns from Independent assets
The investing category includes income and expenses from assets that generate returns independently of the entity’s main business activities.
Typically included:
The classification depends heavily on the entity’s primary business activities. For example, interest income earned by a bank may be operating in nature, whereas the same interest income for a manufacturing company may fall within investing activities.
-
Financing Category — The Cost of Obtaining Finance
Entities are required to segregate the liabilities into liabilities solely from arising from transactions involving raising of finance (Financing liabilities) and liabilities do not involve only the raising of finance (Other liabilities).
For financing liabilities income and expenses to be classified under financing category includes effects of initial and subsequent measurement, including on derecognition, and Incremental expenses directly attributable to the issuance or extinguishment.
For other liabilities Income and expenses to be included in financing includes interest income and expenses, if identified for the purpose of applying other requirements of IFRS accounting standards, and income and expenses arising from changes in interest rates.
The financing category generally includes:
The financing category is designed to separate the cost of capital from operational performance.
One of the more debated areas relates to liabilities that do not solely relate to financing activities. Restoration provisions, pension obligations, and long-term decommissioning liabilities may require separation between interest accretion or unwinding and other remeasurement effects as the remeasurement effects might need to be classified under operating category.
-
Income Taxes Category
Income tax expense and income are presented separately from operating, investing, and financing categories.
This aligns with the principle that tax consequences should generally be distinguished from operating results.
-
Discontinued Operations Category
Discontinued operations continue to be presented separately in accordance with IFRS 5 requirements on discontinued operations.
The separate presentation aims to improve users’ ability to distinguish ongoing performance from activities that will not continue into future reporting periods.
Mandatory Subtotals Introduced by IFRS 18
A major feature of IFRS 18 is the introduction of mandatory subtotals (IFRS 18.69), including:
• Operating profit or loss;
• Profit or loss before financing and income taxes; and
• Profit or loss.
These subtotals create greater uniformity across financial statements and reduce the prevalence of entity-specific performance metrics presented prominently without consistent definitions.
Specified Main Business Activities — A Critical Concept
Entities whose main business activities include investing in assets or providing financing to customers may classify certain income and expenses differently from other entities (IFRS 18.49).
Examples include:
Large multinational groups operating across multiple sectors may face challenges in assessing classification consistency, aligning reporting systems, updating chart of accounts structures, and training finance teams across jurisdictions.
Interaction with Management-defined Performance Measures (MPMs)
IFRS 18 does not prohibit non-GAAP or alternative performance measures. Instead, it introduces enhanced discipline around Management-defined Performance Measures (IFRS 18.117).
Where entities present MPMs:
Operational and Systems Impact
The implementation of IFRS 18 is not merely an accounting policy exercise. It may require substantial operational transformation, including:
Analysts, investors, lenders, and boards will require education regarding changes in operating profit, reclassification impacts, and comparability between historical and future reporting periods.
Key Areas Likely to Drive Debate
Several areas are expected to generate interpretation challenges during implementation:
Regulators and auditors are expected to focus heavily on consistency and documentation of judgements during early adoption periods.
Final Thoughts
IFRS 18 represents a major shift in the presentation of financial statements. While the new categorisation framework introduces greater structure and comparability, it also demands significant judgement, systems readiness, and governance discipline.
For preparers, the challenge will not simply be technical compliance — it will be ensuring that the revised income statement communicates performance clearly and credibly to the stakeholders.
For investors and analysts, IFRS 18 has the potential to significantly improve comparability across entities and industries, particularly through the introduction of standardised operating profit subtotals and enhanced transparency over management-defined performance measures.
As implementation timelines approach, organisations that proactively assess classification impacts, redesign reporting processes, and engage stakeholders early will be better positioned to navigate the transition effectively.
