Table of Contents
Objectives of IFRS 18
- Key objectives of IFRS 18 are to:
- Improve the consistency, transparency, and comparability of financial performance across entities.
- Help users better understand an entity’s financial performance and management's view of performance.
- Address long-standing criticisms of inconsistent reporting under IAS 1, especially regarding subtotals and performance measures.
Key Features and Concepts of IFRS 18
- 1. New Defined Subtotals in Profit or Loss
- IFRS 18 introduces three mandatory categories in the statement of profit or loss:
- Operating: Includes income and expenses from the main business activities.
- Investing: Includes returns from investments (e.g., interest and dividends not from main business operations).
- Financing: Includes items like interest on borrowings and other financing costs.
These categories standardize the income statement format and require consistent presentation of certain line items.
- 2. Mandatory Presentation of Operating Profit
- IFRS 18 requires a subtotal for "Operating Profit", something not mandated under IAS 1.
- Operating profit excludes income and expenses from investing and financing activities and unusual items.
- 3. Improved Disaggregation and Transparency
- IFRS 18 requires entities to disaggregate material items in the income statement and notes.
- Companies must describe the nature of expenses (e.g., depreciation, employee benefits) when using a "by-function" method (e.g., cost of sales, administrative expenses).
- 4. Management-Defined Performance Measures (MPMs)
- IFRS 18 introduces a formal framework for disclosing Management-Defined Performance Measures.
- These are non-GAAP performance metrics (e.g., adjusted EBITDA) that companies use internally.
- IFRS 18 requires reconciliation of MPMs to the most directly comparable IFRS subtotal (e.g., operating profit or net profit).
- Includes disclosures on why the measure is used, how it's calculated, and changes over time.
- 5. Associates and Joint Ventures
- Income from equity-accounted investments is presented outside operating profit, reflecting that these are not core operating activities for most companies.
- 6. Segment Reporting Linkage
- IFRS 18 strengthens the link between financial statements and segment disclosures under IFRS 8.
- Ensures users can understand performance from both a management and external reporting perspective.
- How IFRS 18 is different from IAS 1
Aspect | IAS 1 | IFRS 18 |
Profit or Loss Structure | Flexible structure; no mandatory subtotals | Mandatory structure with three categories: Operating, Investing, Financing |
Operating Profit | Not required or defined | Clearly defined and required |
Presentation Consistency | High variability across entities | Standardized categories improve comparability |
MPMs (Non-GAAP Measures) | No specific guidance | Required disclosures with reconciliation and explanation |
Disaggregation Requirements | General requirement to present material items separately | More specific and strict requirements for disaggregation |
Associates & Joint Ventures | Presentation flexibility | Standardized presentation outside operating profit |
Link to Segment Reporting | Limited linkage | Stronger alignment with IFRS 8 disclosures |
Terminology and Guidance | Principles-based, fewer defined terms | More prescriptive with defined categories and formats |
Key Challenges in Adopting IFRS 18:
Redesigning the Statement of Profit or Loss
One of the most immediate challenges is the mandatory restructuring of the income statement. IFRS 18 requires businesses to present income and expenses in three clearly defined categories: operating, investing, and financing, along with a required subtotal for operating profit.
- This means companies must:
- Reassess how income and expenses are classified.
- Redesign financial reporting templates and systems.
- Ensure consistency across group entities or subsidiaries that may have diverse operational structures.
For entities with complex or non-standard business models, applying these categories consistently can be operationally difficult.
Identifying and Reconciling Management-Defined Performance Measures (MPMs)
IFRS 18 introduces mandatory disclosure and reconciliation of Management-Defined Performance Measures (MPMs)—non-GAAP performance metrics such as “adjusted EBITDA” or “core profit.”
- Challenges include:
- Identifying which internal metrics qualify as MPMs.
- Ensuring consistent, transparent definitions across reporting periods.
- Developing reconciliation processes to IFRS-defined subtotals.
- Updating internal reporting systems and board materials to align with external disclosures.
This area may also trigger increased scrutiny from regulators and stakeholders, especially where MPMs have historically lacked transparency.
Enhanced Disaggregation Requirements
IFRS 18 requires companies to disaggregate material items in the profit or loss statement and related notes, even when using the “by-function” presentation (e.g., cost of sales, admin expenses).
The disaggregation must provide users with meaningful information about:
- The nature of expenses (e.g., employee costs, depreciation).
- Significant individual items (e.g., impairment losses, restructuring charges).
- This creates several challenges:
- Detailed mapping of accounts and expenses is needed.
- System capabilities may need to be enhanced to track and report disaggregated data.
- Materiality judgments become more complex, requiring consistent internal guidance.
System and Process Changes
- Update ERP systems and reporting tools.
- Redesign chart of accounts to align with new presentation categories.
- Train finance teams and stakeholders on classification and disclosure changes.
Alignment with Segment Reporting (IFRS 8)
- Segment data is reported on a non-IFRS basis.
- Internal segment metrics differ significantly from statutory profit figures.
- Organizations must ensure:
- MPMs and segment disclosures align and are well-reconciled.
- Internal segment metrics differ significantly from statutory profit figures.
Increased Disclosure Burden and Audit Complexity
- Annual and interim reporting processes become longer and more detailed.
- External auditors will require enhanced audit trails, supporting schedules, and internal controls around new subtotals and reconciliations.
Change Management and Stakeholder Communication
Adopting IFRS 18 is not just a technical accounting change—it affects how management, investors, analysts, and regulators perceive a company’s performance.
- Organizations must:
- Clearly communicate changes in presentation and new performance metrics.
- Provide guidance to investors and board members on interpreting revised financials.
- Manage expectations around historical comparability during the transition phase.
How we can be of help to you:
If you’d like, I can also provide a transition roadmap, sample project plan, or Word-formatted report summarizing these challenges for internal use.
IFRS 18 brings a major shift in how entities present financial performance. By introducing standard subtotals, formalizing the use of management-defined performance measures, and enhancing disaggregation, it increases the clarity, comparability, and decision-usefulness of financial statements. Entities transitioning from IAS 1 to IFRS 18 will need to restructure their income statement, revise reporting systems, and possibly update investor communications and internal KPIs.
The implementation of IFRS 18 – Presentation and Disclosure in Financial Statements marks a significant shift in financial reporting standards. As companies move away from IAS 1, they face both technical and operational challenges that require careful planning, system upgrades, and strong change management. Faber LLP, with its deep technical knowledge and practical industry experience, is uniquely positioned to guide businesses through this transformation, ensuring compliance while optimizing financial transparency and performance communication.
Faber LLP begins by conducting a comprehensive impact assessment tailored to your industry, operations, and current financial reporting practices. This diagnostic phase identifies how IFRS 18 will affect your financial statement structure, chart of accounts, key performance metrics, and internal reporting processes. Our experienced advisors analyze existing disclosures, subtotals, segment reporting, and management performance measures to assess the gaps between your current framework and the new IFRS 18 requirements.
Once the impact areas are identified, we develop a customized implementation roadmap. This includes redesigning the statement of profit or loss to reflect IFRS 18’s new categories—operating, investing, and financing—and ensuring a clear and accurate presentation of required subtotals such as operating profit. Faber LLP also assists in classifying and mapping income and expenses under the revised structure, which is often one of the most complex and judgment-based aspects of adoption. For groups with multiple subsidiaries or cross-border operations, we provide standardization guidance and inter-company alignment strategies.
A major component of IFRS 18 is the disclosure of Management-Defined Performance Measures (MPMs). Faber LLP helps your finance and leadership teams identify which metrics qualify as MPMs, prepare reconciliations to IFRS-defined subtotals, and develop robust documentation to meet audit and regulatory scrutiny. We also provide training and communication tools to ensure consistency in how MPMs are used internally and externally, and help you update investor relations materials and MD&A disclosures accordingly.
In parallel, Faber LLP works closely with your IT and finance departments to upgrade systems and reporting tools. We help ensure your ERP or accounting software can support the new categorization, enhanced disaggregation, and segment-level reporting linkages required under IFRS 18. Where necessary, we provide custom templates, reporting packs, and disclosure checklists to ease the transition process.
To support effective change management, Faber LLP offers training workshops and stakeholder communication strategies, ensuring that your internal finance team, board of directors, and auditors understand the rationale and implications of the new reporting framework. Our approach also emphasizes good governance by integrating IFRS 18 into your internal controls, financial policies, and audit processes, thereby reducing future compliance risks.
Ultimately, Faber LLP’s IFRS 18 implementation support goes beyond compliance—we position your business to enhance its financial storytelling, strengthen investor confidence, and improve comparability with peers. By aligning reporting practices with global standards, your business will benefit from improved transparency, strategic clarity, and long-term stakeholder trust.