The global landscape of financial reporting is currently undergoing its most profound transformation in decades. The introduction of IFRS 18 "Presentation and Disclosure in Financial Statements" by the International Accounting Standards Board (IASB) marks the end of the IAS 1 era. This new standard fundamentally redesigns how corporate performance is communicated to the global market. By replacing IAS 1 (Presentation of Financial Statements), IFRS 18 aims to curb the historical "wild west" of income statement reporting, providing investors with standardized anchor points for financial analysis.
For years, the flexibility under accounting standards 18's predecessor allowed companies to define their own versions of "operating profit," leading to a significant lack of comparability. IFRS 18 addresses this by introducing a highly structured approach to financial statement presentation, ensuring that financial statements disclose information that is both transparent, auditable, and digitally compatible with modern analytical tools.
The standard was issued in April 2024 and will be effective from 1 January 2027, with early adoption permitted.
The major aim of IFRS 18 was to bring comparability to the statement of profit or loss, reduce management-defined subtotals, and also enhance how performance is communicated to users. Such changes gradually led regulators and investors to express concerns that financial performance would no longer be comparable between entities due to excessive flexibility. IFRS 18 focuses squarely on this issue.
IFRS 18 applies to all entities that prepare general-purpose financial statements under IFRS. The scope of IFRS 18 does not change the requirements for recognition or measurement but has a significant impact on the presentation in the financial statements. The application of IFRS 18 is to be done retrospectively, which entails restatement of comparative information. This standard does not have any effects on cash flow classification but interacts closely with IAS 7 disclosures.
New Structure of the Statement of Profit or Loss
The most visible change under IFRS 18 is the mandatory classification of all income and expenses into five distinct categories within the statement of profit or loss. This replaces the relatively unstructured format previously seen under IAS 1.
- Operating Category: This is now the "residual" category. It includes all income and expenses from an entity’s main business activities that do not fall into the other four categories. It effectively captures the results of core operations.
- Investing Category: Includes returns from assets that generate income independently, such as dividends from non-consolidated investments and fair value changes in investment properties.
- Financing Category: Focuses strictly on the cost of raising capital, including interest expenses on bank loans and lease liabilities.
- Income Taxes and Discontinued Operations: These remain distinct to ensure they do not obscure the operating performance.
Mandatory Subtotals: Defining Operating Profit
Historically, "Operating Profit" was one of the most used but least defined terms in global accounting. IFRS 18 changes this by mandating two new standardized subtotals:
- Operating Profit or Loss: A mandatory measure of the results from an entity’s main business operations.
- Profit or Loss Before Financing and Income Tax: A view of performance before capital structure and tax effects.
- By standardizing these subtotals, IFRS 18 ensures that the presentation of financial statements is no longer subject to distinctive management definitions. Every company will now provide a consistent starting point for calculating ratios like EBIT or EBITDA.
Management-Defined Performance Measures (MPMs): Technical Depth
Perhaps the most impactful change in IFRS 18 is the formalization of Management-Defined Performance Measures (MPMs). For decades, companies have used "Alternative Performance Measures" (APMs) like "Adjusted EBITDA" in press releases to narrate their performance. However, these figures often lacked transparency and were prone to "cherry-picking."
IFRS 18 brings these measures into the audited financial statements. An MPM is defined as a subtotal of income and expenses that a company uses in public communications outside the financial statements to communicate management's view of an aspect of the entity’s financial performance.
Technical Disclosure and Audit Requirements
- The inclusion of MPMs within the audited notes necessitates a rigorous framework:
- The "Single Note" Rule: To prevent information from being scattered, IFRS 18 requires all MPM disclosures to be consolidated in a single note. This note must include a statement that the MPM reflects management's view and an explanation of why the measure provides useful information.
- Mandatory Reconciliation: Management must provide a tabular reconciliation between the MPM and the most directly comparable IFRS-defined subtotal (e.g., reconciling "Adjusted Operating Profit" back to the IFRS "Operating Profit").
- Tax and NCI Effects: Financial statements disclose the specific tax effect and the effect on non-controlling interests (NCI) for every single item that reconciles the MPM to the IFRS subtotal. In 2025, the IASB clarified that companies could use a simplified approach for calculating these tax effects, but they must be consistent across reporting periods.
- Restatement of Comparatives: If management changes the calculation of an MPM or stops using it, they must explain the change and restate the comparative figures for the previous year. This prevents management from "hiding" poor performance by shifting the goalposts mid-year.
Example: If a telecommunications company reports an "Adjusted EBITDA" that excludes restructuring costs and legal settlements, IFRS 18 requires them to list these specific costs, show their tax impact, and explain why excluding them helps investors understand the core business better—all within the audited financial statements.
Enhanced Principles for Aggregation and Disaggregation
A frequent complaint from institutional investors was that information was either too summarized (obscuring risks) or too voluminous (creating "clutter"). IFRS 18 introduces a "principles-based" approach to how information is grouped, moving away from the more permissive rules of accounting standards 18's era.
The "Role" of Primary Statements vs. Notes
IFRS 18 establishes clear, complementary roles for different parts of the report:
- Primary Financial Statements: Their role is to provide a "structured summary" of the entity's financial position and performance. This means the face of the income statement should not be cluttered with minor details.
- The Notes: Their role is to provide "material information" that disaggregates the summary lines in the primary statements.
The End of the "Other" Category
One of the most significant changes for preparers is the restriction on the "Other" label. If an item is material, IFRS 18 prohibits it from being buried in "Other Expenses" or "Miscellaneous Income." If a company cannot find a more descriptive label, it must investigate the nature of the items and disaggregate them. The standard requires that items with "dissimilar characteristics" be presented separately.
Presentation of Operating Expenses
Companies can present operating expenses by Nature (e.g., raw materials, employee benefits) or by Function (e.g., cost of sales, distribution costs). However, IFRS 18 introduces a new "transparency requirement":
- If a company presents by function, it must disclose in the notes the amounts for five specific "by-nature" categories: depreciation, amortization, employee benefits, impairment losses, and write-downs of inventories.
- This ensures that even if a bank or manufacturer uses a functional presentation, analysts can still extract the core economic inputs (like labor costs) to build their own models.
Relevance of IFRS 18 in the BFSI Sector
The Banking, Financial Services, and Insurance (BFSI) sector faces unique challenges with IFRS 18. Unlike a retailer where "financing" is a support cost, for a bank, providing finance is the operation.
- Specified Main Business Activities: IFRS 18 includes guidance for entities with "specified main business activities." For a bank, interest income and expenses from lending will be classified in the Operating Category rather than the Financing category.
- Example for Banks: A bank’s "Net Interest Income" will now essentially be a component of its "Operating Profit." However, the interest on the bank's own long-term corporate debt (not used for customer lending) will remain in the Financing Category.
- MPMs in BFSI: Metrics like the "Combined Ratio" in insurance or "Net Interest Margin" in banking are critical. Under IFRS 18, any "Adjusted Profit" figures used in investor roadshows will now require the rigorous reconciliation and tax-effect disclosures mentioned above.
Simple example to explain IFRS 18
Consider a manufacturing firm with revenue, finance cost, investment income, and tax expense. According to IFRS 18, revenue and production costs belong to operating activities. Interest income received on fixed deposits would be classified under investing whereas loan interest is payable under financing.
Previously, companies sometimes netted or grouped together such items. IFRS 18 eliminates this option and increases the comparability of profit subtotals.
Let’s understand with a case also:
Background of the entity
XYZ Manufacturing Ltd is a IFRS reporting company and carries out the manufacture and sale of industrial equipment. They have prepared the accounts on a yearly basis ending on 31 March 2028 and adopt IFRS 18 for the first time.
The company has the following income and expenses during the year (₹ in Lakhs):
PARTICULARS
- Revenue from sale of goods: 5,000
- Cost of Goods Sold: (3200)
- Employee benefits expense: (600)
- Administrative expenses: (300)
- Expenses relating to restructuring: (150)
- Interest income on fixed deposits: 80
- Dividend income from mutual funds: 40
- Interest expense on bank loan: (220)
- Foreign exchange loss on loan: (60)
- Income Tax Expense: (180)
Now, the presentation requirements related to each of the heads in accordance with IFRS 18, income and expenses in XYZ Manufacturing Ltd have to be classified into specified categories, showing specified subtotals.
Income and Expense Categorization
Under IFRS 18, the classification is as follows:
Operating category
Revenue from Sales of Goods – 5,000
Cost of Goods Sold – (3,200)
Employee benefits expense - (600)
Administrative expenses - (300)
Restructuring Cost - (150)
Operating Profit: 750
Investing category
Interest income on fixed deposits – 80
Dividend income from mutual funds 40
Profit before financing and income tax: 870
Financing category
Interest expense on bank loan – (220)
Foreign exchange loss on loan – (60)
Profit before Tax: 590
Income Tax
Income Tax Income tax expense – (180)
Profit for the Year: 410 Lacs
Latest Discussions and Recent Amendments (Late 2025)
As of December 2025, the IASB has been finalizing the "Digital Taxonomy" for IFRS 18. This is a crucial step for electronic filing (XBRL).
- Cash Flow MPMs: Recent IASB discussions have explored extending the MPM disclosure rules to the Statement of Cash Flows. While IFRS 18 currently focuses on income statement subtotals, there is strong pressure to regulate measures like "Free Cash Flow" under the same framework by 2027.
- Implementation Challenges: 2025 surveys show that the "Operating" residual category is the biggest headache for CFOs. Items previously thought of as "extraordinary" or "non-recurring" must now be integrated into Operating Profit if they don't meet the narrow definitions of Investing or Financing.
Conclusion
IFRS 18 is not merely a technical update; it is a fundamental shift in the philosophy of financial reporting. By replacing IAS 1 and the legacy of accounting standards 18, the IASB is forcing companies to be more disciplined in their narratives.
The standard is effective for periods beginning on or after January 1, 2027. Given the massive overhaul required for IT systems, chart of accounts, and internal controls—especially for the disaggregation of "Other" items and the reconciliation of MPMs—the time for impact assessment is now. The transition to IFRS 18 ensures that the presentation of financial statements becomes a standardized, audited, and transparent window into corporate reality.
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