IFRS 18: What the New Standard Means for Financial Reporting

The International Accounting Standards Board issued IFRS 18 Presentation and Disclosure in Financial Statements on 9 April 2024. It replaces IAS 1 and is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. The requirements also apply to interim financial statements.

The IASB developed the standard in response to investor concerns about the comparability and transparency of performance reporting. For entities preparing IFRS financial statements, and for anyone who relies on those statements — including valuers, lenders and acquirers — the changes are structural rather than cosmetic.

Three categories in the statement of profit or loss

IFRS 18 requires income and expenses to be classified into three defined categories. The operating category covers income and expenses from the entity’s main business activities, and acts as the residual for items not classified elsewhere. The investing category covers returns from investments generated largely independently of the main business activities. The financing category covers income and expenses arising from obtaining finance.

Two required subtotals

The standard requires entities to present an operating profit subtotal and a profit or loss before financing and income taxes subtotal, in addition to profit or loss itself. Entities whose main business activity is providing finance are treated differently in respect of the second subtotal.

The composition of operating profit will vary according to what an entity identifies as its main business activities. This is important: two entities in the same sector may present different operating profit figures if they classify their activities differently, so the accompanying disclosure matters as much as the subtotal.

Management-defined performance measures

IFRS 18 brings certain non-GAAP measures inside the audited financial statements for the first time. Where management communicates a subtotal of income and expenses that is not specified by IFRS, it must be disclosed as a management-defined performance measure and reconciled to the most directly comparable IFRS subtotal.

In practice this means the “adjusted EBITDA” or “underlying profit” figures that have historically appeared only in investor presentations will, where they meet the definition, need to be presented with a reconciliation in the notes.

Aggregation and disaggregation

The standard introduces enhanced principles on aggregation and disaggregation, based on the roles of the primary financial statements and the notes. The primary statements are intended to provide a structured summary; the notes provide the detail. Line items described only as “other” will attract scrutiny where they are material.

What this means in valuation and transaction work

Three practical consequences are worth noting.

First, comparability across periods will break at transition. Valuations and models built on historical operating profit will need to be reconciled to the restated presentation rather than assumed to be continuous.

Second, where a management-defined performance measure has been used as the basis for an earn-out, a covenant, or a multiple applied in a transaction, the reconciliation requirement may expose differences between the measure as presented and the measure as understood by the counterparty.

Third, entities that have not yet identified their main business activities should do so early. That determination drives the classification of income and expenses and therefore the operating profit subtotal itself.

The effective date is 1 January 2027, but the comparative period begins earlier for most entities. Preparation is a 2026 activity.