Two businesses can report identical profit before tax, yet present very different pictures of operating performance. IFRS 18 is designed to improve how financial performance is presented and compared.
For finance teams, the immediate task is understanding how existing reporting will translate into the new structure. For calendar-year businesses first applying IFRS 18 in 2027, that includes preparing 2026 comparative information.
The starting point is a question: can your current records explain every change between your existing profit and loss statement and the IFRS 18 version?
Why IFRS 18 matters in 2026
IFRS 18, Presentation and Disclosure in Financial Statements, replaces IAS 1. It applies to annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. Check relevant local endorsement or adoption requirements alongside it.
Application is retrospective: comparative information must reflect the new requirements. A company first applying IFRS 18 for the year ending 31 December 2027 will therefore restate its 2026 comparatives. Companies with different year-ends must identify their own transition periods. First-year interim reporting also needs attention.
Annual transition disclosures include a reconciliation, for each profit and loss line item, between the immediately preceding comparative period’s restated figures and those previously presented under IAS 1.
Waiting until the 2027 year-end could leave the team reconstructing information that its systems never captured separately.
What changes in the income statement?
IFRS 18 requires income and expenses in the statement of profit or loss to be classified into five categories:
| Category | What it covers |
|---|---|
| Operating | Income and expenses not classified in the other four categories. |
| Investing | Specified returns and related income or expenses from investments, cash and other assets generating returns largely independently. |
| Financing | Specified income and expenses from financing liabilities, plus interest-related items from certain other liabilities. |
| Income taxes | Tax expense or income within IAS 12 and related foreign exchange differences. |
| Discontinued operations | Income and expenses classified under IFRS 5. |
The standard also introduces two defined subtotals: operating profit or loss and profit or loss before financing and income taxes. The second combines the operating and investing categories.
Classification depends on the business. Special rules apply where investing in assets or financing customers is a main business activity. Certain financing businesses also have an exception to presenting the second subtotal. A manufacturer’s mapping cannot simply be copied into a bank’s accounts.
Operating profit can include unusual or volatile operating expenses. It should not be treated as a measure of recurring earnings.
Worked example: different operating profit, unchanged total profit
Consider a fictional standalone manufacturer. Investing and customer financing are not its main business activities. Both columns use identical 2026 transactions; only presentation changes.
Amounts are whole US dollars. The example assumes a 25% illustrative income tax rate, with no tax differences or discontinued operations. This is a simplified presentation example, not a country-specific tax computation.
| Line item | Previous IAS 1 presentation: USD | IFRS 18 presentation: USD |
|---|---|---|
| Revenue | 1,000,000 | 1,000,000 |
| Cost of sales | (600,000) | (600,000) |
| Gross profit | 400,000 | 400,000 |
| Administrative expenses | (180,000) | (180,000) |
| Restructuring expense | (20,000) | (20,000) |
| Deposit interest included above operating profit | 10,000 | — |
| Operating profit | 210,000 | 200,000 |
| Deposit interest: investing category | — | 10,000 |
| Profit before financing and income taxes | Not presented | 210,000 |
| Borrowing interest: financing expense | (30,000) | (30,000) |
| Profit before tax | 180,000 | 180,000 |
| Income tax: 180,000 × 25% | (45,000) | (45,000) |
| Profit for the year | 135,000 | 135,000 |
The previous column illustrates this company’s assumed presentation; IAS 1 did not prescribe that treatment for every business.
Under IFRS 18, its deposit interest sits in investing. The restructuring cost remains operating.
The lower operating subtotal does not indicate weaker trading in this comparison. Finance teams should explain the reclassification before stakeholders interpret it as a performance decline.
What are management-defined performance measures?
A management-defined performance measure, or MPM, is a qualifying income-and-expense subtotal used in public communications outside the financial statements to communicate management’s view of the entity’s overall financial performance. Measures listed in IFRS 18 or specifically required by another IFRS Accounting Standard are excluded. An internal KPI does not automatically qualify.
Assume the manufacturer publicly reports adjusted operating profit excluding restructuring costs. The following illustrates its reconciliation. The restructuring expense is assumed fully tax-deductible at the illustrative rate; there are no non-controlling interests.
| Measure or disclosure | Calculation or basis | USD |
|---|---|---|
| IFRS 18 operating profit | As presented above | 200,000 |
| Add back restructuring expense | Expense included in operating profit | 20,000 |
| Adjusted operating profit | 200,000 + 20,000 | 220,000 |
| Tax benefit associated with the excluded expense | 20,000 × 25% | 5,000 |
| Non-controlling interest effect | Standalone entity | 0 |
The tax-benefit row is a separate disclosure; it is not added to adjusted operating profit.
Required MPM information belongs in a single note. It includes the calculation, why management considers the measure useful, reconciliation to the most directly comparable qualifying IFRS total or subtotal, and each reconciling item’s tax and non-controlling-interest effects. Changes to the measure also require explanation.
Adding back restructuring costs in an adjusted measure does not remove them from IFRS operating profit. The reconciliation illustrates that distinction; it is not a complete disclosure note.
What CFOs and finance teams should review
Start with chart-of-accounts mapping and consolidation packages. A single interest or foreign-exchange account may contain transactions needing different treatment. Document the underlying transactions and classification judgements.
Review management dashboards, investor materials, lending agreements and incentive arrangements that refer to operating profit. Determine whether their definitions require clarification; a reporting change does not automatically rewrite a contract.
Aggregation and disaggregation also matter: group items with shared characteristics and separate information where material differences would otherwise be obscured. Review broad “other expenses” labels.
The specified expense-by-nature disclosure requirements apply when any operating-category expense line is classified by function. This can require additional reporting data.
Include cash-flow reporting in the project: consequential IAS 7 amendments require operating profit as the starting point for the indirect method.
Five preparation steps before 2027
- Confirm the timetable. Identify the first annual reporting period, comparative periods, relevant interim reports and local requirements.
- Document classification decisions. Assess main business activities and map material income and expenses, with supporting reasons.
- Test comparative data. Produce a draft restated profit and loss statement and retain the reconciliation to previously reported figures.
- Establish disclosure controls. Identify qualifying MPMs, assign owners and collect adjustment, tax and supporting expense data.
- Run a complete reporting rehearsal. Review draft statements, notes and system outputs with relevant stakeholders and auditors where applicable.
IFRS 18 requires businesses to reconsider how performance is classified, explained and communicated. A useful next step is to prepare one draft IFRS 18 statement using your own comparative data. The gaps it exposes will make the implementation work clearer.
Patel Pratik & Co. can support finance teams with reporting reviews, classification analysis and practical transition planning.