IFRS 18 Presentation and Disclosure in Financial Statements: Summary, Practice Questions & What Changes

Under IAS 1, 'operating profit' had no definition — companies decided for themselves what to include, where to put unusual items, and which subtotals to show. Two companies in the same industry could report operating profit on different bases, and analysts rebuilt income statements by hand to compare them. Non-GAAP measures multiplied outside the financial statements with no audit trail. IFRS 18 attacks both problems with defined categories and required subtotals inside the statements, and disciplined disclosure of management's own measures in the notes. It carries forward much of IAS 1 unchanged — going concern, accrual basis, comparatives, the statement of financial position — the revolution is concentrated in the statement of profit or loss.

Every item of income and expense lands in exactly one category. Operating: the default and the residual — everything from the entity's main business activities, and anything not required to go elsewhere; revenue, cost of sales, staff costs, depreciation, impairments of operating assets, and gains on disposal of PPE all sit here. Investing: returns from investments that generate returns largely independently of the entity's other resources — income from associates and joint ventures, dividends and interest earned on investments, rental income from investment property. Financing: costs of raising finance — interest on borrowings and lease liabilities, and fair value changes on some financing instruments. Income taxes and discontinued operations complete the five.

One deliberate wrinkle: entities that invest or provide financing as a main business activity — banks, insurers, investment property companies — classify some of those items in operating instead, so a bank's interest margin stays in its operating profit. For everyone else the categories are fixed, which is exactly what makes the new subtotals comparable.

IFRS 18 mandates subtotals that IAS 1 never required: operating profit or loss (the operating category's total) and profit or loss before financing and income taxes (operating plus investing). For the first time, 'operating profit' means the same thing across IFRS reporters — a defined, comparable anchor for margins, multiples and covenant tests. The familiar profit or loss total remains, and the statement flows: operating → investing → financing → tax → discontinued operations.

Companies may keep publishing their adjusted measures — but if a subtotal of income and expenses is used in public communications to convey management's view of performance and is not a measure IFRS specifies, it is a management-defined performance measure (MPM) and belongs in a single note in the financial statements. That note discloses how each MPM is calculated, why it usefully represents performance, and a reconciliation to the most directly comparable IFRS subtotal — including the tax and NCI effect of each reconciling item. 'Adjusted EBITDA' moves from the glossy front half of the annual report into the audited notes.

IFRS 18 sharpens the principles for grouping line items: items are aggregated only when they share characteristics, and disaggregated when material differences exist. Labels must be faithful and specific — a line called 'other expenses' with no explanation no longer passes; entities must describe what is inside or break it out. Operating expenses are presented by nature, by function, or mixed — whichever gives the most useful structured summary — but a by-function presentation (e.g. cost of sales) triggers note disclosure of key nature-based amounts such as depreciation, amortisation and employee benefits.

• Operating profit: undefined under IAS 1 → a mandatory, defined subtotal under IFRS 18
• Income statement structure: free-form under IAS 1 → five categories with a fixed flow under IFRS 18
• Profit before financing and income taxes: not required under IAS 1 → required subtotal under IFRS 18
• Adjusted / non-GAAP measures: outside the financial statements under IAS 1 → MPMs in a single audited note with reconciliations under IFRS 18
• 'Other' line items: tolerated under IAS 1 → must be meaningfully labelled or disaggregated under IFRS 18
• Unchanged: going concern, accrual basis, comparatives, statement of financial position, OCI and cash flow statements (aside from consequential amendments)

Transition is retrospective: comparatives are restated in the year of adoption, so the first IFRS 18 income statement arrives with a fully re-presented prior year. Effective date: annual periods beginning on or after 1 January 2027, early adoption permitted (and disclosed).