Last reviewed: August 2026.
IFRS 18 becomes effective for annual reporting periods beginning on or after 1 January 2027. It replaces IAS 1 and changes how entities structure the statement of profit or loss, explain management-defined performance measures and aggregate information. Earlier application is permitted.
This practical guide focuses on the transition work that finance teams, students and reviewers need to understand. For the complete set and purpose of financial statements, use our separate financial statements guide.
What is IFRS 18?
IFRS 18 Presentation and Disclosure in Financial Statements is the IASB’s new presentation standard. It carries forward many IAS 1 requirements but concentrates major improvements on the statement of profit or loss and related notes. Recognition and measurement rules in other IFRS Accounting Standards generally do not change merely because IFRS 18 changes presentation.
The standard is designed to make performance reporting more comparable and transparent. Its three headline changes are:
- defined categories and new required subtotals in the statement of profit or loss;
- disclosures about management-defined performance measures, or MPMs; and
- stronger principles for aggregation and disaggregation.
| Area | IFRS 18 requirement | Implementation impact |
|---|---|---|
| Profit or loss | Five categories and two defined subtotals | Remap accounts and restate comparatives |
| MPMs | A single note with explanations and reconciliations | Align public communications, tax effects and controls |
| Aggregation | Group items with shared characteristics and separate dissimilar material items | Review line items, note groupings and labels |
| Operating expenses | Use the nature, function or mixed presentation that provides the most useful structured summary | Build supporting expense-by-nature data |
Effective date and transition
IFRS 18 applies to annual periods beginning on or after 1 January 2027. An entity with a 31 December year-end applying the standard for the first time in 2027 will need IFRS 18-compliant comparative information for 2026. Because application is retrospective, transition planning cannot safely wait until the end of 2027.
Teams should identify affected reporting packages, map the chart of accounts, redesign consolidation and disclosure processes, and plan how comparative information will be reproduced. Transition disclosures include a reconciliation between the amounts previously presented under IAS 1 and the restated amounts under IFRS 18 for the required comparative period.
The five categories in the statement of profit or loss
Income and expenses are classified into five categories: operating, investing, financing, income taxes and discontinued operations. The operating category is the default category: it includes income and expenses that are not classified in another category. It is not limited to recurring or cash items.
Operating category
Operating normally captures the results of the entity’s main business activities and other items not assigned elsewhere. Revenue, cost of sales, employee costs and ordinary operating expenses will commonly appear here. Unusual or volatile items do not automatically leave the operating category.
Investing category
Investing generally includes returns from investments that generate returns individually and largely independently of other resources. It also includes income and expenses from cash and cash equivalents and, subject to the standard’s detailed requirements, investments in associates and joint ventures.
Financing category
Financing generally captures income and expenses from liabilities that arise from transactions involving only the raising of finance, together with specified interest effects on other liabilities. The exact classification requires analysis of the instrument and whether providing finance to customers is a main business activity.
Income taxes and discontinued operations
The income taxes category contains tax expense or income recognised by applying IAS 12 and related foreign-exchange effects specified by IFRS 18. The discontinued operations category contains income and expenses presented under IFRS 5.
Two new defined subtotals
IFRS 18 requires entities to present:
- Operating profit or loss—the total of income and expenses classified in the operating category.
- Profit or loss before financing and income taxes—operating profit or loss plus income and expenses classified in the investing category.
These common subtotals reduce the diversity that existed when entities could design key profit measures differently. They also give users a more consistent starting point for comparing performance.
Worked example: IFRS 18 profit-or-loss structure
Assume a manufacturing company has no specified main business activity of investing or providing finance. The following simplified example illustrates the structure; it is not a complete set of financial statements.
| Line item | Category | Amount |
|---|---|---|
| Revenue | Operating | 1,200 |
| Cost of sales | Operating | (700) |
| Selling and administrative expenses | Operating | (220) |
| Impairment loss | Operating | (20) |
| Operating profit | Required subtotal | 260 |
| Share of profit of associate | Investing | 30 |
| Interest income on cash | Investing | 10 |
| Profit before financing and income taxes | Required subtotal | 300 |
| Finance expense | Financing | (40) |
| Profit before income taxes | Subtotal | 260 |
| Income tax expense | Income taxes | (65) |
| Profit | Total | 195 |
The example shows why chart-of-account mapping matters. A line item’s classification depends on IFRS 18 requirements and the entity’s facts—not on whether management regards the item as normal, recurring or controllable.
Management-defined performance measures
An MPM is a subtotal of income and expenses that is used in public communications outside the financial statements, communicates management’s view of an aspect of financial performance, and is not a total or subtotal specified by IFRS Accounting Standards. Measures such as “adjusted operating profit” may meet the definition; ratios and purely cash-flow measures generally do not because they are not subtotals of income and expenses.
IFRS 18 requires MPM information in a single note. For each MPM, an entity explains why the measure provides useful information, how it is calculated, and how it reconciles to the most directly comparable IFRS-specified subtotal or total. The reconciliation identifies the income-tax effect and the effect on non-controlling interests for each reconciling item.
When an MPM changes, the entity explains the change, the reason, and the effect where required. This means finance, investor relations, legal and tax teams need a shared control process over presentations, earnings releases and other public communications.
Aggregation and disaggregation
IFRS 18 requires entities to consider whether items have shared or dissimilar characteristics. Items with shared characteristics may be aggregated, while material information about items with dissimilar characteristics should not be obscured by broad labels.
Vague descriptions such as “other expenses” need scrutiny. The label should faithfully describe the contents, and material dissimilar components may require separate presentation or note disclosure. Review our materiality guide alongside this analysis.
Operating expenses: nature or function?
Within the operating category, expenses are presented using the nature of expense, the function of expense, or a mixed presentation—whichever provides the most useful structured summary. A nature presentation might show employee benefits, depreciation and raw materials. A function presentation might show cost of sales, distribution and administrative expenses.
If expenses are presented by function, IFRS 18 requires specified expense-by-nature information in the notes. Systems therefore need reliable data that can support both the face of the statement and the notes.
How IFRS 18 affects the statement of cash flows
Consequential amendments affect IAS 7. For entities using the indirect method, operating profit becomes the starting point for reporting cash flows from operating activities. Classification requirements for interest and dividends are also more specific, with additional rules for entities that have relevant specified main business activities.
For an entity without those specified main business activities, dividends paid are generally financing cash flows, while interest and dividends received are generally investing cash flows and interest paid is generally financing. Always apply the detailed IAS 7 requirements to the entity’s facts. For background, see our cash-flow links guide.
IFRS 18 implementation checklist
| Step | Control question | Evidence to retain |
|---|---|---|
| 1. Scope | Which entities and reporting packages apply IFRS? | Scope memo and timetable |
| 2. Main activities | Does the entity invest in assets or provide financing as a main business activity? | Documented judgement |
| 3. Account mapping | Is every income and expense account mapped to a category? | Approved mapping table |
| 4. MPM inventory | Which public subtotals meet the MPM definition? | Communications inventory and assessment |
| 5. Data and systems | Can systems produce restated comparatives, nature disclosures, tax and NCI effects? | Test outputs and reconciliations |
| 6. Dry run | Has a complete statement and note package been reviewed? | Parallel close and review sign-off |
Common IFRS 18 mistakes
- treating operating as a synonym for recurring;
- assuming recognition or measurement rules have been replaced;
- ignoring public communications when identifying MPMs;
- using broad “other” labels that obscure material information;
- failing to capture expense-by-nature data when functions appear on the face;
- applying a general corporate classification model to banks or investment entities;
- starting comparative-data work too late.
Frequently asked questions
Does IFRS 18 replace IAS 1?
Yes. IFRS 18 replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027. Some IAS 1 requirements were retained in IFRS 18, while others moved to IAS 8 and IFRS 7.
Does IFRS 18 change profit recognition?
IFRS 18 mainly changes presentation and disclosure. Recognition and measurement continue to follow the relevant IFRS Accounting Standards.
Is EBITDA automatically an MPM?
No. The measure must satisfy the IFRS 18 definition. An EBITDA-labelled subtotal may or may not be an MPM depending on how it is calculated and used in public communications.
Do comparative figures need to be restated?
Yes. IFRS 18 is applied retrospectively, so affected comparative information is restated and the required transition reconciliation is prepared.
Can IFRS 18 be applied early?
Yes. Earlier application is permitted, with disclosure of that fact.
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Key takeaway
IFRS 18 is not merely a relabelling exercise. It requires consistent category judgements, comparable subtotals, controlled MPM disclosures and better-organised information. A disciplined 2026 dry run gives finance teams time to resolve mapping and data issues before mandatory 2027 reporting.
Official and technical references: IFRS Foundation—IFRS 18, IFRS Foundation—IAS 7, and ACCA’s IFRS 18 technical article.