For decades the statement of profit or loss has been the most flexible of the primary financial statements. IAS 1 required a handful of line items and a bottom line, but left the ordering, the subtotals and much of the architecture to management judgement. That flexibility is precisely what IFRS 18 Presentation and Disclosure in Financial Statements sets out to constrain. Issued by the IASB and effective for annual reporting periods beginning on or after 1 January 2027, with comparative information restated, IFRS 18 replaces IAS 1 and rebuilds the income statement around a defined structure. Early application is permitted, but the practical work of getting there should begin well before the effective date.
It is worth being clear about what does not change. IFRS 18 does not alter recognition or measurement. Revenue, impairment, financial instruments and the rest continue to be measured exactly as they are today, and profit for the period is unchanged. What changes is how that profit is presented, how it is subtotalled, and what management must disclose about the performance measures it chooses to communicate outside the required framework. In that sense the standard is about the shape of the story, not the numbers within it, but the shape carries real consequences for systems, KPIs, debt covenants and analyst communication.
Three categories, and a defined order
The central mechanic of IFRS 18 is the classification of income and expenses into three defined categories in the statement of profit or loss: operating, investing and financing. The operating category is the default, it captures income and expenses that do not fall into the other categories, and typically reflects the entity's main business activities. The investing category covers returns from assets that generate a return largely independently of the entity's other resources, such as investments in associates and joint ventures, cash and cash equivalents, and other standalone investments. The financing category captures income and expenses from liabilities that involve the raising of finance, together with interest on other liabilities.
There is an important nuance for entities whose main business involves investing in assets or providing financing to customers. A bank, an insurer or an investment property group may need to classify items that would otherwise sit in investing or financing within the operating category instead, because those activities are the business. IFRS 18 provides specific requirements for these entities, and determining which classification applies is one of the more judgemental parts of implementation. It is not a mechanical mapping exercise, and it should not be treated as one.
Mandatory subtotals
Flowing from the categories are two subtotals that every entity must now present on the face of the statement: operating profit or loss, and profit or loss before financing and income taxes. Operating profit is the result after operating income and expenses but before investing and financing effects. Profit before financing and income taxes then adds the investing category. These are defined subtotals with a consistent meaning across reporting entities, which is the point. For years, 'operating profit' has appeared on countless income statements meaning subtly different things at different companies. IFRS 18 gives the term a standardised definition, and that comparability is one of the standard's principal objectives.
IFRS 18 does not change a single measured number. It changes what the numbers add up to on the way down the page, and that is enough to reshape how performance is read.
Management-defined performance measures come inside the tent
Perhaps the most consequential innovation is the treatment of management-defined performance measures, or MPMs. An MPM is a subtotal of income and expenses that an entity uses in public communications outside the financial statements to convey management's view of financial performance, think 'adjusted operating profit' or 'underlying earnings'. Historically these lived in the front half of the annual report, the investor presentation and the earnings release, outside the audited financial statements and outside a common disciplinary framework.
IFRS 18 brings MPMs into the notes. Where an entity uses an MPM, it must disclose it in a single note, explain why the measure provides useful information, describe how it is calculated, and provide a reconciliation to the most directly comparable subtotal specified by IFRS. The tax and non-controlling interest effect of each reconciling item must be disclosed. The measure must be applied consistently and any changes explained. Critically, because these disclosures sit within the financial statements, they fall within the scope of the audit. Finance teams should expect their adjusted measures to receive a level of scrutiny they may not have attracted before, and should confirm now that each such measure can be defended, reconciled and audited.
Aggregation and disaggregation
Running alongside the category structure is a strengthened set of principles on aggregation and disaggregation. IFRS 18 requires items to be grouped by shared characteristics and separated where characteristics differ, with the objective of presenting information that is useful rather than obscured by excessive aggregation or cluttered by excessive detail. The standard also disciplines the use of labels such as 'other', pressing entities to explain the composition of residual line items rather than using them as a convenient home for the miscellaneous. In practice this will prompt many entities to revisit the granularity of their primary statements and notes, and to reconsider what belongs on the face versus in the notes.
What finance teams should do now
The effective date feels distant, but the comparative requirement pulls the real deadline forward: an entity reporting for the year ending 31 December 2027 must present 2026 on the new basis, which means the classification decisions need to be settled and the data captured through 2026. The first step is a classification assessment, mapping current income and expense lines into the operating, investing and financing categories and identifying the judgemental items, particularly for entities with investing or financing as a main business activity. The second is an MPM inventory: cataloguing every performance measure used in external communications, testing each against the definition, and preparing the required reconciliations and rationale.
From there the work becomes operational. Chart-of-accounts and consolidation-system changes are likely, because the new categories and subtotals need to be produced reliably and repeatably, not assembled by hand each quarter. Debt covenants, incentive metrics and internal KPIs that reference 'operating profit' should be reviewed against the new defined meaning, and any divergence flagged to lenders and remuneration committees early. Finally, investor communications and analyst guidance should be prepared for a presentation that will look materially different, even though profit is unchanged. Handled well, IFRS 18 is an opportunity to tell a clearer, more comparable performance story. Handled late, it becomes a restatement exercise under time pressure. The distinction is largely a matter of starting now.
Key takeaways
- IFRS 18 replaces IAS 1 for periods beginning on or after 1 January 2027 with comparatives restated, so 2026 figures must be captured on the new basis, the practical deadline is already close.
- It changes presentation and disclosure only: recognition, measurement and the final profit figure are unchanged, but income and expenses must be classified into operating, investing and financing categories.
- Two subtotals become mandatory on the face of the statement, operating profit or loss, and profit or loss before financing and income taxes, giving these terms a standardised, comparable meaning.
- Management-defined performance measures such as 'adjusted' or 'underlying' earnings must now be disclosed in a single note, reconciled to an IFRS subtotal, and fall within the scope of the audit.
- Act now: complete a category-classification assessment, inventory and reconcile all MPMs, update the chart of accounts and consolidation systems, and review covenants and KPIs that reference operating profit.