IFRS 18 Presentation and Disclosure: The 2027 Overhaul of the Income Statement

IFRS 18 is the most significant overhaul of financial statement presentation in a generation. Effective from 2027, it replaces IAS 1 and reshapes the income statement with defined categories and mandatory subtotals, brings management’s alternative performance measures into the audited accounts, and tightens how information is grouped. Any company reporting under IFRS needs to understand it now. This guide explains the new structure, the key innovations, and what to do to prepare.

Why was IFRS 18 introduced?

IFRS 18 responds to long-standing criticism that IAS 1 allowed too much variation in how companies structured their income statements, undermining comparability. Different companies defined operating profit differently or not at all, classified similar items differently, and presented a proliferation of inconsistently defined subtotals. Investors found it hard to compare performance across companies and struggled to reconcile the alternative performance measures companies emphasised in their commentary with the audited numbers.

The standard aims to improve comparability and transparency by imposing structure on the income statement, requiring consistent categories and subtotals, and bringing management’s own performance measures into the audited financial statements with required reconciliations. It is fundamentally about making performance reporting more consistent and more transparent, addressing concerns that have built up over many years of IAS 1 practice.

What are the new income statement categories and subtotals?

IFRS 18’s centrepiece is a defined structure for the statement of profit or loss. Income and expenses are classified into three categories — operating, investing, and financing — and the standard requires two new defined subtotals: operating profit, and profit before financing and income taxes. This gives every IFRS income statement a consistent skeleton, so that ‘operating profit’ means the same thing across companies for the first time.

The operating category captures the results of the entity’s main business activities; the investing category covers returns from investments such as associates and certain financial assets; and the financing category covers the costs of obtaining finance. This structure replaces the largely free-form income statement of IAS 1, and it requires companies to reassess how each line item is classified, a process that itself involves judgment for items that could fall into more than one category.

What are management-defined performance measures?

One of IFRS 18’s most notable innovations is the treatment of management-defined performance measures (MPMs) — the subtotals companies use in their public communications to convey their view of performance, such as ‘adjusted operating profit’, ‘underlying earnings’, or ‘EBITDA before exceptional items’. Previously these alternative performance measures sat outside the audited financial statements, with limited consistency or scrutiny. IFRS 18 brings qualifying MPMs into the notes.

Where a company uses an MPM, IFRS 18 requires it to be disclosed in a single note, with an explanation of why it provides useful information, how it is calculated, and a reconciliation to the most directly comparable subtotal defined by IFRS. This subjects management’s preferred performance metrics to the discipline of the audited accounts, addressing the long-standing concern that non-GAAP measures could present a flattering picture without adequate explanation or reconciliation.

What changes to aggregation and disaggregation does IFRS 18 bring?

IFRS 18 enhances the principles for grouping information, addressing the problem of statements that are either too aggregated to be useful or cluttered with immaterial detail. It requires items to be grouped based on shared characteristics and disaggregated where doing so provides useful information, with guidance on what belongs on the face of the statements versus in the notes. Vague labels such as ‘other’ are discouraged unless properly explained.

The intent is to improve the usefulness of both the primary statements and the notes by ensuring information is presented at the right level of detail. For preparers, this means revisiting how line items are grouped and whether the current level of aggregation genuinely serves users. Combined with the new income statement structure, this reshapes how the accounts communicate, reinforcing the disclosure-quality themes explored across our IFRS hub.

How should companies prepare for IFRS 18?

Preparing for IFRS 18 is a project, not a presentational tweak. The first step is to assess how the new categories affect the income statement, which requires classifying every income and expense item into operating, investing, or financing, and reconfiguring the chart of accounts and reporting systems to produce the new subtotals. Companies in specified main business activities, such as financial institutions, have particular guidance on classification that must be applied.

The second major workstream is MPMs: identifying every management-defined performance measure used in communications, determining which fall within the standard’s scope, and building the disclosures and reconciliations. Finally, companies should review aggregation and disaggregation across the statements and notes. Engaging auditors early, updating systems, and educating stakeholders about the new-look statements are all part of a controlled transition, in keeping with the change-management discipline emphasised across our IFRS hub.

How does IFRS 18 affect specific industries?

IFRS 18’s defined categories do not fall the same way for every business, and the standard provides specific guidance for entities with particular main business activities — notably those that invest in assets or provide financing as a main activity, such as banks, insurers, and investment entities. For these entities, items that would be investing or financing for a typical company are part of their operating activities, so the classification of income and expenses into the three categories differs.

This industry-sensitive classification is essential to making the operating profit subtotal meaningful across very different business models. A bank’s interest income is operating, not investing; an investment entity’s returns on its investments are operating, not investing. Companies must therefore assess whether they fall within the specified main business activities and apply the relevant classification guidance. Getting this right is central to a faithful IFRS 18 income statement, and it requires careful analysis of the entity’s actual business model.

What is the relationship between IFRS 18 and the cash flow statement?

IFRS 18 makes consequential changes to the statement of cash flows under IAS 7, aimed at improving consistency between the income statement categories and cash flow classification. In particular, it removes some of the classification options that previously reduced comparability — for instance, specifying the classification of interest and dividend cash flows for most entities rather than leaving it to choice — so that the cash flow statement aligns better with the new income statement structure.

This alignment is part of IFRS 18’s broader goal of making the primary financial statements work together as a coherent, comparable set. For preparers, it means the transition affects not just the income statement but the cash flow statement too, and the systems and processes that produce both must be updated together. Treating IFRS 18 as a presentation overhaul spanning multiple statements, rather than an income-statement-only change, is essential to a clean transition, in keeping with the integrated view across our IFRS hub.

What is the strategic significance of bringing MPMs into the accounts?

The decision to bring management-defined performance measures into the audited financial statements is one of IFRS 18’s most strategically significant changes. For years, companies have emphasised adjusted or underlying performance measures in their communications — stripping out items they consider non-recurring or non-operating — while these measures sat outside the audited accounts with limited scrutiny. Critics argued this allowed a flattering narrative disconnected from the IFRS numbers. IFRS 18 directly addresses this tension.

By requiring qualifying MPMs to be disclosed in a single note, explained, and reconciled to an IFRS-defined subtotal, the standard subjects management’s preferred metrics to the discipline and audit scrutiny of the financial statements. This does not prohibit MPMs — it makes them transparent and comparable to the IFRS figures. For companies that rely heavily on adjusted measures, this is a meaningful change in accountability, and it reflects the broader push toward transparency that characterises modern IFRS, as explored across our IFRS hub.

How should companies sequence their IFRS 18 transition?

A well-sequenced IFRS 18 transition begins with an impact assessment: classifying income and expenses into the new categories, identifying the entity’s main business activities, cataloguing MPMs, and reviewing aggregation. This diagnostic phase reveals the scale of change and the systems and process work required. It should start well ahead of the 2027 effective date, because the downstream work — reconfiguring systems, restating comparatives, and updating disclosures — depends on its conclusions.

The next phases involve building the new statement structure and reconciliations, restating comparative periods onto the new basis, updating the chart of accounts and reporting systems, and engaging auditors on the classification judgments and MPM disclosures. Throughout, communicating with stakeholders — lenders, boards, and investors whose covenants, KPIs, and expectations reference income statement subtotals — is essential so the new-look statements are understood rather than misread. This change-management discipline mirrors the approach to first-time adoption explored across our IFRS hub.

What does IFRS 18 mean for investor communication?

IFRS 18 reshapes the canvas on which companies communicate financial performance to investors. With a defined operating profit subtotal that means the same across companies, investors gain a more reliable basis for comparison, and with MPMs brought into the audited notes and reconciled, the gap between a company’s preferred narrative and its IFRS results narrows. Companies will need to revisit how they frame performance in results announcements and presentations to align with the new structure.

For many companies, this is an opportunity as much as an obligation: a clearer, more comparable income statement and transparent MPM reconciliations can strengthen investor trust and reduce the friction of explaining adjusted measures. Those that engage early and communicate the changes well will navigate the transition smoothly, while those that treat it as a last-minute compliance exercise risk confusing the market. Proactive communication is central to a successful transition, in keeping with the stakeholder-management themes across our IFRS hub.

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