To establish comprehensive principles for the presentation and disclosure of information in financial statements, with a primary focus on the Statement of Profit or Loss (P&L).
This standard replaces most of IAS 1 *Presentation of Financial Statements*. IAS 1 is now reduced in scope, primarily covering general features and the Statement of Financial Position, Statement of Changes in Equity, and Statement of Cash Flows.
The key objectives are to:
Improve comparability and transparency by introducing a structured, category-based P&L (Operating, Investing, Financing).
Increase transparency over Management-defined Performance Measures (MPMs) by requiring reconciliation and explanation within the audited financial statements.
Applies To:
IFRS 18 applies to all entities preparing financial statements under IFRS.
It governs the overall structure of the P&L and specific disclosures for all entities.
It introduces new rules for entities that choose to disclose Management-defined Performance Measures (MPMs) in any of their public communications (e.g., investor presentations, press releases), not just in the financial statements.
IFRS 18 supersedes the P&L presentation and disclosure requirements previously in IAS 1.
The Three Core Categories:
IFRS 18 mandates that all income and expenses recognized in the P&L must be classified into one of three categories:
The default category. Includes all income/expenses not classified as investing or financing.
*Examples:* Revenue, Cost of Goods Sold, R&D, S&A expenses, depreciation of operating assets, impairment of goodwill/inventory/operating PPE, restructuring costs.
Includes income/expenses from assets that generate returns "individually and largely independently" of other resources (i.e., non-core operations).
*Examples:* Interest income from cash, dividends received, gains/losses on disposal of investments, rental income (if not main business), and by default, income/expenses from associates & joint ventures (A&JVs).
Includes income/expenses from transactions involving raising capital (liabilities from financing activities) and the costs of that capital.
*Examples:* Interest expense on loans/bonds, finance lease interest, gains/losses on financing hedges, unwinding of discounts on provisions.
The Two Mandatory Subtotals:
Operating profit (or loss): The subtotal for the operating category. A highly comparable measure of core business performance.
Profit (or loss) before financing and income tax: Links operating and investing categories (performance from all business activities pre-financing/tax).
Example P&L Structure (Simplified):
| P&L Item | Category |
| Revenue | Operating |
| Cost of Goods Sold | Operating |
| Gross Profit | (Subtotal) |
| Selling, General & Admin Expenses | Operating |
| Research & Development Expenses | Operating |
| Impairment of goodwill | Operating |
| Operating profit (or loss) | (Mandatory Subtotal) |
| Share of profit from associates (classified as investing) | Investing |
| Interest income from investments | Investing |
| Gain on disposal of subsidiary | Investing |
| Profit (or loss) before financing and income tax | (Mandatory Subtotal) |
| Interest expense on loans | Financing |
| Loss on financial instruments (financing) | Financing |
| Profit (or loss) before tax | (Subtotal) |
| Income tax expense | (Presented separately) |
| Profit (or loss) for the period | (Total) |
What is an MPM?:
A subtotal of income and expenses used in an entity's public communications (outside financial statements) to communicate management's view of performance, and which is not specifically defined by IFRS.
*Examples:* "Adjusted Operating Profit", "Underlying EBITDA", "Core Earnings", "Profit before one-off items".
*Not MPMs:* IFRS-defined subtotals (Gross Profit, Operating Profit), simple calculations (Operating Profit Margin %), or cash flow measures (Free Cash Flow).
The New Disclosure Requirement:
This is a major change. If an entity uses MPMs in public communications, it must disclose them in a single note in its audited financial statements, bringing "non-GAAP" measures "inside the tent".
Objective: Increase transparency, credibility, consistency, and make management accountable for the measures they promote.
MPM Disclosure Rules (in the single note):
Reconciliation: Must provide a reconciliation from the MPM to the most directly comparable IFRS-defined subtotal (e.g., "Adjusted Operating Profit" reconciled to "Operating profit").
Explanation: Why the MPM is useful and provides a different perspective.
Calculation Method: How the MPM is calculated (e.g., "Operating profit excluding $10m restructuring costs").
Tax Effect: The income tax effect and NCI effect for each item in the reconciliation.
Consistency: Statement that calculation is consistent, or explanation if changed.
No Undue Prominence: MPMs cannot be presented more prominently than IFRS subtotals *within* the financial statements.
Analysis of Expenses (Nature vs. Function):
Entities must still choose to present operating expenses on the face of the P&L by either Nature (e.g., depreciation, employee costs) or Function (e.g., cost of sales, admin expenses).
New Disclosure: If presenting by Function on the P&L face, the entity must disclose the amounts for certain "by nature" expenses (incl. depreciation, amortization, employee benefits) in the notes.
Associates and Joint Ventures (A&JVs):
Significant change: Income/expenses from equity-method A&JVs are now classified within the three categories.
Default: Classified in the investing category.
Exception: Classified in the operating category if the A&JV is "integral" to the entity's main business activities.
*Example (Integral):* A 30% stake in a JV that manufactures a key component for the entity's main product. (Goes to Operating).
*Example (Not Integral):* A 30% stake in an associate operating an investment property portfolio in another country. (Goes to Investing).
Disaggregation and 'Unusual' Items:
Replaces the banned "extraordinary items" concept with a principle of disaggregation.
Requires disclosure of "unusual" income and expenses ā€“ items with low predictive value (e.g., major restructuring, litigation settlement, natural disaster impact).
These are disclosed separately, either as a line item on the P&L face (within their category) or in the notes, with a clear explanation.
Effective Date:
Mandatory for annual reporting periods beginning on or after 1 January 2027.
Early adoption is permitted.
Transition Requirement:
Entities must apply IFRS 18 retrospectively in accordance with IAS 8.
This means comparative P&L information (e.g., for 2026) must be restated to conform to the new structure (Operating, Investing, Financing categories and subtotals).
*Example:* An entity adopting in 2027 must analyze its 2026 P&L, re-classify all items into the new categories, and present the 2026 comparative data with the mandatory subtotals.
