IFRS 18: More than a new Income Statement

For many organisations, IFRS 18 may initially seem like another financial reporting change. In reality, it could influence how performance is communicated to investors, lenders, boards and other stakeholders. While it does not change the underlying economics of a business, it may change how those economics are presented and interpreted. IFRS 18 is effective for periods beginning on or after 1 January 2027 and replaces IAS 1 Presentation of Financial Statements. 

This is not just an accounting exercise

The introduction of IFRS 18 is the most significant change to the presentation of financial statements for many years. The standard aims to improve comparability and transparency by introducing:

• new mandatory subtotals in the income statement, including operating profit or loss
• new categories for income and expenses
• enhanced requiremnts around aggregation and disaggregation
• new disclosures for management-defined performance measures (MPMs).

Many finance teams may view the changes as largely cosmetic. However, management should recognise that stakeholders often focus on reported performance measures rather than the underlying accounting rules. If the presentation changes, stakeholder perceptions may also change.

Your operating profit or loss could look different

One of the most visible changes is the introduction of a mandatory operating profit or loss subtotal. For many entities, certain items currently presented within operating results may move to investing or financing categories depending on the nature of the income or expense. 

Although total profit or loss remains unchanged, IFRS 18 may change how financial performance is perceived. The new presentation requirements can result in amounts previously included within operating profit being reclassified to investing or financing categories, which raises important questions.

• Have analysts, ivestors and lenders historically focused on a metric that will change under IFRS 18?
• How will management explain movements that arise solely from presentation changes?

Finance leaders who wait until the first IFRS 18 reporting period may find themselves having difficult conversations with stakeholders who perceive performance to have changed when the underlying business has not.

Management KPIs are moving into the spotlight

Perhaps the most significant development for management teams is the new focus on  MPMs. The standard introduces a formal definition of MPMs.

Many organisations communicate measures such as:

• adjusted EBITDA
• underlying operating profit
• adjusted earnings
• core profit
• normalised EBIT.

Historically, these measures may have appeared in investor presentations, annual reports or market communications with varying levels of explanation. Under IFRS 18, entities must provide specific disclosures, including reconciliations, to explain how these measures relate to the financial statements. Greater visibility of these measures is likely to bring greater scrutiny of how they are calculated and presented.

Management should expect auditors, regulators and stakeholders to challenge whether these measures are consistent, clearly defined and genuinely useful.

The implications extend beyond financial reporting

One of the most overlooked aspects of IFRS 18 is its potential impact on wider business arrangements.

The implementation guidance notes that entities may need to revisit remuneration structures, debt covenants and internal reporting processes because performance measures linked to IAS 1 presentations may be affected. Management should therefore consider the following:

• Bonus and incentive schemes based on profit measures.
• Banking covenants linked to earnings metrics.
• Investor communications and analyst presentations.
• Board reporting packages.
• Internal management dashboards.

A measure used consistently for years may require reassessment under the new standard.

Data and systems review

Unlike many disclosure changes, IFRS 18 can require organisations to collect information that may not currently be readily available.

The new requirements around disaggregation and MPM disclosures may mean that finance teams need to capture, analyse and report data differently. The transition could therefore involve:

• updating chart of accounts structures
• revising reporting packs
• enhancing consolidation systems
• modifying close and reporting processes
• strengthening documentation around management adjustments.

Organisations that begin planning early will have significantly more flexibility than those who postpone addressing these challenges until implementation approaches.

Questions management should be asking now

Rather than asking whether IFRS 18 will affect your organisation, the better question may be how significantly it will affect you.

1. Which reported performance measures currently used by the business may qualify as MPMs?
2. How will operating profit change under the new requirements?
3. Are remuneration arrangements linked to metrics that could be affected?
4. Could lender reporting or covenant calculations require updates?
5. Do existing systems capture the information needed for new disclosures?
6. Are investors, lenders and boards being prepared for the upcoming changes?

Final thought

IFRS 18 does not change profits, cashflows or organisational performance. What it changes is the way performance is presented and explained.

For management, that distinction is critical.

Organisations that prepare early will be better positioned to maintain stakeholder confidence, avoid surprises and take control of the narrative conveyed by their financial statements. Those that leave implementation until the last minute may discover that IFRS 18 is more than a financial reporting project; it is a communication project with potentially significant implications for how performance is perceived.