IFRS 18: What Accounting and Audit Teams Need to Know

IFRS 18 replaces IAS 1 and represents the most significant change to financial statement presentation in over two decades. Issued by the International Accounting Standards Board (IASB) on 9 April 2024, the new standard redefines how companies present financial performance. It introduces mandatory profit subtotals, and brings management-defined performance measures (MPMs) into the audited financial statements for the first time.

This guide breaks down what IFRS 18 changes, what it means for audit firms and the Office of the CFO, and how teams can start preparing before the 2027 effective date.

What Is IFRS 18?

IFRS 18, formally titled Presentation and Disclosure in Financial Statements, was issued by the IASB on 9 April 2024. It replaces IAS 1 Presentation of Financial Statements, the primary standard governing financial statement presentation since 1997.

The standard is effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted. Entities that adopt early are required to disclose that fact in the notes.

A few important things to understand upfront:

IFRS 18 changes how financial performance is presented and disclosed. It doesn’t change how items are recognized or measured. Revenue, expenses, assets, and liabilities are still accounted for under the same existing IFRS standards. What changes is the structure of the statement of profit or loss, the disclosure requirements around performance measures, and the rules for how information is grouped and labeled.

The standard must be applied retrospectively, including restatement of comparatives. Companies preparing their first IFRS 18-compliant statements in 2027 must restate 2026 data under the new framework.

The IASB developed IFRS 18 in response to longstanding investor concerns. 

Under IAS 1, entities had significant flexibility in how they structured the statement of profit or loss. That flexibility led to inconsistent P&L structures across companies in similar industries, incomparable definitions of operating profit, and widespread use of unregulated non-GAAP measures that were difficult for investors to compare or verify.

IFRS 18 addresses these issues through three core sets of changes.

Three Core Changes in IFRS 18

1. A new structure for the statement of profit or loss

Under IFRS 18, all income and expenses must be classified into one of five categories:

• Operating – income and expenses from the entity’s main business activities and anything not classified in another category
• Investing – income and expenses from assets that generate returns individually and largely independently of the entity’s other resources, such as investments in associates, joint ventures, debt and equity investments, and investment properties
• Financing – income and expenses from liabilities that arise from transactions involving only the raising of finance, plus interest expenses on all liabilities
• Income taxes – income tax expense
• Discontinued operations – as defined by IFRS 5

The operating category functions as a residual. If an item of income or expense doesn’t meet the definition of investing, financing, income taxes, or discontinued operations, it falls into operating. This is a meaningful shift from IAS 1, which did not require classification into defined categories at all.

IFRS 18 also introduces two new mandatory subtotals:

• Operating profit or loss – the subtotal of all income and expenses classified as operating
• Profit or loss before financing and income taxes – the subtotal of operating profit or loss plus all income and expenses classified in the investing category

All entities must include both subtotals, except those that provide financing as a main business activity – they’re exempt from the second subtotal.

It’s important to note that the classification is based on the nature of the underlying asset, liability, or transaction, not the nature of the income or expense itself. For example, impairment of PPE used in operations is classified as operating, but impairment of an investment in an associate (unless investing is a main business activity) is classified as investing.

Specified main business activities.

More complex rules apply to entities like banks, insurers, and investment entities. If investing in assets or providing financing to customers is a main business activity, certain income and expenses that would normally fall into investing or financing may instead be classified as operating. For instance, a bank would classify interest income from customer loans in the operating category.

2. Management-defined performance measures (MPMs)

MPMs are one of the most consequential aspects of IFRS 18. The IASB introduced MPMs to address the widespread use of alternative performance measures (APMs) and non-GAAP metrics. Historically, companies reported these measures outside the audited financial statements with limited transparency or consistency.

Under IFRS 18, an MPM is defined as a subtotal of income and expenses that meets all three of the following criteria:

• It is used in public communications outside the financial statements, such as management commentary, press releases, or investor presentations (oral communications, written transcripts of oral communications, and social media posts are excluded)
• It communicates management’s view of an aspect of the financial performance of the entity as a whole
• It isn’t a subtotal specifically required or commonly listed by IFRS Accounting Standards

Common examples of MPMs include adjusted operating profit, adjusted EBITDA, and similar measures that exclude items like restructuring costs or impairments from IFRS-defined subtotals. Measures that aren’t subtotals of income and expenses, such as financial ratios (return on equity, combined ratio), cash flow measures (free cash flow), or non-financial metrics (customer satisfaction, occupancy rates) don’t meet the definition.

For each MPM, IFRS 18 requires detailed disclosures in a single dedicated note within the financial statements. Companies must disclose a description of what the MPM communicates, the calculation methodology, and a reconciliation to the closest IFRS subtotal, including income tax effects and the impact on non-controlling interests for each reconciling item. Companies must also state that the MPM reflects management’s view and isn’t necessarily comparable to similar measures used by other entities

If an entity changes an MPM, introduces a new one, or stops disclosing one, it must explain the change and the reasons behind it. Changes to MPMs are treated as changes in accounting estimates under IFRS 18, which may require restating comparatives.

The critical point for audit firms.

Because MPM disclosures now sit within the financial statements, they fall within the scope of the financial statement audit under ISA 200. Under current practice, alternative performance measures typically fall under ISA 720, which applies only to ‘other information’ accompanying the audited financial statements. IFRS 18 changes that, bringing MPMs into the audited financials and subjecting them to full audit scrutiny.

3. Enhanced aggregation and disaggregation guidance

IFRS 18 introduces structured principles for how entities group and separate items across the primary financial statements and notes. The core principles are straightforward:

• Aggregate items that share similar characteristics (nature, function, measurement basis, size, geographical location, regulatory environment)
• Disaggregate items with dissimilar characteristics
• Don’t obscure material information through grouping

These principles apply across the full set of financial statements, not just the income statement. 

One important new requirement relates to the presentation of operating expenses. Companies can present operating expenses by nature (raw materials, salaries, depreciation), by function (cost of sales, selling expenses, administrative expenses), or using a mixed approach. If any operating expenses are presented by function, the entity must also disclose specified expenses by nature in the notes, including depreciation, amortization, employee benefits, and impairment losses.

IFRS 18 also tightens requirements around labeling. The use of “other” as a label (for example, “other expenses”) is discouraged. Entities should use labels that describe the characteristics of the aggregated items as precisely as possible. If an entity does use “other,” it may need to provide additional disaggregated information in the notes.

What IFRS 18 Means for Audit Firms

IFRS 18 expands the scope and complexity of audit work in several ways.

• MPMs become auditable. Auditors need to assess whether MPM definitions are reasonable, whether reconciliations to IFRS subtotals are accurate and complete, and whether the disclosures faithfully represent what they claim. This requires understanding what measures management uses in external communications and evaluating whether those measures meet the IFRS 18 definition.
• Classification judgments require deeper analysis. The five-category model introduces new judgment areas, particularly around entities with specified main business activities. Determining whether investing in assets or providing financing to customers qualifies as a main business activity involves evaluating entity-specific evidence that requires thorough documentation and review.
• Retrospective restatement creates additional first-year work. Auditors review both the current period and the restated comparative under IFRS 18, along with the required reconciliation between the IAS 1 and IFRS 18 presentations.
• Aggregation and disaggregation decisions are a more prominent audit area. With more structured requirements around how information is grouped and labeled, auditors need to evaluate whether management’s judgments about aggregation produce useful and non-misleading presentations. The new restrictions on using “other” as a catch-all label also require auditors to assess labeling choices more closely.

Firms should start adapting their methodology, workpaper templates, and training materials well ahead of 2027 to be ready when clients begin reporting under the new standard.

What IFRS 18 Means for the Office of the CFO

For finance teams, IFRS 18 touches systems, processes, disclosures, and external communications.

• Chart of accounts mapping. Finance teams need to map their current chart of accounts to the five IFRS 18 categories. For multi-entity organizations running multiple ERPs, this is a significant operational lift. Every transaction needs to be classifiable as operating, investing, or financing (or taxes or discontinued operations), and the classification depends on the nature of the underlying asset, liability, or transaction, not just the income or expense type.
• New mandatory subtotals may reshape how the market reads your numbers. Operating profit, as defined by IFRS 18, may look different from the operating profit line that some entities currently present. That difference could have downstream effects on investor communications, analyst models, covenant calculations, and compensation structures tied to specific profit metrics. Finance teams should assess those impacts early and communicate changes to investors proactively.
• MPM disclosure requirements formalize what may already be informal. If your organization uses adjusted EBITDA, adjusted operating profit, or any similar measure in earnings calls, press releases, or investor presentations, those measures likely need to be assessed against the IFRS 18 definition. If they qualify as MPMs, they’ll require formal disclosure in the financial statements, complete with reconciliations and tax-effect calculations.
• 2026 comparatives mean preparation starts now. Because IFRS 18 requires retrospective application, the 2026 reporting period becomes the comparative year in the first IFRS 18-compliant financial statements. Teams need to start capturing data in a way that supports restructuring under the new framework, even before mandatory application begins.
• Cross-functional coordination is required. IFRS 18 adoption involves FP&A, investor relations, legal, IT, and in some cases HR (where compensation metrics are tied to profit measures). This isn’t a project that stays within accounting.

IFRS 18 vs. IAS 1: Key Differences at a Glance

How to Prepare for IFRS 18 Adoption

The 2027 effective date may feel distant, but retrospective application means the real preparation window is already open.

• Assess impact now. Review your current P&L structure and identify where classifications change under the five-category model. Determine how items like foreign exchange differences, fair value gains and losses, and impairments are classified under the new framework. Identify whether your entity has specified main business activities that trigger additional classification requirements.
• Map your chart of accounts. Determine how existing line items align to operating, investing, and financing categories. Flag areas that require judgment, such as hybrid instruments, FX differences on different liability types, and income from assets that may or may not generate returns independently.
• Identify your MPMs. Audit all non-GAAP measures currently used in external communications and determine which meet the IFRS 18 definition. Consider whether adjusting which measures you communicate may be more efficient than building the full disclosure infrastructure for every existing measure.
• Build your comparative baseline. Retrospective application requires that 2026 comparatives be presented under IFRS 18. Start capturing data and structuring disclosures ahead of the effective date.
• Engage cross-functional teams early. Bring investor relations, legal, IT, and FP&A into the conversation as soon as possible. If compensation metrics, debt covenants, or investor communication practices are tied to specific profit measures, those areas need lead time to adjust.
• For audit firms: update testing approaches, templates, and training. MPM audit requirements and new classification judgments represent new work. Firms should develop internal guidance, identify the areas requiring the most judgment, and train engagement teams before the first adoption cycle.

How Technology Supports the Transition

The operational lift of IFRS 18 adoption scales with the complexity of the organization. High transaction volumes, multiple ERPs, and complex entity structures all amplify the effort required to reclassify income and expenses, build new reporting structures, and produce MPM disclosures with the required reconciliations.

AI-powered accounting platforms can reduce that burden by supporting chart of accounts mapping, automating classification at the transaction level, and maintaining traceability between source documents and financial statement line items. 

The key requirement: any technology supporting IFRS 18 adoption must produce auditable, traceable outputs.

Trullion’s Audit Suite and Knowledge Room are built for this kind of work, connecting source documents to validated, traceable data across complex workflows. Whether you’re an audit firm preparing for new MPM testing requirements or a finance team restructuring your chart of accounts, the platform supports connected, audit-ready work from day one.

FAQs

What is IFRS 18? 

IFRS 18, Presentation and Disclosure in Financial Statements, is the new IFRS standard that replaces IAS 1. Issued by the IASB on 9 April 2024, it introduces a defined structure for the statement of profit or loss, mandatory disclosures for management-defined performance measures, and enhanced rules for aggregation and disaggregation of information in financial statements.

When does IFRS 18 take effect? 

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, including interim financial statements. Early adoption is permitted.

Does IFRS 18 change how items are measured? 

No. IFRS 18 affects presentation and disclosure only. Recognition and measurement of items continue to be governed by the relevant existing IFRS standards (for example, IFRS 15 for revenue, IFRS 16 for leases, IFRS 9 for financial instruments).

What happens to IAS 1?

IAS 1 is withdrawn and replaced by IFRS 18. Some of its general requirements, such as going concern considerations and current/non-current classification of assets and liabilities, have been carried forward into IFRS 18. Other requirements, such as those related to accounting policies and changes in estimates, have moved to IAS 8 (retitled Basis of Preparation of Financial Statements).

Do I need to restate comparatives? 

Yes. IFRS 18 requires retrospective application, which means the comparative period must be restated under the new framework. For entities with a calendar year-end adopting in 2027, the 2026 comparative year must be presented under IFRS 18. A reconciliation between the IAS 1 and IFRS 18 presentations is also required for the comparative year.

What’s the difference between IFRS 18 categories and IAS 7 categories? 

While IFRS 18 and IAS 7 both use the terms operating, investing, and financing, the categories serve different objectives and aren’t fully aligned. For example, cash spent to acquire property, plant, and equipment is classified as an investing cash flow under IAS 7, but the income and expenses from using that equipment in operations are classified as operating under IFRS 18. The IASB chose not to align the definitions because the income statement and the cash flow statement have different purposes. That said, IFRS 18 does amend IAS 7 to require operating profit or loss as the starting point for the indirect method and removes existing optionalities for classifying interest and dividend cash flows.

Are MPMs mandatory? 

MPM disclosure is mandatory for any entity that uses subtotals of income and expenses meeting the IFRS 18 definition in public communications outside the financial statements. If an entity doesn’t use such measures, no MPM disclosure is required. However, the definition is broad, and IFRS 18 includes a rebuttable presumption that any subtotal of income and expenses used in public communications communicates management’s view of financial performance.