A Comprehensive Guide for Finance Leaders
The financial reporting landscape is undergoing a significant transformation with the issuance of IFRS 18 – Presentation and Disclosure in Financial Statements by the International Accounting Standards Board.
IFRS 18 replaces IAS 1 and introduces structured changes to how financial performance is presented, how subtotals are defined, and how management-defined performance measures (MPMs) are disclosed.
For CFOs, audit committees, and financial controllers, this is not a cosmetic change — it is a structural reform of profit or loss presentation.
Why IFRS 18 Was Introduced
Investors and regulators have long raised concerns about:
- Inconsistent income statement presentation
- Lack of comparability across industries
- Unclear definitions of operating profit
- Non-standard performance measures (e.g., adjusted EBITDA)
IFRS 18 addresses these issues by:
- Standardizing key subtotals
- Requiring classification into defined categories
- Increasing transparency of management performance measures
- Enhancing disclosure requirements
The objective is simple: improve transparency, comparability, and decision-usefulness of financial statements.
Core Structural Changes Under IFRS 18
1. Defined Categories in the Statement of Profit or Loss
Entities must now classify income and expenses into five structured categories:
- Operating
- Investing
- Financing
- Income taxes
- Discontinued operations
This categorization improves clarity around core operating performance versus financing and investing effects.
2. Mandatory Subtotals
IFRS 18 introduces required subtotals, including:
- Operating profit
- Profit before financing and income taxes
- Profit before tax
This reduces flexibility that previously existed under IAS 1 and limits presentation diversity across companies.
For analysts, this is a major shift toward comparability.
3. Management-Defined Performance Measures (MPMs)
One of the most impactful features of IFRS 18 is the formal regulation of Management Performance Measures.
If management presents non-IFRS measures such as:
- Adjusted operating profit
- Adjusted EBITDA
- Normalized earnings
They must now:
- Provide clear definitions
- Reconcile to IFRS subtotals
- Explain why the measure is useful
- Disclose calculation methodology
This significantly increases transparency and reduces earnings management risk.
4. Enhanced Aggregation and Disaggregation Principles
IFRS 18 strengthens guidance on:
- How items should be grouped
- When additional disaggregation is required
- Avoiding excessive aggregation that obscures material information
Entities must ensure that material information is not hidden within large aggregated line items.
Impact on Key Financial Metrics
IFRS 18 will directly affect:
- EBITDA calculations
- Operating margin
- Performance reporting in investor presentations
- Internal management reporting structures
- Banking covenant definitions
Organizations that heavily rely on adjusted performance metrics will need to redesign disclosures and reconciliation frameworks.
Transition and Effective Date
IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027 (subject to jurisdictional endorsement).
Early preparation is strongly recommended due to:
- System changes required
- KPI redesign implications
- Investor communication adjustments
- Audit documentation updates
Retrospective application is required, meaning prior-year comparatives must be restated.
Strategic Implications for CFOs and Boards
IFRS 18 is not just an accounting update — it is a governance matter.
Boards and CFOs should assess:
- How operating profit will be defined under the new structure
- Whether current KPIs align with IFRS 18 categories
- How management performance measures will be justified
- Impact on executive compensation metrics
- Effects on banking covenants and financing agreements
This is particularly important for listed entities, large private groups, and multinational organizations.
Practical Steps for Implementation
At Prabix, we recommend a structured implementation roadmap:
Phase 1 – Diagnostic Assessment
- Gap analysis against IAS 1 presentation
- Identify impacted KPIs and subtotals
- Map revenue and expense classifications
Phase 2 – System & Process Redesign
- Update chart of accounts
- Adjust reporting templates
- Align management reporting with IFRS 18 structure
Phase 3 – Governance & Disclosure Controls
- Establish MPM documentation framework
- Train finance teams
- Update internal policies
Phase 4 – Investor Communication Strategy
- Prepare transition messaging
- Explain restated comparatives
- Align board-level communication
Common Challenges We Anticipate
- Confusion around operating vs financing classification
- Complexity in defining Management Performance Measures
- Resistance from management used to flexible presentation
- IT and ERP reconfiguration requirements
- Reconciliation workload during transition
Organizations that start early will gain strategic advantage and avoid compliance stress.
Conclusion
IFRS 18 represents one of the most significant presentation reforms in recent IFRS history.
By standardizing income statement structure and regulating non-IFRS performance measures, the standard enhances credibility, transparency, and investor confidence.
However, the transition will require careful planning, strong governance, and cross-functional coordination.
For CFOs and finance leaders, IFRS 18 is not merely technical — it is strategic.