IFRS 18 presentation and disclosure explained

What IFRS 18 is

IFRS 18 Presentation and Disclosure in Financial Statements is the IFRS standard that replaces IAS 1 for annual periods beginning on or after 1 January 2027. It sorts income and expenses into operating, investing and financing categories, requires two new subtotals including operating profit, brings management's own performance measures into the audited notes and tightens aggregation. It matters because every IFRS reporter's income statement changes, with comparatives restated.

The IASB issued IFRS 18 in April 2024 and earlier application is permitted. As of September 2026 it has been adopted in the European Union, where the Commission endorsed it in February 2026 with the same effective date, and in the United Kingdom, where the UK Endorsement Board adopted it in December 2025. IFRS 18 changes presentation only: recognition and measurement under every other standard stay the same, so total profit does not change. What changes is how profit is broken down, labelled and explained.

Why the IASB replaced IAS 1

IAS 1 required few subtotals. Companies presented operating profit, but each defined it differently: some included the share of profit of associates, others excluded restructuring costs or foreign exchange, and investors could not compare the figure across companies. At the same time many companies reported adjusted performance measures in press releases and presentations that sat outside the audited statements, with little explanation of how they were calculated. And statements often grouped large, dissimilar amounts under vague headings such as other expenses.

IFRS 18 addresses all three problems. Much of IAS 1 survives: the requirements on going concern, accruals, current and non-current classification in the balance sheet and the statement of changes in equity were carried into IFRS 18 or moved to IAS 8 and IFRS 7 without substantive change. IAS 8 has been renamed Basis of Preparation of Financial Statements.

The five categories of income and expenses

Every item in the statement of profit or loss is classified into one of five categories: operating, investing, financing, income taxes and discontinued operations. The classification depends in part on the entity's main business activities. A bank that provides financing to customers, or an investment entity or property company that invests in assets as a main business activity, classifies some items in operating that other companies classify in investing or financing. For a typical trading, manufacturing or service company:

• Operating: the residual category, holding everything not classified elsewhere. It includes revenue and operating costs, but also impairment losses, restructuring costs, gains on disposal of equipment and foreign exchange differences on trade balances, so it is broader than many companies' current operating profit.
• Investing: income and expenses from investments in associates, joint ventures and unconsolidated subsidiaries, from cash and cash equivalents, and from other assets that generate a return individually and largely independently of the entity's other resources, such as investment property and equity or debt investments.
• Financing: for liabilities that arise only from raising finance, such as bank loans and bonds, all their income and expenses. For other liabilities, such as lease liabilities, provisions and pension liabilities, only interest and the effects of changes in interest rates, such as lease interest or the unwinding of a discount on a provision.
• Income taxes: tax expense or income under IAS 12 and related foreign exchange differences.
• Discontinued operations: as required by IFRS 5.
• Foreign exchange differences follow the item that caused them: a trade receivable's differences are operating, a foreign-currency bank loan's are financing.

Required subtotals and the statement of profit or loss

IFRS 18 requires two new subtotals in addition to profit or loss. Operating profit or loss is the total of all income and expenses in the operating category. Profit or loss before financing and income taxes is operating profit plus the investing category; entities with certain main business activities, such as some banks, do not present it. Additional subtotals are allowed if they fit the structure and are not misleading.

Within the operating category, operating expenses must be analysed on the face of the statement by nature (raw materials, employee benefits, depreciation), by function (cost of sales, distribution, administration) or on a mixed basis, choosing whichever gives the most useful structured summary. Any entity that presents any expenses by function must disclose in a single note the total of five nature expenses, namely depreciation, amortisation, employee benefits, impairment losses and write-downs of inventories, and the amount of each included in every function line item. Goodwill must now be presented as a separate line item in the statement of financial position.

Worked example: restating an IAS 1 income statement

Nordlicht Retail SE, a retailer with no specified main business activity, reports under IAS 1 as follows, in EUR thousand: revenue 50,000; cost of sales 30,000; gross profit 20,000; distribution costs 6,000; administrative expenses 5,000; other income 800 (rent from an investment property 500 and a gain on selling equipment 300); operating profit 9,800. Then share of profit of an associate 700, finance income 400 (interest on bank deposits 150, dividends from equity investments 250), finance costs 2,200 (bank loan interest 1,200, lease interest 500, unwinding of the discount on a restoration provision 200, and a foreign exchange loss on trade payables 300). Profit before tax 8,700, income tax 2,000, profit 6,700.

Under IFRS 18 the same numbers are rearranged. Profit is unchanged at 6,700, but operating profit falls from 9,800 to 9,000: the property rent of 500 moves out to investing and the exchange loss of 300 on trade payables moves in. Analysts who compared Nordlicht's old operating profit with a peer's will now compare like with like.

• Operating: revenue 50,000, cost of sales (30,000), gross profit 20,000, distribution costs (6,000), administrative expenses (5,000), gain on sale of equipment 300, foreign exchange loss on trade payables (300). Operating profit 9,000.
• Investing: investment property rent 500, share of profit of associate 700, interest on bank deposits 150, dividends received 250. Total 1,600.
• Profit before financing and income taxes: 9,000 + 1,600 = 10,600.
• Financing: bank loan interest (1,200), lease interest (500), unwinding of provision discount (200). Total (1,900).
• Profit before income taxes: 10,600 - 1,900 = 8,700. Income tax (2,000). Profit 6,700, unchanged from IAS 1.
• Part of the line-by-line reconciliation required for the comparative year: operating profit as previously presented 9,800, less investment property rent 500, less foreign exchange loss 300, gives 9,000.

Management-defined performance measures

A management-defined performance measure (MPM) is a subtotal of income and expenses that the entity uses in public communications outside the financial statements, such as management commentary, press releases or investor presentations, to communicate management's view of an aspect of the entity's financial performance as a whole, and that is not specified by IFRS. Adjusted operating profit and adjusted EBIT are typical MPMs. Subtotals that IFRS 18 lists as commonly used, such as gross profit, operating profit before depreciation, amortisation and impairments within the scope of IAS 36, and profit before income taxes, are not MPMs. Ratios, free cash flow and non-financial measures are not MPMs either, because they are not subtotals of income and expenses.

All MPMs are disclosed in a single audited note. For each one the entity explains why it is useful and how it is calculated, and reconciles it to the most directly comparable subtotal specified by IFRS, showing for each reconciling item the income tax effect, the effect on non-controlling interests and the line items affected. Nordlicht's investor presentation quotes adjusted operating profit, which excludes restructuring costs of 400 included in administrative expenses. The note reconciles operating profit 9,000 plus restructuring 400 to adjusted operating profit 9,400, with a tax effect of 100 at a 25 percent rate and no non-controlling interest effect. Changes to an MPM, new MPMs and dropped MPMs must also be explained.

Aggregation, disaggregation and the word other

IFRS 18 gives the primary statements and the notes separate roles. The primary statements provide a useful structured summary; the notes provide the material detail. Items are aggregated when they share characteristics and disaggregated when they do not, whenever the resulting information is material. Characteristics that can justify separate presentation include nature, function, measurement basis, size, geography, and whether an item is recurring.

Labels such as other expenses are discouraged. An entity must look for a more informative label and, if an aggregated item still has to be called other, disclose information about its composition. For many preparers this is the most labour-intensive part of the transition, because every catch-all account in the chart of accounts has to be examined, and some have held unrelated items for years.

Consequential changes to the cash flow statement and other standards

IFRS 18 amends several other standards at the same time. The changes that affect a typical company's reporting and systems:

• IAS 7: the indirect method must start from operating profit or loss rather than a choice of profit figures.
• IAS 7: for entities without specified main business activities, the classification options disappear. Interest received and dividends received are investing cash flows; interest paid and dividends paid are financing cash flows.
• IAS 33: additional earnings per share figures may be disclosed only if the numerator is a total or subtotal listed in IFRS 18 or required by IFRS, or an MPM.
• IAS 34: in the first year, condensed interim statements must show the IFRS 18 headings and required subtotals, and give the transition reconciliation.
• IAS 8: renamed Basis of Preparation of Financial Statements and now holding some requirements moved from IAS 1.
• IFRS 19: the reduced-disclosure standard for eligible subsidiaries has been amended for IFRS 18, with effect from 1 January 2027.

What IFRS 18 changes in your chart of accounts and reporting

IFRS 18 applies retrospectively, so a calendar-year company presenting its first IFRS 18 statements for 2027 must restate 2026 and reconcile each line of the 2026 income statement from the IAS 1 amounts to the IFRS 18 amounts. The first half-year interim report in 2027 needs the same reconciliation. The 2026 data therefore already has to be mappable to the new categories. For most finance teams the real work is in the ledger, not the note:

• Give every income statement account a single IFRS 18 category, and split any account that mixes categories, such as finance costs holding both loan interest and trade exchange differences, or other income holding both investment property rent and disposal gains.
• Separate foreign exchange accounts by source: trade balances (operating), borrowings (financing), and investments or cash held for investment (investing).
• Record interest on cash and cash equivalents apart from other interest income, because for most companies it moves to investing.
• If expenses are presented by function, capture depreciation, amortisation, employee benefits, impairment and inventory write-downs by function, typically through cost centres or departments on the journal lines.
• Flag the items management excludes from its MPMs, such as restructuring or acquisition costs, with a consistent account or dimension so the reconciliation and its tax effects can be produced every period.
• Replace catch-all other accounts with named accounts wherever the amounts are material.
• Keep a mapping of old to new presentation for the comparative year, and document the main business activity assessment, which is made at the reporting entity level.

A transition plan for 2026 and 2027

For a calendar-year entity the comparative year, 2026, is already under way, so the order of work matters. Finish the main business activity assessment and the category mapping first, because everything else depends on them. Then change the chart of accounts from the start of a period so that restated comparatives can be produced from the ledger rather than rebuilt by hand. Draft a dry-run 2026 income statement and MPM note in IFRS 18 format with the auditors before the first interim period of 2027 closes.

Two communication tasks run alongside. Lenders should be asked whether covenant definitions that refer to operating profit need amending, since the reported figure may move. Investor relations should review every measure used in public communications, because any subtotal of income and expenses used there becomes an MPM that the audited note must reconcile.

Preparing for IFRS 18 in Skyline Nexus ERP

Skyline Nexus ERP already keeps presentation data on the account rather than in a spreadsheet. Each account type under Fiscal Authority > Chart of Accounts > Account Types carries a P&L Category (Cost of Goods Sold (COGS), Operating Expense, Other or Financial Expense), a Balance Sheet Liquidity classification and a Cash Flow Activity (Operating, Investing or Financing), and Settings > Report Classifications can auto-populate them. The Income Statement shows Revenue, Cost of Goods Sold, Gross Profit, Operating Expenses, Operating Income, Other Income, Other Expenses and Net Income, with Compare With for the restated comparative year, and an EBIT & EBITDA Report is available under Tax & Compliance Reports.

To present in IFRS 18's categories, split mixed accounts into separate GL codes whose account types map cleanly to operating, investing or financing, then assemble the IFRS 18 layout from the Trial Balance export in Excel. Cost centres on journal lines, analysed in the Cost Center Analysis report, can carry the function split for the by-nature note. Note that the Skyline Nexus Cash Flow report is a direct analysis of cash and bank movements, which IAS 7 permits; prepare the indirect reconciliation starting from operating profit alongside it in the year-end working papers. Our guide on financial statements and the year-end audit pack covers exporting these reports for the auditor.

Related guides

IFRS 18 sits on top of every other standard in this series. These guides continue from here.

• What is IFRS: the framework, who must use it and a map of the standards.
• IAS 21 foreign currency accounting: the exchange differences IFRS 18 now splits by category.
• IFRS 16 leases: lease interest in the financing category and the cash flow effects.
• How to read financial statements: the four statements and how they connect.
• Trial balance to financial statements: how the ledger becomes the statements.
• Designing a chart of accounts: dimensions instead of account proliferation.
• Financial ratio analysis: ratios built on operating profit and EBITDA.