A Comprehensive Overview of IFRS 18: A Major Reform in Financial Statement Presentation and Disclosure

Today, I’d like to summarize the big picture of IFRS 18 Presentation and Disclosure in Financial Statements, issued by the International Accounting Standards Board (IASB) in April 2024.

Designed for both readers and listeners—perfect if you find visual explanations more helpful.

In this article, you will learn:

The background of replacing IAS 1 with IFRS 18.
The "5 Categories" and "Mandatory Subtotals" introduced to the Statement of Profit or Loss (P/L).
Disclosure requirements for the newly defined "Management-defined Performance Measures (MPM)."
Clear principles for the aggregation and disaggregation of information.

This article reflects the latest requirements for mandatory implementation for annual reporting periods beginning on or after January 1, 2027 (early adoption is permitted).

💡 What is IFRS 18?

IFRS 18 is a new standard that replaces IAS 1 Presentation of Financial Statements. Through this new standard, the IASB aims to improve comparability and transparency in financial reporting, allowing investors to evaluate corporate performance more accurately.

The most significant change is the structured "Statement of Profit or Loss." For the first time, items like "Operating Profit" have been standardized, eliminating the inconsistency previously seen in practical applications across different companies.

📘 The Structure of IFRS 18

IFRS 18 is organized into several key sections as follows:

Section	Overview
Objective & Scope	Presentation and disclosure requirements for general-purpose financial statements (Para 1-8).
General Requirements	Structure of financial statements, materiality, and reporting frequency (Para 9-40).
Aggregation & Disaggregation	Principles on how to group or split information (Para 41-45).
Statement of Profit or Loss	Presentation of the 5 categories and mandatory subtotals (Para 46-85).
Other Primary Statements	OCI, Financial Position, and Changes in Equity (Para 86-112).
Notes (including MPM)	Disclosure rules for Management-defined Performance Measures (Para 113-132).

📘 The 5 Categories of the P/L Statement

A core feature of IFRS 18 is the requirement to classify all income and expenses into one of five categories in the Statement of Profit or Loss.

Category	Description
Operating	All income/expenses not classified in other categories. Represents main business activities.
Investing	Returns from assets (interest, dividends, share of profit from JVs/associates, etc.).
Financing	Activities related to raising capital, including interest on liabilities and related FX gains/losses.
Income Taxes	Income tax expense or income in accordance with IAS 12.
Discontinued Ops	Profit or loss from discontinued operations in accordance with IFRS 5.

In conjunction with these categories, two specific subtotals are now mandatory:

Operating Profit or Loss
Profit or Loss before Financing and Income Taxes

💡 Management-defined Performance Measures (MPM)

While many companies use non-IFRS metrics (e.g., Adjusted EBITDA) in communications, IFRS 18 formally defines these as "Management-defined Performance Measures (MPM)."

Definition: A subtotal of income/expenses used in public communications (press releases, presentations) to reflect management’s view of performance.
Disclosure Requirements: These must be disclosed in a single note in the financial statements, including:

Why the measure provides useful information.
An explanation of how the measure is calculated.
A reconciliation between the MPM and the most directly comparable IFRS subtotal.

📘 Principles of Aggregation and Disaggregation

IFRS 18 strengthens the principles of aggregation and disaggregation based on "Materiality."

Aggregation: Grouping items with shared characteristics.
Disaggregation: Separating items with different characteristics.
Limiting "Other" Items: Guidance is provided to prevent important information from being "obscured" by grouping too many items into "Other."
Disclosure of Expenses by Nature: Even if the P/L is presented by function (e.g., Cost of Sales), companies are now required to disclose specific "by-nature" items (depreciation, employee benefits, etc.) in the notes.

💡 Effective Date and Transition

Effective Date: Mandatory for annual periods beginning on or after January 1, 2027.
Comparative Info: Retrospective restatement of comparative information for the prior period is required.
Early Adoption: Permitted.

📘 IAS 1 vs. IFRS 18: Key Changes

Finally, I would like to share a macro-level comparison table. IFRS 18 is not merely a revision of IAS 1; it represents a strategic restructuring that separates the standards for financial statement presentation from those governing accounting estimates and underlying assumptions.

The table below summarizes the transition from IAS 1 to IFRS 18 and other related standards.

Category	Previous Requirements (IAS 1)	New Requirements / Relocation (IFRS 18 & others)	Key Change Points
1. General Principles	Contained principles like fair presentation and statement of compliance.	Relocated to IAS 8	Redefined as the basis of accounting policies rather than just presentation.
2. P/L Structure	No strict classification; choice between by function or by nature only.	IFRS 18 (3 New Categories)	Mandatory classification into Operating, Investing, and Financing categories.
3. Mandatory Subtotals (P/L)	No formal definition of Operating Profit; used voluntarily by entities.	IFRS 18 (Mandatory Operating Profit)	Presentation of Operating Profit is now mandatory for all entities.
4. Non-GAAP Measures	Used freely outside financial statements (e.g., in press releases).	IFRS 18 (Introduction of MPM)	Adjusted profits are now classified as MPMs, requiring reconciliation in the audited notes.
5. Aggregation & Disaggregation	Aggregated based on materiality with limited specific guidance.	IFRS 18 (Enhanced Guidance)	Clarifies the roles of the Primary Statements (summary) and Notes (details) to prevent obscuring info.
6. Statement of Cash Flows	Choices existed for classifying interest and dividend cash flows.	IAS 7 (Amended)	Classification options are significantly restricted to align with the P/L categories.
7. Going Concern & Estimates	Requirements for sources of estimation uncertainty were in IAS 1.	Relocated to IAS 8	Consolidated into IAS 8 to separate presentation rules from accounting policy/estimate rules.
8. Other Comprehensive Income (OCI)	Distinction based on whether items are reclassifiable (IAS 1).	IFRS 18 (Maintained)	The basic classification remains, but it is integrated into the new IFRS 18 structure.

💡 Final Thoughts

IFRS 18 is not just a rewrite of IAS 1; it is a fundamental shift in how the P/L is structured. The standardization of "Operating Profit" and the integration of MPMs into the audited notes will require significant updates to financial systems and reporting processes.

From the perspective of consolidated accounting and system design, this is a vital opportunity to redefine how companies communicate their performance to investors.

Disclaimer: This article is for general informational purposes only and does not constitute professional or technical advice. Please consult with a qualified professional before making decisions related to financial reporting.