IFRS 18 Operating Expenses: Why the Function-by-Nature Matrix Is Harder Than It Looks

In June 2026, the IFRS Interpretations Committee (IFRIC) published a tentative agenda decision on the presentation of operating expenses under IFRS 18 — one of eight tentative agenda decisions released in the IFRIC Update, June 2026, open for comment until 9 September 2026. The conclusion: no standard-setting needed. In other words, no new rules were created.

But read the decision carefully, and it reveals the true nature of what IFRS 18 demands for operating expenses. Here is the punchline:

Your line items on the face of the P&L are more flexible than you might think. But behind them, you will need a data infrastructure — across your entire group — capable of producing a function-by-nature matrix.

This article walks through the basics of by-nature vs by-function presentation, what the IFRIC decision actually confirmed, and where the real implementation burden sits.

New to IFRS 18's overall structure? Our video walkthrough covers the categories, the Operating Profit subtotal, and MPMs before we go deep here:

1. A Quick Refresher: By Nature vs By Function

There are two traditions for presenting operating expenses.

Presentation by nature: expenses grouped by what the money was spent on.

Raw materials / Employee benefits / Depreciation / Other operating expenses

This is the traditional style in continental Europe (Germany, France).

Presentation by function: expenses grouped by what activity they served.

Cost of sales / Selling expenses / General and administrative expenses / R&D

Function-based presentation is often described as a matter of local convention. Section 4 of this article suggests a different explanation: a single aggregated cost-of-sales line may be less a cultural choice than the practical ceiling of what a consolidated group can actually trace.

2. What the IFRIC Decision Confirmed: Mixed Presentation Is Allowed — With Conditions

(1) Mixed presentation is required when it provides the most useful information

IFRS 18 does not allow entities to choose freely between presentation by nature, by function, or a mixed approach. Paragraph 78 requires whichever presentation provides the most useful structured summary. If that is a mixed presentation, then a mixed presentation is required.

(2) Expenses of the same nature may be split

Employee benefits for manufacturing staff may remain within cost of sales, while head-office employee benefits are presented separately as a nature line. The only condition (paragraph B82) is that line item labels must not mislead. A label such as "Head-office employee benefits" makes clear what is included—and what is not.

So the face of the P&L can be designed with considerable flexibility, as long as the labels are honest. Viewed in isolation, this looks like good news.

3. But the Real Story Is in the Notes: The Function-by-Nature Matrix

Behind this presentational flexibility, paragraph 83 of IFRS 18 imposes a disclosure requirement with no escape route. If you present operating expenses by function (or mixed), you must disclose the amounts of the following five items included in each function line:

1. Depreciation

2. Amortisation of intangible assets

3. Employee benefits

4. Impairment losses

5. Write-downs of inventories

This is a clear step up from the old IAS 1 paragraph 104, which required only three items (depreciation, amortisation, employee benefits) — and only in total.

Before (IAS 1): three items, disclosed as group-level totals.

After (IFRS 18): five items (two more), allocated to each function line.

Visualised:

From "one total" to "one matrix." Five rows, and as many columns as you have function lines on your P&L. And each column must reconcile to the line item on the face of the statement — allocation differences that never mattered under total-only disclosure suddenly have nowhere to hide.

4. The Real Burden: What Does "Employee Benefits in Cost of Sales" Even Mean?

"One matrix — how hard can it be?" At the parent-entity level, not very. Your cost accounting system already holds element-level data on labour and depreciation.

The problem is consolidation. And the problem is not volume of work — it is that the number you are asked to disclose is not well-defined until you define it yourself.

Take the smallest possible group. Company A manufactures components: this year it incurs 100 of employee benefits and 40 of depreciation, and sells its entire output to Company B for 200. Company B combines those components with its own materials and labour, runs them through a multi-stage production process, sells part of the finished goods externally, and holds the rest in inventory at year-end.

Now answer one cell of the matrix: employee benefits included in consolidated cost of sales.

Three questions immediately surface — and IFRS 18 answers none of them explicitly.

First: from whose books? In B's ledger, A's employee benefits do not exist. They arrived as "purchases" — a single price of 200 in which labour, depreciation and margin have already fused. The consolidated financial statements present the group as a single entity, so in principle that 200 must be looked through and re-characterised as the group's own labour and depreciation. But the only party who knows the composition is A, and the only party who knows what happened to the components afterwards is B. Neither can produce the number alone.

Second: what does "included in cost of sales" mean when incurrence and expensing diverge? A incurred 100 of employee benefits this year. But some of those benefits are now sitting inside B's work-in-progress and finished goods inventory, and will not become consolidated cost of sales until next year — while this year's cost of sales contains A's labour from last year's inventory. "Employee benefits included in cost of sales" is not "employee benefits incurred by companies whose output feeds cost of sales." It is a flow through a multi-stage inventory pipeline, and the two amounts equal each other only by coincidence.

Third: must the composition match the goods actually sold? B's production process does not preserve identity. A's components merge with external materials into work-in-progress, get absorbed into products at standard cost, and absorb variance allocations on top. By the time a unit is sold, "how much of A's labour is in this unit" is a question that even B's own cost accounting was never designed to answer at the individual-element level — that is precisely what standard costing exists to avoid. Any composition you assign to consolidated cost of sales will be a modelled composition, not an observed one.

Add the realities of an actual group — multi-tier supply chains where the answer to question one must be chained across three or four intercompany hops, principal structures where the invoicing entity and the manufacturing entity are different companies so the commercial flow no longer tracks the physical flow, and transfer-pricing markups layered in between — and the conclusion becomes unavoidable:

For a manufacturing group, the function-by-nature matrix has no exact answer. What IFRS 18 actually demands is that you define one: an allocation policy that converts intercompany purchases into group-level nature elements, a convention for the incurred-versus-expensed timing gap, and a materiality threshold for where the look-through stops. The implementation project is not "add fields to the reporting package." It is designing a defensible approximation — and agreeing it with your auditor before the first reporting date, not after.

A note from practice. The author has led exactly this kind of consolidated cost-visibility project — for management purposes, where tolerances were far more forgiving than an audited disclosure would allow. It never fully worked. Item masters across ERPs never quite matched — tens of thousands of SKUs, and tracing even one through an intercompany transfer meant reconciling item codes and BOM structures that were never built to align. In a chemicals business, reactions yield co-products with no natural cost split. And by the time slow-moving inventory finally sold, the transactional records needed to trace its origin had often already aged out of the system. These were solved, if at all, with allocation conventions nobody outside the team ever had to defend.

Some of these are walls of scale: more mapping effort gets you closer to an answer, even if it never fully arrives. But others are not walls at all — they are the absence of a single answer to find. A shipment on the water at year-end belongs to no one's inventory count, yet its cost sits somewhere. Which exchange rate re-measures an element created in one currency, transferred in a second, and expensed in a third — transaction-date, period-average, or closing? Every choice is defensible. None is correct. No amount of data resolves that, because there is no fact underneath it to discover.

IFRS 18 now asks for an audited version of a number the author never got to a clean answer on for internal purposes alone.

5. The Bottom Line: The Data You Need — and the Story You Have to Build

For a standalone entity, the function-by-nature matrix is an extraction exercise — the data is already in the ledger. For a manufacturing group, it splits into two problems.

One is data: item masters that reconcile across ERPs, inventory movements traceable through intercompany transfers, records that survive long enough to cover slow-moving stock. Most groups don't have this yet, and building it is a real infrastructure project.

The other isn't a data problem at all. No amount of data tells you which exchange rate to use for a cost element created in one currency and expensed in another, or how to split a shared cost pool between chemical co-products. These are choices, not facts.

What closes that gap is a documented allocation policy, agreed with your auditor in advance.

IFRS 18 looks like a presentation standard.

In reality, it reaches deep into cost accounting, consolidation processes, and group data architecture.

The challenge is not producing the matrix.

The challenge is defining what the numbers in the matrix actually mean.

This article reflects the author's analysis of IFRS 18 and the IFRIC's June 2026 tentative agenda decision as of the date of publication and does not constitute accounting, audit, or legal advice. The tentative agenda decision discussed here remains open for comment until 9 September 2026 and may be revised before being finalised. Entities should consult their own advisors and auditors when determining how to apply IFRS 18 to their specific facts and circumstances.