The Transition to IFRS 18 and its Implications for Financial Reporting: Between Conceptual Innovation and the Need for Early Preparation
The adoption of International Financial Reporting Standard 18 Presentation and Disclosure in Financial Statements (IFRS 18) marks a major milestone in the evolution of international financial reporting. It replaces International Accounting Standard 1 Presentation of Financial Statements (IAS 1) and enhances the guidance on the structure and content of financial statements regarding financial performance, performance indicators and the structure of the statement of profit or loss and other comprehensive income.
Since IFRS 18 introduces a major structural reform, both in the presentation of primary financial statements and in the way information is grouped (aggregated or disaggregated) and presented, it is of the utmost importance that entities start the transition process as soon as possible. Although its application only becomes mandatory for periods beginning on 1 January 2027, in order to provide consistent comparative figures with the first reporting under this standard, it is critical that ERP systems, charts of accounts and internal and external reporting procedures be adapted from the start of the 2026 financial year. At the same time, entities must review how their operations are classified and disclosed so they can proactively collect data and ensure accurate reporting of each category of revenue and expenses required under the new standard.
Compared to IAS 1, which provides a general framework for structuring financial statements but in practice allows entities considerable flexibility in defining their own subtotals, aggregating and disaggregating items, using custom performance indicators and presenting information in the notes, often in a way that is difficult to follow, IFRS 18 imposes a standardised, more disciplined and prescriptive framework aligned with investor expectations and international best practices. This flexibility possible under IAS 1 has reduced comparability among entities, affecting users’ ability to consistently assess financial performance.
Mandatory Classification of Revenues and Expenses into Five Categories
One of the essential changes introduced by IFRS 18 is the requirement to classify revenues and expenses into five mandatory categories:
- Operating activities, which include revenues and expenses not presented in the investment or financing categories
- Investing activities, which include income from interest, dividends from non-operational investments – investments that generate returns independently of other resources
- Financing activities, including financing costs and related expenses
- Income taxes
- Discontinued operations
This classification eliminates the ambiguities present under IAS 1 and introduces common terminology for entities, investors and auditors. The operating activities category – the central milestone in performance analysis used by investors and the starting point for forecasting future cash flows – is defined much more clearly under IFRS 18 than under IAS 1, which does not formally define it.
Although the first three categories resemble those in IAS 7, they are not identical. For example, gains and losses from foreign exchange differences related to financing activities will be presented in that category, while those related to trade receivables or payables will be presented under operating activities.
The new structure requires entities to re-examine internal reporting flows, the relationship between the business model and item classification, and the links between internal financial analysis and IFRS 18-compliant financial statement presentations.
Mandatory Subtotals: Enforcing Performance Presentation Discipline
IFRS 18 requires all entities to present two standardised subtotals:
- Profit/Loss from operating activities
- Profit/Loss before financing and income taxes
These do not exist as explicit requirements under IAS 1 and will have a major impact on communicating financial performance. Subtotals become common benchmarks across industries and companies, significantly reducing arbitrariness in current reporting.
For many reporting entities, implementing these subtotals will involve adjusting internal performance indicators, reconfiguring accounting policies and reviewing financial contracts containing debt covenants based on operating profit indicators.
Management-Defined Performance Measures
A significant innovation of IFRS 18 is the introduction of management-defined performance measures, which reflect how management monitors performance and are related to the statement of profit or loss but are not defined by international financial reporting standards.
Currently, many public entities use indicators such as EBITDA (earnings before interest, taxes, depreciation, and amortisation), adjusted for non-recurring or exceptional items, adjusted net income, core operating profit or revenues from main activities. IAS 1 does not regulate these presentations, creating risks regarding comparability and consistency.
IFRS 18 establishes clear requirements: precise definitions of each performance measure, reconciliation of these measures with IFRS totals and subtotals, justification of their use, maintaining comparability over time and explaining methodology changes.
This brings formal discipline to performance communication, making management-defined performance measures an integral part of financial reporting rather than mere narrative elements.
Grouping of Information and its Presentation: A Structured Approach
IFRS 18 strengthens principles for presenting information by introducing detailed requirements on:
Aggregation and Disaggregation
- Entities must strike an appropriate balance between detail and conciseness
- Aggregation is allowed only when grouped items share similar characteristics
- Disaggregation is mandatory when items differ significantly by nature, function or risk
Appropriate Labels
- Place items in the primary financial statements and the notes to fulfil their complementary roles. It must be clear, unbiased and consistent with the economic nature of the items
- IFRS 18 restricts the use of labels that could cause confusion with defined terms
The IFRS 18 approach classifies and presents income and expense items based on materiality and the “characteristics” test, considering nature (what is it?), function (what role does it play?) and measurement basis (how is it measured?). For example, under IAS 1, interest and similar items could be grouped as “finance costs”, whereas IFRS 18 requires differentiation between interest expenses (financing) and interest income (which may be operating or investing, depending on the activity). For other income or expenses, IAS 1 is relatively permissive, but under IFRS 18, the term “other” is acceptable only for aggregations of individually insignificant items.
Effects of IFRS 18 on Other Standards
Although IFRS 18 does not explicitly amend other standards, its application has notable implications:
- IAS 7 – Statement of Cash Flows
Classifications introduced in the income statement will require conceptual consistency with cash flows, affecting how users interpret the relationship between profit and cash flow - IAS 34 – Interim Financial Reporting
Interim statements must align with IFRS 18 structure starting in 2026 to ensure continuity and comparability - IAS 33 – Earnings per Share
New subtotals may influence how entities present adjusted EPS or other performance metrics in investor communications
Preparing for the Transition to IFRS 18: Recommendations for Effective Implementation
Ahead of the first reporting exercise under IFRS 18 (2027), reporting entities should adopt a phased approach:
- Gap Analysis
Map current income statement lines to the five IFRS 18 categories and identify discrepancies; review item descriptions and adapt to IFRS 18 grouping and detail requirements - Adjust Systems and Internal Processes
ERP systems, charts of accounts and internal/external reporting procedures must be adapted to reflect the new structure - Recalculate and Restate Historical Indicators
To ensure comparability, financial information from 2026 and even 2025 should be recalibrated under IFRS 18 - Update Technical Documentation and Accounting Policies
Accounting manuals and IFRS policies must be revised to meet IFRS 18 requirements. This includes reviewing income and expense classification, ensuring faithful representation, justifying classification bases and defining performance indicators - Staff Training and Internal Communication
Implementing IFRS 18 impacts not only finance but also strategy, risk and investor relation functions
In conclusion, IFRS 18 represents a major step in modernising financial reporting by standardising performance presentation and strengthening information discipline. Compared to IAS 1, the new standard introduces:
- a clear structure for the statement of profit and loss
- new mandatory subtotals
- explicit regulation of management-defined performance measures
- strict requirements for aggregation and disaggregation
- harmonisation of presentations across entities and industries
Although it does not come into effect until 2027, early preparation is essential to ensure a smooth transition, given the need for comparative data and the scale of operational changes. IFRS 18 is not just a technical update – it is a paradigm shift aimed at enhancing transparency, relevance and comparability in international financial reporting.
This is not just a compliance update – it impacts systems, reporting processes, investor communication and business strategy. Early planning for the transition is essential to avoid last-minute disruptions, ensure accuracy and transparency in reporting, and build trust among interested stakeholders.
