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IFRS 18: How the new presentation requirements will change financial statements
IFRS 18 Presentation and Disclosure in Financial Statements (IFRS 18) affects all entities reporting under IFRS Accounting Standards. IFRS 18 is, undoubtedly, one of the most significant changes to financial statement presentation in recent years.
The new Standard will replace IAS 1 Presentation of Financial Statements (IAS 1) for annual reporting periods beginning on or after 1 January 2027, and is intended to promote better structured and comparable income statements.
IFRS 18 requires entities to restate comparative information unless impracticable, helping users compare financial performance across reporting periods. While IFRS 18 includes new presentation and disclosure requirements; it does not fundamentally change existing recognition and measurement principles. We set out the key presentation changes.
Key presentation changes
Categories of the statement of profit and loss
IFRS 18 introduces categories for classifying income and expenses based on the entity’s “main business activities”. The objective is to create a more structured statement of profit and loss and improve comparability between entities.
Historically, companies often presented performance measures differently, making comparisons difficult. Under IFRS 18, income and expenses are allocated into prescribed categories, creating greater consistency.
The new categories introduced are operating, investing and financing. While these categories may appear similar to line items presented in the statement of cash flows, these categories are distinct from those used in the statement of cash flows.
The table below summarises the requirements:
Category | Description |
Operating | This is the residual category which will include all items not required to be classified in one of the other categories including those that are volatile and non-recurring. This includes all income and expenses arising from an entity’s main business activities. |
Investing | Typically includes income and expenses arising from assets that generate returns independently of other resources held by an entity, for example:
|
Financing | Consists of income and expenses from transactions that involve only the raising of financing, for example
|
Income taxes | Consists of income tax expense recognised in profit or loss in accordance with IAS 12 Income taxes and any tax-related foreign exchange differences. We expect in the UK and Ireland for this category to be generally described as taxes. |
Discontinued operations | Consists of income and expenses from discontinued operations in accordance with IFRS 5 non-current assets held for sale and discontinued operations. |
Presenting operating expenses by category
Entities must also present operating expenses in a way that provides the most useful structured summary. Expenses can be classified by nature, according to their underlying type or characteristics (e.g. raw materials) or by function, accordingly to the related business activity (e.g. cost of sales).
The following provides an illustrative presentation:
Nature | Function | Mixed: nature and function |
Revenue XX | Revenue XX | Revenue XX |
Purchase of raw materials (X) | Cost of sales (X) | Cost of sales (X) |
Salaries (X) | Gross profit (X) | Gross profit (X) |
Amortisation of intangible assets (X) | Distribution costs (X) | Administration expenses (X) |
Depreciation (X) | Administration expenses (X) | R&D expenses (X) |
Operating profit X | Operating profit X | Operating profit X |
The standard introduces a concept of “main business activity” to classify income and expenses into either operating, investing or financing categories. For example, a main business activity might be manufacturing goods to sell to customers.
Furthermore, the standard requires an entity to assess whether it has a “specified main business activity”, which is defined as either investing in particular types of assets, or providing financing to customers.
Examples of entities with a specified main business activity include:
Investing in assets | Providing finance to customers |
Investment entities | Banks and other lending institutions |
Investment property companies | Lessors that provide financing to customers in finance leases |
Insurers | Entities that provide financing to customers to enable those customers to buy the entity's products |
Where an entity has a “specified main business activity”, some items which would be classed as “investing” or “financing” above would be instead classified as “operating” activities. For example, rental income for an investment property company would cease to be an “investing” activity and become “operating”.
The following illustrative Statement of Profit or Loss is based on the IFRS 18 illustrative examples. The Statement of Profit or Loss is for an entity that does not have a “specified main business activity” (e.g. it does not invest in assets or provide finance to customers as its main business activity) and has considered it appropriate to present expenses based on their function.
Figure 1 - Illustration of a presentation of the statement of profit or loss
Revenue | Operating |
Cost of Sales | |
Gross profit | |
Other operating income | |
Selling expenses | |
Research and development expenses | |
General and administrative expenses | |
Goodwill impairment loss | |
Other operating expenses | |
Operating profit | Investing |
Share of profit and gains on disposal of associate and joint ventures | |
Profit before financing and income taxes | Financing |
Interest expense on borrowings and lease liabilities | |
Interest expense on pension liabilities | |
Profit before income tax | Income taxes |
Income tax expense | |
Profit from continuing operations | |
Discontinued | |
Loss |
Grouping (aggregation and disaggregation) of information
In addition to the new profit or loss categories and mandatory subtotals, IFRS 18 also introduces enhanced guidance on how information should be aggregated and disaggregated throughout the financial statements.
The objective is to provide users with useful information without overwhelming them with unnecessary detail or conversely, obscuring important information. In broad terms:
Aggregation is the addition of assets, liabilities, equity, income, expenses and cash flows that share characteristics and are included in the same classification
Disaggregation is the separation of an item into component parts that have characteristics that are not shared, and an entity should disaggregate items whenever the resulting information is material.
The requirements apply not only to line items presented in the primary financial statements, but also to information disclosed in the notes. Some of the key principles that entities should ensure when disaggregating or grouping information:
Items should be classified and aggregated based on shared characteristics and disaggregated based on dissimilar characteristics. For example, revenue from product sales and revenue from subscriptions may need to be presented separately, whereas similar professional service revenues may be aggregated
Material information should not be obscured by combing dissimilar items
Items presented as line items in the primary financial statements should provide useful, structured summaries
Information should be aggregated or disaggregated to provide material information within the notes
To apply the principles of aggregation and disaggregation discussed above, an entity should aggregate items based on shared characteristics and disaggregate items based on characteristics that are not shared by applying the following steps:
Identify the assets, | ➜ | Classify and aggregate | ➜ | Disaggregate items based |
Judgement is required in deciding the appropriate level of aggregation and disaggregation across the financial statements, based on similar or dissimilar characteristics. Such characteristics include:
Nature of the item
Function of the item
Frequency of the item of income or expense or whether it is recurring or non-recurring
Measurement basis
Relative size
Geographical location
Regulatory environment
The S&W expert view on IFRS 18
IFRS 18 introduces significant changes to how financial performance is presented, including new categories within the statement of profit or loss, mandatory subtotals and enhanced requirements for aggregating and disaggregating information. While the changes are primarily focused on presentation and disclosure, many organisations may need to reassess their reporting processes, systems and controls to ensure they can meet the new requirements.
The new presentation requirements will affect all reporting entities, one of the most closely scrutinised aspects of IFRS 18 is the introduction of new disclosure requirements for management-defined performance measures (MPMs). We'll also explore what qualifies as an MPM, the disclosures required and practical steps organisations should be taking now to prepare.
With IFRS 18 taking effect from 1 January 2027, organisations should now assess how the standard will affect their reporting processes and what changes may be needed ahead of implementation.