IAS 1 Presentation of Financial Statements will soon be replaced by a new IFRS Accounting Standard, likely to be numbered IFRS 18. While much of the existing content of IAS 1 will remain unchanged, IFRS 18 will introduce significant changes to the presentation of the primary financial statements, especially the statement of profit or loss.


Comparability and transparency are key qualities that primary users, such as investors, expect when it comes to financial information presented in financial statements. The International Accounting Standards Board (IASB) heard feedback that entities often fell short in this regard, particularly when reporting on their financial performance.

In response, the IASB undertook a project to facilitate clearer presentation of financial information in a more structured format to allow for improved comparability of this information between entities. Users of financial statements will then be better placed to make investing or lending decisions.

What are the key changes?

While the current IAS 1 will be withdrawn and replaced by the proposed new IFRS 18, many of the existing requirements will remain unchanged and either be carried forward to the new standard or moved to other appropriate standards. The income statement will be the most affected by the introduction of IFRS 18 and will look somewhat different to what many entities are used to. IFRS 18 will introduce three sets of new requirements relating to the following:

  • Classification of income and expenses into defined categories, and presentation of defined subtotals, in the statement of profit or loss;
  • Enhanced disclosure requirements for Management-defined Performance Measures (MPMs); and
  • Improved guidance for grouping of financial information.

New presentation requirements and financial information characteristic expected to be impacted: 

IFRS 18 Table

Defined categories and subtotals

Defined categories for income and expenses

Currently, IAS 1 does not mandate how an entity must classify or categorise expenses when preparing the income statement. This will change under IFRS 18 which identifies and defines three major categories for income and expenses, namely:

  • operating
  • investing
  • financing.

The operating category is essentially the default category and comprises anything that does not fit into the other two categories based on the definitions provided.

Interestingly, the classifications above do not necessarily align with the classifications used in the cash flow statement. Considering that the same labels will be used in the income statement and cash flow statement but have different meanings, this may cause confusion for users if not well understood. Classifying income and expenses into each of the three categories above will require an entity to consider what its main business activities are. Some types of income and expenses could be classified differently due to the nature of an entity’s main business activities. Entities with specified main business activities may classify investing and/or financing items as operating in certain cases.

For example, borrowing funds by a manufacturer will not be considered a main business activity and the manufacturer will most likely classify interest expense on the borrowings as financing in nature. In contrast, a bank that incurs interest expense on borrowings will classify such interest as operating in nature since providing finance to customers is one of its main business activities.

Defined subtotals

Currently, there are limited requirements in IAS 1 when it comes to line items and subtotals in the income statement. IFRS 18 will introduce two newly defined subtotals that entities will be required to present in their income statement:

  • operating profit or loss; and
  • profit before financing and income tax.

Operating profit or loss represents the subtotal of all income and expenses categorised as operating while profit before financing and income tax is the subtotal of operating profit or loss and all income and expenses classified as investing.

Management-defined Performance Measures

Investors find management performance measures (such as ‘Adjusted’ profit, EBITDA, and Operating profit excluding non-recurring items) useful however it is not always clear to investors how these measures are calculated.

The IASB acknowledges the usefulness of these measures and has therefore defined what a ‘Management-defined Performance Measure’ (MPM) is and included specific requirements for their disclosure in the notes to the financial statements.

For IFRS 18’s disclosure requirements to apply to an MPM, it must be:

  • used in public communications outside of the financial statements (excluding social media posts and oral communications); and
  • used to communicate to users of financial statements management’s view of an aspect of the entity’s financial performance.

Entities that do not engage in public communications to users (such as private companies) will not be subject to these new MPM disclosure requirements. Furthermore, only those MPMs that relate to an entity’s financial performance are within scope. That is, MPMs related to financial position or cash flows are not captured by these disclosure requirements.

The MPM disclosures are required to be provided in a single note that covers the following:

  • A reconciliation back to the most directly comparable subtotal specified by IFRS Accounting Standards;
  • An explanation of why the MPM is reported;
  • An explanation of how the MPM is calculated; and
  • A description of any changes to the MPM.

Including MPMs in the notes to the financial statements means they will be subject to audit. Auditors will therefore need to be aware of publicly communicated MPMs by entities as these may need to be disclosed in the financial statements under the new requirements.

Grouping of information

Entities aggregate information about transactions and other events to form line items in the primary statements and/or disclosure in the notes. Most of the existing guidance on aggregation and disaggregation will be carried forward from IAS 1, however some of the key requirements introduced by IFRS 18 include:

  • Classifying and aggregating items based on ‘shared characteristics’;
  • Disaggregating items if the resulting disaggregation is material;
  • Limiting the circumstances in which ‘other’ can be used to describe a group of items;
  • Additional disclosures when classifying expenses by function, including the requirement to disclose, in a single note, expenses by nature for certain amounts (depreciation, amortisation, employee benefits, impairment and write-downs of inventories).

What do these changes mean for entities?

The implications of IFRS 18 may be significant for entities depending on their current reporting practices.

Reviewing the current ‘mapping’ of income and expenses within the income statement and comparing this to the formalised structure introduced by IFRS 18 will be a good place to start. This will assist in identifying changes needed in reporting systems and processes to ensure alignment with the new requirements relating to classification of items and presentation of mandatory subtotals. This exercise will be particularly important for groups with a variation of business activities.

Listed entities will also need to be mindful of the financial performance MPMs they publicly communicate outside of their financial statements as these will be subject to the new MPM disclosure requirements. This is something auditors will need to be aware of too.

When do these changes become effective?

At the time of writing, IFRS 18 had not yet been issued by the IASB, however this is expected to occur in April 2024, with the Australian Accounting Standards Board (for Australian adoption) to follow suit shortly thereafter.

Entities will have until 1 January 2027 to implement the new standard as it is expected to apply to annual reporting periods beginning on or after this date. The new standard will need to be applied retrospectively meaning comparatives will need to be restated in the first year IFRS 18 is applied.

Consequential amendments to IAS 34 Interim Financial Reporting will require entities to present each of the required headings and subtotals in IFRS 18 in their interim financial statements in the first year of applying IFRS 18. Therefore, a June reporter with half-yearly reporting requirements will be required to report its H1 2027 income statement in accordance with IFRS 18’s requirements.

This article was first published in Issue 19 of The Bottom Line.