By Archie Balondo
If you have typed something like “what is IFRS 18” or “how will IFRS 18 change my income statement” into an AI tool recently, you are part of a growing conversation happening across finance teams worldwide. The questions are valid, and the stakes are real.
For decades, the structure of the income statement has been left largely to each company’s discretion. Two businesses in the same industry could report vastly different formats, making comparison a frustrating exercise for analysts and investors. That flexibility is about to change.
In April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements, which replaces IAS 1 and takes effect for annual reporting periods beginning on or after January 1, 2027 under IFRS accounting standards. Early adoption is permitted and must be disclosed in the notes. For organizations that want a head start, the runway is already shorter than it looks.
IFRS 18 affects all primary financial statements, but its most significant changes are concentrated in the statement of profit or loss. Here is what every finance professional, analyst, and business leader needs to understand about this landmark change before the 2027 deadline arrives.
Why This Change in Financial Statement Presentation Was Necessary
The call for reform came directly from investors. An IASB study of 100 companies found that over 60 reported operating profit using at least nine different methods. Some included associate results. Others folded in foreign exchange gains. The result was a reporting landscape where the same label could mean something entirely different depending on who was filing.
IFRS 18 responds by introducing a consistent, defined structure for the statement of profit or loss, giving investors a reliable starting point for comparison.
The Three New Categories That Change Everything
Under IFRS 18, all income and expenses in the statement of profit or loss must be classified into one of five categories: operating, investing, financing, income taxes category, and discontinued operations categories. The three main categories to understand are:
Operating
This is the residual category, meaning that anything not specifically required to go into investing or financing will land here. For most companies, operating category will capture revenue, cost of sales, and gross profit, along with distribution costs and administrative expenses. Critically, the standard now requires a mandatory subtotal for operating profit, ending the era when some companies simply chose not to present one.
Investing
This category captures income and expenses from assets that generate returns individually and largely independently from the entity’s other resources. Think dividends received from an equity investment that is not part of your core business, or interest income on cash surpluses held in treasury. For most general corporates, investing category will be a relatively smaller section of the statement.
Financing
The financing category captures the cost of obtaining finance. This includes interest expense on borrowings and similar liabilities-related costs. The standard also requires a second mandatory subtotal, “profit or loss before financing and income taxes,” which combines operating and investing results before financing costs are deducted.
There is an important nuance for industries like banking, insurance, and investment property. For entities where investing in assets or providing financing to customers is a main business activity, items that would ordinarily appear in the investing or financing category will instead be classified as operating. Operating profit should reflect what an entity actually does as its core business.
Management Performance Measures: The Transparency Requirement
This is arguably the change that will attract the most attention from listed companies and their investor relations teams.
Many organizations communicate their performance using company-specific metrics, often labeled as Adjusted EBITDA, Adjusted EBIT, or Underlying Profit. Investors frequently find these measures useful as they rely on operating profit margin as a baseline for comparing performance across companies. The problem has always been that companies have not provided enough context for investors to understand how these alternative performance measures are calculated or how they relate to the line items in the official financial statements.
IFRS 18 addresses this directly. If your company discloses a management-defined performance measure (MPM) in public communications outside the financial statements, such as in management commentary, press releases, or investor presentations, you will now be required to include a single disclosure note in the financial statements that reconciles each MPM back to the most directly comparable IFRS-defined subtotal.
The note must also explain why each MPM is included and confirm it reflects management’s view of the entity’s financial performance as a whole. This disclosure requirement forms part of the audited financial statements, which means loosely defined non-GAAP metrics in investor presentations are no longer operating in a compliance gray zone.
Aggregation and Disaggregation: No More Catch-All “Other” Lines
One of the more practical changes for accounting teams involves how items are grouped in the statement of profit or loss and in the notes. IFRS 18 introduces new principles for aggregation and disaggregation, with the explicit goal of ensuring that line items labeled “other” are addressed through disclosure in financial statements rather than buried in catch-all lines.
Under the new standard, entities cannot simply lump volatile or unusual items into a generic “other operating expenses” line. Items that share characteristics should be aggregated; those with distinct characteristics must be disaggregated. Those that are individually significant or have distinct characteristics must be presented separately or explained in the notes. Part of that review includes revisiting how significant accounting policies are disclosed, as IFRS 18 transitions those requirements from IAS 1 into IAS 8.
What Retrospective Application Actually Means for Your Team
One detail that often gets underestimated when finance teams first engage with IFRS 18 is the requirement for retrospective application. When your organization adopts IFRS 18 in 2027, you will be required to restate the comparative income statement from 2026 using the new categories and structure. This means finance and IT teams need to start thinking now about how historical data will be reclassified.
IFRS 18 also makes targeted changes to the statement of cash flows, requiring companies to use operating profit as the starting point when applying the indirect method. According to guidance published by both PwC and EY, companies should expect to conduct comprehensive gap analyses, update financial systems, revisit internal reporting processes, and potentially renegotiate financial covenants that reference existing operating profit definitions. Debt agreements that reference EBITDA or operating profit may need to be reviewed because the figure itself could change under the new structure, even when the underlying business performance remains the same.
Your Accounting Systems Are Not Ready Yet
One dimension of the IFRS 18 transition that deserves more attention is the gap between what the standard requires and what most accounting platforms currently produce.
Widely used systems, including QuickBooks, SAP, and NetSuite, are built around chart of accounts structures that do not naturally map to the Operating, Investing, and Financing categories IFRS 18 introduces. Generating a compliant statement of profit or loss from these platforms will require deliberate reconfiguration. Reporting templates, journal entry workflows, and period-close processes will all need to be reviewed against the new category definitions.
This matters especially for the retrospective requirement. If your system cannot cleanly distinguish interest income on cash surpluses from operating income, producing restated 2026 comparatives becomes a manual exercise that carries both time and audit risk. For organizations running multiple entities across different systems, consistent classification logic will need to be applied across every entity before a group-level compliant statement can be produced.
My Take: A Win for Honest Financial Reporting
I have watched finance teams grapple with the challenge of communicating performance to investors and analysts while managing the limitations of a fragmented reporting framework. IFRS 18 is a significant step toward cleaner, more honest financial storytelling.
“When you understand the rules of the P&L, you can tell a cleaner, more honest story about your business.”
Yes, the transition will require meaningful work. Systems will need updating. Data streams will need restructuring. Some MPMs that have been used in investor communications for years will require careful reconciliation before they can continue to be disclosed. But the result is a P&L that genuinely reflects how a business operates.
January 2027 might feel far enough away to defer action. It is not. Implementing new reporting structures, retraining teams, updating systems, and reviewing covenant agreements all take time. The changes also apply to interim financial statements and condensed interim financial statements in the initial year of adoption, meaning mid-year reports will need to reflect the new structure as well. Finance leaders who begin their gap analysis now will be in a far stronger position when the deadline arrives.
Is your team already planning for this transition? What is the biggest hurdle you foresee, whether that is system changes, internal training, or renegotiating KPIs tied to existing profit definitions? I would genuinely like to hear where organizations are in their thinking.
About the Author
Archie Balondo is the Center of Excellence Manager for Accounting and Finance at Cloudstaff, where he leads a team of finance professionals supporting global clients across diverse industries. With extensive experience in financial reporting, compliance, and team development, Archie helps organizations build finance functions that are both technically rigorous and strategically aligned. His focus is on equipping finance teams with the knowledge, tools, and structure they need to stay ahead in a rapidly changing reporting environment.
Looking to build or strengthen your accounting and finance team ahead of the IFRS 18 transition? Cloudstaff connects businesses with top-tier finance professionals who bring both technical expertise and reporting agility. Accounting Outsourcing Services – Offshore Accounting Experts