Understanding the Purpose of IFRS 18
IFRS 18, Presentation and Disclosure in Financial Statements, introduces a significant change to how companies applying IFRS Accounting Standards communicate financial performance. The standard becomes mandatory for annual reporting periods beginning on or after 1 January 2027, although organisations may choose to adopt it earlier. It replaces IAS 1, Presentation of Financial Statements, as the principal standard governing the structure and presentation of financial statements.
The introduction of IFRS 18 does not represent a complete redesign of every presentation principle previously contained in IAS 1. Instead, the International Accounting Standards Board focused primarily on improving the statement of profit or loss and strengthening the usefulness and comparability of information presented to investors and other users of financial statements. Certain requirements previously contained in IAS 1 have therefore been retained within IFRS 18, while others have been transferred to IAS 8, Basis of Preparation of Financial Statements, or IFRS 7, Financial Instruments: Disclosures.
Under IFRS 18, an entity must continue to prepare a complete set of financial statements at least once every year. Comparative information for the immediately preceding reporting period must also be provided, including relevant comparative disclosures contained in the accompanying notes.
Why IFRS 18 Was Introduced
One of the principal concerns behind the development of IFRS 18 was the wide variation in the way companies presented financial performance. Although entities were applying the same accounting standards, differences in subtotals, classifications and management performance measures sometimes made direct comparison difficult.
IFRS 18 seeks to create greater consistency without eliminating management’s ability to explain business performance. The standard establishes clearer requirements for organising income and expenses, presenting key profit measures and explaining certain performance indicators used outside the financial statements.
For investors, analysts and other stakeholders, the expected result is financial reporting that is easier to understand, compare and analyse. For preparers, however, implementation will require careful consideration of existing reporting structures, internal performance measures, accounting systems and disclosure processes.
New Required Profit Subtotals
Among the most prominent changes introduced by IFRS 18 is the requirement to present two specifically defined subtotals within the statement of profit or loss. These are operating profit and profit before financing and income taxes.
The introduction of these defined subtotals is intended to improve comparability across companies. Previously, businesses sometimes used terms such as operating profit in different ways because IFRS Accounting Standards did not prescribe a universally defined operating profit subtotal.
By creating clearer categories and mandatory subtotals, IFRS 18 provides users with more consistent reference points when evaluating operating performance. This is particularly important when comparing companies operating within the same industry or assessing trends in a company’s results over several reporting periods.
Management-Defined Performance Measures
IFRS 18 also introduces specific disclosure requirements for management-defined performance measures. These are subtotals of income and expenses that are not specifically required by IFRS Accounting Standards but are used by management in public communications to explain an aspect of financial performance.
Companies frequently communicate measures such as adjusted operating profit, underlying earnings or similar non-standardised performance indicators. While these measures can provide useful management perspectives, differences in calculation methods can reduce transparency.
IFRS 18 responds to this concern by requiring qualifying management-defined performance measures to be disclosed and explained within the financial statements. This should give users a clearer understanding of how management calculates these measures and how they relate to amounts recognised under IFRS Accounting Standards.
Greater Focus on Aggregation and Disaggregation
Another important feature of IFRS 18 is its enhanced guidance on aggregation and disaggregation. Financial statements must strike an appropriate balance between combining information that shares similar characteristics and separating information that is materially different.
Excessive aggregation can conceal useful information, while excessive disaggregation can make financial statements unnecessarily complex. IFRS 18 therefore establishes principles designed to help companies determine when items should be grouped together and when separate presentation or disclosure provides more meaningful information.
These requirements are expected to influence both primary financial statements and supporting notes. Companies may consequently need to reassess existing account groupings, reporting templates and disclosure practices before adopting the new standard.
The Origins of Financial Statement Presentation Requirements
The development of IFRS 18 can be understood more clearly by examining the evolution of IAS 1. In April 2001, the IASB adopted IAS 1, Presentation of Financial Statements, which had originally been issued by the International Accounting Standards Committee in September 1997.
That version of IAS 1 consolidated and replaced several earlier standards dealing with financial statement presentation. These included IAS 1, Disclosure of Accounting Policies, first issued in 1975; IAS 5, Information to be Disclosed in Financial Statements, introduced in the 1970s; and IAS 13, Presentation of Current Assets and Current Liabilities, approved in 1979.
The consolidation created a broader framework for presenting general-purpose financial statements and formed the foundation of financial statement presentation requirements for more than two decades.
Major Changes to IAS 1 Over Time
IAS 1 underwent several important revisions before ultimately being replaced by IFRS 18. In December 2003, the IASB published a revised version as part of its early technical improvement programme.
Further amendments followed in September 2007. These changes affected the presentation of movements in owners’ equity and comprehensive income and introduced revised terminology for the titles of financial statements.
In June 2011, the IASB modified IAS 1 again to improve how components of other comprehensive income were presented. These revisions sought to make it easier for financial statement users to understand items recognised outside profit or loss and their potential future accounting treatment.
The Disclosure Initiative and Materiality
In December 2014, the IASB issued amendments under its Disclosure Initiative. These changes responded to concerns that some entities were applying presentation and disclosure requirements mechanically rather than exercising appropriate professional judgement.
The amendments reinforced the importance of materiality and clarified that companies should determine the most useful way to present information rather than treating prescribed formats as rigid templates. Relevant principles from these amendments have been carried forward into IFRS 18.
Materiality received further attention in October 2018 when the IASB amended IAS 1 and IAS 8 through the Definition of Material project. The revised guidance improved the explanation of material information and promoted consistency in applying the concept throughout IFRS Accounting Standards. Elements of this work now appear within IFRS 18.
Developments in Liability Classification
Another major area of change concerned the classification of liabilities as current or non-current. In January 2020, amendments clarified that classification depends partly on whether an entity has the right, at the reporting date, to defer settlement of a liability for at least twelve months after the reporting period.
The mandatory application date for these amendments was subsequently deferred in July 2020 to annual reporting periods beginning on or after 1 January 2023.
Further refinements followed in October 2022 through the Non-current Liabilities with Covenants amendments. These requirements improved disclosures where an entity’s ability to defer settlement depends on compliance with particular covenants and addressed practical concerns surrounding classification. Relevant requirements have since been incorporated into IFRS 18.
Accounting Policy Disclosures
In February 2021, the IASB issued Disclosure of Accounting Policies, amending IAS 1 and IFRS Practice Statement 2. The amendment shifted the emphasis from disclosing “significant” accounting policies toward providing material accounting policy information.
The objective was to encourage entities to present accounting policy information that genuinely helps users understand the financial statements rather than providing lengthy standardised disclosures. Related requirements have now been distributed between IFRS 18 and IAS 8.
Preparing for the Transition to IFRS 18
The IASB issued IFRS 18 in April 2024, marking the culmination of a long process of improving financial statement presentation. Although many familiar principles from IAS 1 remain, IFRS 18 introduces important changes that may affect financial reporting processes, management reporting and external communications.
Companies should therefore view the transition as more than a simple change in financial statement formatting. Preparing for adoption may require reviewing existing profit or loss classifications, identifying management-defined performance measures, evaluating aggregation practices and determining whether accounting systems can support the required presentation and disclosures.
With mandatory application beginning from 1 January 2027 reporting periods, IFRS 18 represents an important step toward more transparent, structured and comparable financial reporting. Its success will ultimately depend on how effectively companies apply the new requirements while continuing to exercise sound judgement in communicating financially material information.
FAQs about IFRS 18
When does IFRS 18 become effective?
IFRS 18 applies to annual reporting periods beginning on or after 1 January 2027. Companies are permitted to adopt the standard earlier if they are ready to implement its requirements.
Does IFRS 18 completely replace all IAS 1 requirements?
Not entirely. While IFRS 18 replaces IAS 1 as the main standard governing financial statement presentation, several IAS 1 requirements were retained, while others were transferred to IAS 8 and IFRS 7.
What are the major changes introduced by IFRS 18?
The standard introduces defined profit subtotals, disclosure requirements for management-defined performance measures, and stronger principles governing how financial information should be aggregated or separated.
What new subtotals must companies present?
Companies will generally be required to present operating profit and profit before financing and income taxes. These defined subtotals are intended to make financial performance easier to compare across businesses.
Why is operating profit important under IFRS 18?
Previously, companies could calculate and describe operating profit in different ways. IFRS 18 establishes a more structured approach, giving investors and analysts a more consistent reference point when evaluating operating performance.
What are management-defined performance measures?
Management-defined performance measures are certain subtotals of income and expenses that are not specifically required by IFRS Accounting Standards but are used in public communications to explain management’s view of financial performance.
Will companies still be able to use adjusted performance measures?
Yes. IFRS 18 does not prohibit companies from communicating management-specific performance measures. However, qualifying measures must be properly disclosed and explained, improving transparency around how they are calculated.
What does aggregation and disaggregation mean under IFRS 18?
Aggregation involves combining items with similar characteristics, while disaggregation means separating information when important differences exist. IFRS 18 encourages companies to avoid both excessive grouping and unnecessary detail.
Why did IFRS 18 replace IAS 1?
The IASB wanted to improve consistency and comparability, particularly within the statement of profit or loss. IFRS 18 addresses concerns that companies reporting under IFRS could present similar financial performance in significantly different ways.
How should businesses prepare for IFRS 18?
Companies should review their existing financial statement formats, profit classifications, non-GAAP or adjusted performance measures, accounting systems and disclosure processes. Early preparation can help identify areas requiring system or reporting changes.
How could IFRS 18 benefit investors?
The new standard should make it easier for investors to understand how companies generate profit, compare performance between businesses and reconcile management’s preferred performance measures with figures reported under IFRS Accounting Standards.