IFRS 18 is the IASB’s biggest overhaul of primary financial statements in decades, with the most visible changes landing in the statement of profit or loss: a defined category structure (operating / investing / financing, plus income taxes and discontinued operations) and mandatory subtotals, including a defined concept of operating profit or loss.

The second headline change is that certain non‑GAAP performance subtotals used externally—called management-defined performance measures (MPMs)—must now be disclosed inside the audited financial statements, in one single note, with reconciliations (including tax effects) to the closest IFRS subtotal/total.

Despite the scale of the presentation change, IFRS 18 does not change recognition or measurement and is not intended to change the overall profit figure; it changes how performance is structured, labelled and explained.

Key timeline:

A practical so what?:

IFRS 18’s objective is to set requirements for presentation and disclosure so that general purpose financial statements provide relevant information that faithfully represents assets, liabilities, equity, income and expenses.

Its scope is broad: entities apply it when presenting and disclosing information in financial statements prepared in accordance with IFRS Accounting Standards. It sets requirements for the statement(s) of financial performance, statement of financial position and statement of changes in equity, and for note disclosures, while cash flow presentation requirements remain in IAS 7 (but IAS 7 is amended consequentially).

Important boundary: IFRS 18 generally does not apply to condensed interim financial statements under IAS 34, but specific paragraphs (including the MPM requirements) do apply, and IFRS 18 adds particular first‑year interim presentation requirements.

IFRS 18 supersedes IAS 1, but the IASB explicitly did not re-open every IAS 1 topic; some requirements were retained in IFRS 18, while others were moved to International Accounting Standard 8 Basis of Preparation of Financial Statements and other standards.

Context for why it exists: users told the IASB that inconsistencies in subtotals and structure—particularly operating profit—reduce comparability; IFRS 18 responds by standardising the structure and requiring more transparent disclosure of management-defined subtotals.

IFRS 18 requires income and expenses included in profit or loss to be classified into five categories: operating, investing, financing, income taxes and discontinued operations.

A key driver is whether the entity has specified main business activities (investing in assets and/or providing financing to customers). Entities must assess this and disclose if they have such a main business activity, because it changes classification outcomes for certain income/expense streams.

IFRS 18 also makes certain subtotals mandatory in the statement of profit or loss:

It is still possible (and often useful) to present additional subtotals (e.g., gross profit, profit before tax), but IFRS 18 tightens the rules: extra subtotals must be IFRS‑based, compatible with the statement’s structure, consistent over time, and not displayed more prominently than required totals/subtotals.

The headline benefit is that investors can compare operating/investing/financing results across entities more consistently, while still allowing entity-specific additional subtotals (but under stricter discipline).

Within the operating category, IFRS 18 requires operating expenses to be presented using nature, function, or a mix—but each individual line item must be based on only one characteristic (nature or function).

Where you present one or more operating expense line items by function, IFRS 18 imposes two high-impact requirements:

This is one of the most new data requirement areas: it often forces better tagging in ledgers and group reporting packs.

IFRS 18 retains the familiar comprehensive income architecture:

Key takeaways for UK preparers:

IFRS 18 does not replace IAS 7, but it triggers consequential amendments that matter operationally:

For group reporting, the most practical implication is that you cannot leave cash flow classifications as-is and assume compliance - mapping needs to be revisited.

IFRS 18 continues the familiar SOCIE minimum content:

You must also present or disclose dividends recognised as distributions to owners (and dividends per share), and you must either present or disclose an analysis of OCI by item for each equity component.

IFRS 18 makes the division of labour explicit:

In practice, this becomes a structured decision each reporting period: what must be a line item vs what belongs in note disaggregation, and how to avoid obscuring material information through poor aggregation/disaggregation.

The significant accounting policies discussion is now framed as material accounting policy information, and the core requirements sit in International Accounting Standard 8 Basis of Preparation of Financial Statements.

Materiality judgement support is also provided in IFRS Practice Statement 2 Making Materiality Judgements.

IFRS 18 defines MPMs as management’s externally communicated subtotals of income and expenses that are not specified by IFRS and that communicate management’s view of financial performance. They are scoped by public communications (e.g., management commentary, press releases, investor presentations) and explicitly exclude some channels (e.g., oral communications and social media posts).

The disclosure architecture is strict:

UK governance overlay: The Financial Reporting Council has long warned UK listed companies to define APMs clearly, explain why they are used, and not give them greater focus than GAAP measures. IFRS 18’s MPM and “not more prominent” requirements hard-wire much of this discipline into IFRS financial statements.

IFRS 18 requires notes to be presented systematically, and gives examples of sensible ordering (e.g., by business activity, by measurement basis, or following the order of primary statements).

The standard also provides a structured way to think about disaggregation: classify/aggregate items sharing characteristics and disaggregate where characteristics differ, including considering nature, function, measurement basis, uncertainty, geography and tax effects.

This matters because IFRS 18 explicitly links aggregation/disaggregation to avoiding obscuring material information—an area where regulators often challenge UK annual reports.

Note 1 — Basis of preparation and compliance

Note 2 — Material accounting policy information: presentation, measurement bases and key judgements

Note 3 — Management-defined performance measures

What to include (minimum practical template):

Include a short paragraph explaining the approach used to compute tax effects (statutory rate, pro‑rata allocation, or other).

Note 4 — Operating expenses: function presentation with specified nature expenses

If you present operating expenses by function, include the IFRS 18 single note totals and mapping.

Example skeleton:

Note 5 — Transition to IFRS 18: reconciliation of profit or loss line items

In the first year of application, disclose a reconciliation for each line item in the statement of profit or loss between (a) restated IFRS 18 amounts and (b) amounts previously presented under IAS 1, for the comparative period immediately preceding adoption.

In practice, a table by line item (old caption / new caption / reclassification amount / restated comparative) is usually the clearest.

IFRS 18 must be applied for annual periods beginning on or after 1 January 2027; early application is permitted, and early adopters must disclose that fact.

Transition is retrospective under IAS 8, with targeted IFRS 18 transition disclosures that go beyond the usual IAS 8 narrative:

Remember that the “third balance sheet” logic also remains: where retrospective application/restatement/reclassification has a material effect, you present three statements of financial position.

IFRS 18 applies to entities reporting under IFRS Accounting Standards. Entities preparing financial statements under UK GAAP—most commonly FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland are outside IFRS 18’s scope (unless they change framework).

That said, IFRS 18 will likely influence stakeholder expectations for UK GAAP reporters in two practical ways:

From a UK tax perspective, IFRS 18 is primarily a presentation and disclosure standard and is not intended to change how entities recognise or measure items, nor the overall profit figure. That strongly suggests IFRS 18, by itself, should not create new taxable temporary differences or change “profit before tax” as a starting point for computations—though it may change labels and subtotals used in internal tax processes.

Two practical UK tax angles still matter:

(If your organisation is subject to interest limitation, covenants, or performance-related tax governance metrics, the IFRS 18 relabelling of subtotals can still create “process tax” impacts even if it does not change the tax law outcome.)

Because IFRS 18 requires MPM disclosures in the notes to the financial statements, they sit inside the financial statements perimeter and therefore within the statutory audit scope (rather than being treated purely as other information). This is a practical step-change compared with many historic UK APM presentations.

The most audit-sensitive areas tend to be: