IFRS 18: Technical Changes to the Presentation and Disclosure of Financial Statements
IFRS 18: What Changes Technically in Financial Statements?
IFRS 18 is the international standard that replaces IAS 1 and changes how information is presented and disclosed in financial statements. Its mandatory application for companies that apply IFRS begins for annual reporting periods starting on or after January 1, 2027, and introduces new categories, subtotals, and disclosure requirements.
The new standard will be mandatory for annual periods beginning on or after January 1, 2027, although early application is permitted.
IFRS 18 must be applied retrospectively and establishes specific requirements for comparative information for the prior period.
The change does not consist of replacing all existing accounting requirements. The IASB has focused many of the amendments on the presentation and disclosure of financial information, particularly in the statement of profit or loss.
Some IAS 1 requirements were incorporated into IFRS 18, while others were moved to standards such as IAS 8 Basis of Preparation of Financial Statements and IFRS 7 Financial Instruments: Disclosures.
When Does IFRS 18 Become Effective?
IFRS 18 applies to annual reporting periods beginning on or after January 1, 2027.
Early application is permitted. If an entity elects to apply it early, it must disclose that fact in the notes to the financial statements.
The date is relevant because the standard does not simply apply to information generated from 2027 onward.
Retrospective Application
IFRS 18 requires its requirements to be applied retrospectively in accordance with IAS 8.
In addition, in the annual financial statements for the first period of application, the entity must present, for the immediately preceding comparative period, a reconciliation of each line item in the statement of profit or loss between:
- Amounts restated in accordance with IFRS 18.
- Amounts previously presented under IAS 1.
Therefore, comparative information must be prepared under the new structure to allow for comparison between periods.
The Five Categories in the Statement of Profit or Loss
One of the central changes introduced by IFRS 18 is the classification of income and expenses included in the statement of profit or loss.
The standard establishes five categories:
- Operating
- Investing
- Financing
- Income taxes
- Discontinued operations
The classification must be performed in accordance with the specific requirements of IFRS 18.
Operating Category
The operating category functions as a residual category: it includes income and expenses that are not classified within the other four categories. This means that operating profit or loss does not necessarily correspond to an informal definition of “results generated by ordinary activities.” IFRS 18 establishes specific classification criteria and also addresses specified main business activities. An entity may have one or more main business activities related to investing in assets or providing financing to customers, which may change the classification of certain income and expenses.
Investing Category
The investing category includes certain income and expenses arising from investments and other assets, subject to the specific requirements of IFRS 18. Classification also depends, in certain cases, on whether investing in assets constitutes a main business activity of the entity. Therefore, it is not technically correct to assume that any financial result associated with an investment should automatically be classified in the same way for all entities.
Financing Category
The financing category includes certain income and expenses related to financing. As with the investing category, IFRS 18 establishes specific rules for entities whose main business activity includes providing financing to customers. This is particularly relevant for entities whose business model is connected to financial activities.
Income Taxes
Income and expenses related to income taxes are presented within a specific category.
Discontinued Operations
Results related to discontinued operations are presented within the corresponding discontinued operations category, in accordance with the applicable requirements.
New Subtotals Defined by IFRS 18
IFRS 18 introduces two defined subtotals that must be presented in the statement of profit or loss.
Operating Profit or Loss
Operating profit or loss corresponds to the total income and expenses classified within the operating category.
This establishes a common reference point for operating results among entities applying IFRS 18.
Profit or Loss Before Financing and Income Taxes
The second defined subtotal is profit or loss before financing and income taxes.
It is calculated based on operating profit or loss and the income and expenses classified within the investing category.
A simplified representation would be:
Operating profit or loss +/- Investing result = Profit or loss before financing and income taxes
The effects corresponding to the financing category and income taxes are then considered.
What Happens to Operating Expenses?
IFRS 18 establishes specific requirements regarding how expenses included in the operating category are presented.
The entity must present expenses using a classification that provides the most useful structured summary of those expenses.
It may use:
- Nature of expense
- Function of expense
- A combination of both
Classification by nature identifies the economic resource consumed.
Examples include:
- Raw materials
- Salaries
- Employee benefits
- Depreciation
- Advertising
Classification by function, on the other hand, relates the expense to the activity to which it corresponds, such as:
- Cost of sales
- Distribution
- Administration
IFRS 18 permits a mixed presentation when this provides the most useful structured summary of operating expenses.
An Example
An entity could present expenses by function:
- Cost of sales
- Distribution expenses
- Administrative expenses
Or it could present certain expenses by nature:
- Employee benefits
- Depreciation
- Advertising
- Raw materials
The choice is not simply a matter of format. IFRS 18 establishes criteria for determining which presentation provides the most useful information.
Additional Information on Expenses Classified by Function
When an entity presents one or more operating expense line items classified by function, IFRS 18 requires certain expenses to be disclosed by nature in the notes.
These include:
- Depreciation
- Amortization
- Employee benefits
- Impairment losses on non-financial assets and reversals thereof
- Write-downs of inventories and reversals thereof
The information must allow users to identify the corresponding amounts and their relationship to the functional line items presented in the statement of profit or loss.
This requirement is intended to prevent certain relevant components from being hidden within aggregated functional line items.
Aggregation and Disaggregation of Information
Another important component of IFRS 18 is the treatment of aggregation and disaggregation.
The standard establishes principles for determining how transactions and other economic events should be grouped within line items in the financial statements and notes.
In general, items that share characteristics should be aggregated, while items with different characteristics should be disaggregated when necessary to prevent material information from being obscured.
This particularly affects overly broad categories.
For example, a line item called “Other expenses” may contain different types of transactions with distinct economic characteristics.
The application of IFRS 18 requires an assessment of whether such aggregation provides sufficient information or whether certain components should be presented separately.
The technical objective is not to indiscriminately increase the number of lines in the financial statements, but rather to prevent aggregation from reducing the usefulness of the information presented.
Management-Defined Performance Measures
One of the new concepts introduced by IFRS 18 is that of management-defined performance measures (MPMs).
An MPM is a subtotal of income and expenses that meets certain criteria.
These include:
- The entity uses the measure in public communications outside the financial statements.
- The measure communicates management’s view to users of an aspect of the entity’s financial performance as a whole.
- The measure is not specifically defined by IFRS 18 and is not a subtotal required by another IFRS standard.
Therefore, not every KPI used internally by a company automatically constitutes an MPM.
The requirement relating to public communications is particularly important.
What Information Must Be Disclosed About MPMs?
When a measure meets the definition of an MPM, IFRS 18 establishes specific disclosure requirements.
The information must allow users to understand:
- What aspect of financial performance the measure represents.
- How it is calculated.
- How it relates to the subtotals defined by IFRS.
- What adjustments are made.
- How it is reconciled to the most directly comparable subtotal or total defined by IFRS standards.
The standard seeks to ensure that these measures can be interpreted together with the figures defined by IFRS.
This is particularly relevant for indicators that modify an accounting result through adjustments.
IFRS 18 and the Presentation of Information in the Notes
The change is not limited to the statement of profit or loss.
The principles of aggregation and disaggregation also affect information included in the notes.
The rationale is that the primary financial statements and the notes serve complementary purposes.
The primary financial statements should provide a summarized structure, while the notes allow information to be expanded when necessary to understand the amounts presented.
Therefore, IFRS 18 establishes criteria for determining which information should remain aggregated and which information requires a greater level of detail.
Does IFRS 18 Change the Recognition and Measurement of Transactions?
That is not the primary objective of the standard. IFRS 18 focuses primarily on the presentation and disclosure of financial information.
The recognition and measurement criteria established by other IFRS standards continue to apply. The change primarily concerns how certain transactions are classified, presented, and explained within the financial statements.
For example, a transaction that was already recognized for accounting purposes may require a different classification within the statement of profit or loss under the new structure.
IFRS 18 and Comparative Information
The transition requires particular attention to comparative data. Suppose an entity begins applying IFRS 18 during 2027.
Information for the preceding comparative period must be presented under the new methodology so that the financial statements can be compared. In addition, IFRS 18 requires a reconciliation for each line item in the statement of profit or loss between amounts restated under IFRS 18 and amounts previously presented under IAS 1.
Therefore, the transition involves more than modifying the structure of the statement of profit or loss for the current period. It also requires reconstructing the presentation of the comparative period.
IFRS 18 and Information Systems
Although IFRS 18 is a financial presentation standard, its application may require information that is not currently structured in the same way within accounting systems.
For example, if an entity needs to identify certain expenses by nature within line items currently presented by function, it must have the information necessary to perform that disaggregation.
This may involve:
- Chart of accounts
- ERP
- Accounting systems
- Cost center structures
- Financial databases
- Reporting systems
- Consolidation processes
The specific impact depends on how each entity’s financial information is currently structured.
What You Need to Know in 30 Seconds
- IFRS 18 replaces IAS 1 and will be mandatory for annual periods beginning on or after January 1, 2027.
- The standard establishes five categories for income and expenses: operating, investing, financing, income taxes, and discontinued operations.
- It introduces two defined subtotals: operating profit or loss and profit or loss before financing and income taxes.
- Operating expenses may be presented by nature, by function, or using a combination of both, depending on which provides the most useful structured summary.
- Entities that present expenses by function must provide additional information about certain expenses by nature.
- MPMs are subject to specific disclosure requirements when they meet the definition under IFRS 18.
- IFRS 18 is applied retrospectively, including specific requirements for comparative information.
Frequently Asked Questions About IFRS 18
IFRS 18 replaces IAS 1 Presentation of Financial Statements. However, not all IAS 1 requirements were transferred to IFRS 18: some were retained, others were modified, and others were moved to IAS 8 and IFRS 7.
For annual periods beginning on or after January 1, 2027. Early application is permitted.
There are five:
- operating,
- investing,
- financing,
- income taxes,
- discontinued operations.
The two defined subtotals introduced by the standard are operating profit or loss and profit or loss before financing and income taxes.
It is a management-defined performance measure that constitutes a subtotal of income and expenses, is used in public communications outside the financial statements, communicates management’s view of an aspect of financial performance, and is not specifically defined or required by IFRS standards.
The main focus of IFRS 18 is the presentation and disclosure of financial information. It does not generally replace the recognition and measurement criteria established by other IFRS standards.
Yes. The standard requires retrospective application and establishes a reconciliation of statement of profit or loss line items between amounts restated under IFRS 18 and amounts previously presented under IAS 1 for the immediately preceding comparative period.
Expenses in the operating category must be presented using a classification based on their nature, their function, or both, in a way that provides the most useful structured summary.
When functional line items are used, there are also specific requirements for information about certain expenses by nature.
Not for annual periods beginning before January 1, 2027, unless the entity elects to apply it early.
Conclusion
IFRS 18 introduces a new structure for the presentation and disclosure of financial information, with particular emphasis on the statement of profit or loss.
The main changes focus on the classification of income and expenses into five categories, the introduction of defined subtotals, the presentation of operating expenses, management-defined performance measures, and the principles of aggregation and disaggregation.
Its application will be mandatory for annual periods beginning on or after January 1, 2027 and will be retrospective, meaning that the first period of application must include comparative information prepared under the new requirements.
Implementation therefore requires analyzing not only the final format of the financial statements, but also the information available to build the new classifications, subtotals, disaggregations, and reconciliations required by the standard.
At Fidem, we work alongside companies throughout their growth, financial planning, and strategic structuring processes.
