Introducing IFRS 18 – what will the new standard mean for your business?

15 May 2024

The IASB issued IFRS 18 Primary Financial Statements on 9 April 2024, effective for periods beginning on or after 1 January 2027. The new standard sets out the requirements for presentation and disclosure of financial statements, aiming to improve the structure and content of the primary financial statements.  

IFRS 18 introduces three key changes to the presentation of financial statements, aiming to improve information about financial performance and enhance comparability between companies. 

What are the IFRS 18 key changes?

1. Categories 

This change requires the categorisation of all income and expenditure into three new categories as follows:

  • operating;
  • Investing; and 
  • financing activities - in addition to income taxes and discontinued operations.  

This change requires the income statement to include two new sub-totals, being:     

  • Operating profit or loss; and
  • Profit or loss before financing and income taxes.

Example income statement under IFRS 18:

2. Disclosure of information on Management Performance Measures (MPMs)

The second key change is the disclosure of information on Management Performance Measures (MPMs). These are management-defined performance measures that are used in public communications outside the financial statements but are not explicitly required to be disclosed or presented by IFRS Accounting Standards.  

The new disclosures in IFRS 18 on MPMs include:

  • description of the aspect of financial performance and why management believes the MPM provides useful information about the entity’s performance;
  • how the MPM is calculated;
  • a reconciliation between the MPM and the most directly comparable total or subtotal required to be disclosed or presented by IFRS Accounting Standards; and
  • the income tax effect and effect on non-controlling interest for each item disclosed in the MPM reconciliation.

3. Aggregation and disaggregation 

IFRS 18 introduces new requirements regarding the aggregation and disaggregation of information to be presented in the financial statements. This includes general principles for aggregation and disaggregation of information, in addition to specific requirements for disaggregation of items labelled 'other'; presentation of operating expenses in the statement of profit or loss; and disclosure of specified expenses by nature included in line items in the operating category of the income statement.   

Who is impacted by the introduction of IFRS 18 and what does it mean for your business? 

All entities reporting under IFRS Accounting Standards will be impacted, both public and private entities - this includes the identification and disclosure of MPMs.  

Whilst early adoption is permitted, entities will need to await EU endorsement or UKEB endorsement where appropriate. The UKEB is planning to endorse the standard for users of UK-adopted International Accounting Standards (UK-adopted IFRS) towards the end of 2025, assuming no significant issues are found during the outreach. In addition, we expect the FRC to consider the impact of IFRS 18 on FRS 101, which will be relevant for those who choose to use the IAS 1 layouts rather than Companies Act formats.

Whilst many entities already disclose operating profit or loss in their financial statements, the standard provides detailed guidance on which items of income and expense should be disclosed in each category.  

Typically, the income and expense from an entity’s main business activity will be classified in the operating category; however, the operating category is not limited to such expenses and may include volatile and non-recurring income and expenses that do not meet the classification requirements for other categories. Because of the new categories, equity income from associates will now be categorised as investing, rather than operating. Entities may need to assess whether their current reporting systems are sufficient to collate the added information required by the standard.

Entities will need to review and update reporting of any current MPMs such as EBITDA to ensure that they comply with the new requirements of the standard. While the new requirements on MPMs are similar to those for public companies contained in the ESMA guidance on Alternative Performance Measures, IFRS 18 will bring MPMs into the financial statements, so they will be subject to audit.     

Management will also need to consider whether any of their existing contracts refer to MPMs or the new required sub-totals. There may be existing agreements that refer to these items, such as bonus pools, earn-outs and covenants that will need to be reviewed to determine the implication of the new requirements on these agreements.  

Entities should start considering how the changes will impact their business and how they will explain the changes to their stakeholders.  

When will IFRS 18 apply? 

Whilst the changes are not effective until 1 January 2027, the new standard requires restatement of comparative information so for calendar year-end companies, reporting on 2026 results will also be affected. In addition, for listed companies, the new standard will need to be applied in interim financial statements in the first period of adoption.   

Helping you navigate IFRS 18

Our financial reporting experts will be providing the latest insight and guidance over the coming months. For further information about IFRS 18, please contact Lou Ward or your usual RSM contact.  

Louise Ward
Accounting and Financial Reporting Director
Louise Ward
Accounting and Financial Reporting Director