How ready are you for what IFRS 18 will bring?

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It’s now been over a year since the International Accounting Standards Board (IASB) unveiled IFRS 18 Presentation and Disclosure in Financial Statements – a fundamental update to IFRS Accounting Standards, and the countdown to 2027 has already begun. With an effective date of 1 January 2027, the three-year lead time for IFRS 18 isn’t just generous, it’s intentional. IFRS 18 isn’t a minor update you can skim over; it’s a structural shift that will reshape how companies present and explain their financial performance.

The aim? To make financial reporting clearer, more consistent, and easier to compare across companies. In other words, more transparency and insight.

As year-end planning ramps up, this is a good moment to pause and think ahead: how ready are you for what IFRS 18 will bring?

Comparing profit and loss statements has always been a challenge for investors, largely because their structure and presentation can differ greatly. Investors have long struggled with profit or loss statements that vary so much in format and content – it can feel a bit like comparing Luxembourg’s Petite Suisse to the actual Swiss Alps: both genuinely beautiful but built on entirely different elevation models. By introducing defined subtotals, IFRS 18 creates a standardised baseline, enabling analysts and stakeholders to finally compare like with like. The standard also tackles another grey area: management-defined performance measures. These custom metrics can be insightful, but without clear definitions, they’ve often left readers guessing. Under IFRS 18, companies must now spell out how these measures are calculated and why they’re relevant – adding much-needed transparency and discipline.

Of course, these changes won’t happen overnight. They’ll likely touch everything from systems to processes to internal reporting. That’s why early planning isn’t optional: it’s critical.

Roadmap of impact

And make no mistake; IFRS 18 applies to all entities reporting under IFRS, regardless of size or sector. Notably, the standard must be applied at the level of each reporting entity. That means a conclusion made at head office might not hold true for every subsidiary. Local reporting teams will need to assess and apply the standard in their own context. Without that ground-level engagement, consistency across the group simply won’t happen.

Too often, reporting guidance around the primary statements has been framed with the traditional operating company in mind. For other industries, this has sometimes resulted in limited clarity on how best to reflect their activities in the accounts. The new guidance helps to close that gap by introducing specific considerations for entities whose main business is investing or financing customers. In this way, it ensures that the standard remains relevant across all types of businesses and markets.

Now that the scope and scale of the impact are clear, let’s look at some of the practical challenges that we grouped in core areas of the standard:

1. A new structure for the statement of profit or loss;
2. Disclosures related to management-defined performance measures;
3. New principles on aggregation and disaggregation; and
4. New guidance on foreign currency and derivatives, particularly around classification in the profit or loss statement.

1. A new structure for the statement of profit or loss

Items in the statement of profit or loss will need to be classified into one of five categories: operating, investing, financing, income taxes, and discontinued operations.

For a corporate entity, whose main business activities do not consist of providing financing to customers or investing in particular types of assets, these categories will typically include the following:

The classification of items into those categories can differ depending on the main business activity of the entity. Some income and expenses that might ordinarily have been classified in the investing or financing category, when applying the general principles, will be presented in the operating category for these entities that provide financing to customers (for example, banks) or that invest in assets with specific characteristics (for example, an investment entity) as a main business activity. The result of this is that operating profit will include the results of an entity’s main business activities.

IFRS 18 broadens the scope of what may be considered a main business activity. For example, it highlights that an entity offering financing to customers to help them purchase its own products may be seen as engaging in financing as a core activity. This means that the assessment isn’t limited to banks or traditional financial institutions. Instead, a wider range of businesses—including manufacturers, retailers, and service providers—may find that customer financing qualifies as a main business activity under the new standard.

For conglomerates and diversified groups, this creates a real challenge. A parent company and its subsidiaries may reach different conclusions about what their core activities are since the analysis is required to be performed at the level of each reporting entity, which can lead to reclassifications of income and expenses when preparing consolidated financial statements.

IFRS 18 provides examples of evidence that could indicate the main business activities of an entity. This assessment is based on facts and is not purely an assertion for accounting purposes. It also brings new requirements for how performance is presented. Entities must now show certain specified totals and subtotals, most notably the mandatory inclusion of ‘Operating profit or loss’. In addition, ‘Profit or loss’ and ‘Profit or loss before financing and income taxes’ are required. That said, IFRS 18 isn’t one-size-fits-all. For industries like banking or fund, where financing or investing is core to the business, there’s flexibility to present performance in a way that better reflects reality.

2. Disclosures related to management-defined performance measures

Management might define its own measures of performance, sometimes referred to as ‘alternative performance measures’ or ‘non-Generally Accepted Accounting Principles (GAAP) measures’. IFRS 18 defines a subset of these measures which relate to an entity’s financial performance as Management-defined Performance Measures (MPMs). MPMs are defined as a ‘subtotal of income and expenses’ that: is used in public communications outside the financial statements; communicates management’s view of an aspect of the financial performance of the entity as a whole to the user of financial statements; and is not specifically required to be presented or disclosed by IFRS Accounting Standards or one of the subtotals listed in IFRS 18.

Information related to these measures should be disclosed in the financial statements in a single note, including a reconciliation between the MPM and the most similar specified subtotal in IFRS® Accounting Standards. This will effectively bring a portion of non-GAAP measures into the financial statements.

MPMs are only a subset of financial performance measures. The table below illustrates the scope of MPMs as defined by IFRS 18:

A financial ratio, itself, would not meet the definition of an MPM, because it is not a subtotal of income and expenses. However, if a subtotal of income and expenses is the numerator or the denominator of a financial ratio (including an ‘earnings per share’ ratio), that subtotal itself would be an MPM, provided that the subtotal would meet the definition of an MPM if it were not part of a ratio. This means that, where a qualifying subtotal is part of a financial ratio, the MPM disclosure requirements apply to that subtotal of income and expenses.

3. New principles on aggregation and disaggregation

One of the big shifts in IFRS 18 is its stronger guidance on aggregation and disaggregation. At its core, this is about grouping items that share similar characteristics and splitting them out when differences matter. These principles run throughout the financial statements, shaping both the line items that appear on the face of the accounts and the detail disclosed in the notes.

But there’s a balance to strike. Entities can’t override specific IFRS requirements, and they must avoid obscuring material information. Deciding when to aggregate and when to disaggregate isn’t mechanical as it calls for judgment, weighing the nature of assets, liabilities, equity, income, expenses, and cash flows.

 The general principle is straightforward:

• Items are aggregated when they share similar characteristics; and
• Items are disaggregated when they differ in ways that make the information material.

The closer the similarities among items, the more appropriate aggregation becomes to present useful information in the primary financial statements or notes. Conversely, where differences in characteristics are significant, disaggregation is necessary to give a clearer, more meaningful picture.

4. New guidance on foreign currency (FX) and derivatives, particularly around classification in the profit or loss statement.

New guidance also brings greater clarity to the classification of foreign exchange differences and financial instruments. FX gains and losses, recognised under IAS 21, must now be presented in the same category as the income or expenses that triggered them, unless doing so involves undue cost or effort. For instance, FX differences on trade receivables will fall under operating, while those on financing-related liabilities will be classified as financing. Similarly, gains and losses on financial instruments, including derivatives, are no longer treated uniformly. Instead, their classification depends on why the entity holds them, whether for risk management, funding, or trading purposes. This way, the financial statements better reflect the economic intent behind the transactions.

IFRS 18 also introduces a number of limited but important updates across other areas of presentation and disclosure. These may not affect all entities in the same way, but they are still worth reviewing as part of a comprehensive implementation plan and if you’d like to understand what IFRS 18 means for your business, reach out to our team of Corporate Reporting Services (CRS) in Luxembourg.

What we think

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