IFRS 18 Presentation and Disclosure in Financial Statements replaces IAS 1 for periods beginning on or after 1 January 2027, with comparatives restated. Recognition and measurement do not change; how profit is presented does.
- Every income and expense item goes into one of five categories, with two new mandatory subtotals.
- Management-defined performance measures used in public communications must be disclosed and reconciled in a single note.
- The 2026 comparatives have to be restated, so mapping work belongs in 2026, not in the 2027 close.
The five categories
IFRS 18 classifies income and expenses into operating, investing, financing, income taxes and discontinued operations. Operating is the residual category: everything that is not classified elsewhere. Investing covers returns on assets that generate returns individually and largely independently of other resources, such as investment property and equity investments not accounted for as operating. Financing covers income and expenses on liabilities that involve only the raising of finance, and interest on other liabilities such as lease liabilities and employee benefit obligations.
Entities whose main business activity is providing finance or investing in assets, such as banks and investment entities, classify some of these items in operating instead. The assessment of main business activity is a judgement that needs documenting.
Two new subtotals
Every entity presents operating profit, and profit before financing and income taxes. Together with profit for the year, these give a consistent structure across companies, which is the point of the standard. The interest cost on end-of-service obligations and lease liabilities, for example, moves into financing for most corporates.
Management-defined performance measures
Subtotals of income and expenses that an entity uses in public communications outside the financial statements, such as adjusted EBITDA or underlying profit, become management-defined performance measures. They must be disclosed in one note, with a description of why they are useful, how they are calculated and a reconciliation to the closest IFRS subtotal, including the tax and non-controlling interest effect of each reconciling item. Investor presentations and board packs should be reviewed now, because what you already publish determines what you must disclose.
Aggregation, disaggregation and expenses by function
IFRS 18 sets principles for grouping items so that material information is not obscured, and discourages labels such as "other" without explanation. Entities presenting expenses by function must disclose in the notes the amounts of depreciation, amortisation, employee benefits, impairment losses and inventory write-downs included in each line.
Consequential changes to IAS 7
Operating profit becomes the starting point for the indirect method of presenting operating cash flows. For most non-financial entities, interest paid and dividends paid are classified as financing cash flows, and interest and dividends received as investing, removing the current policy choice.
A preparation plan for 2026
- Map the chart of accounts to the five categories and document main business activity judgements.
- Restate the 2026 income statement and cash flow statement in the new format alongside the IAS 1 version.
- Inventory the performance measures used in investor and lender communications and draft the reconciliation note.
- Agree the revised format with the auditor before the 2027 interim reports.
- Check covenant definitions that refer to operating profit or EBITDA, because the reported numbers will move.
Saudi entities should follow SOCPA's endorsement of the standard for their reporting framework. For a deeper look at the new statements, see IFRS 18 and the new primary statements.
