IFRS 18 replaces IAS 1 for periods beginning on or after 1 January 2027. The changes to the income statement are structural, and the comparative period means 2026 data must already be captured in the new format.
Key takeaways
- The income statement gains defined operating, investing and financing categories with a required operating profit subtotal.
- Management-defined performance measures used in public communications must be disclosed and reconciled in a single note.
- Conglomerates and entities with investment or financing activities as a main business need to determine their classification early.
IFRS 18 Presentation and Disclosure in Financial Statements was issued in April 2024 and applies to annual periods beginning on or after 1 January 2027, with early application permitted. It replaces IAS 1. Recognition and measurement do not change, but the structure of the income statement and the disclosure of performance measures do, and both require preparation well before 2027 because comparatives for 2026 must be presented on the new basis.
Categories and subtotals in the income statement
Income and expenses are classified into five categories: operating, investing, financing, income taxes and discontinued operations. Two new subtotals are required: operating profit or loss, and profit or loss before financing and income taxes. The operating category is the default, containing everything not classified elsewhere. Investing includes returns from investments in associates, joint ventures and other assets that generate returns largely independently of the entity's other resources. Financing includes interest on borrowings and on lease liabilities, and the unwinding of discounts on liabilities not arising from financing activities such as pension obligations and provisions.
For most Gulf corporates the main practical effect is that operating profit becomes a defined, comparable measure, and items previously presented above it, such as share of results of associates or fair value gains on investment property held as an investment, may move out of it. For entities whose main business activity is investing or providing financing, such as investment holding companies and finance companies, specific rules place related income in operating profit, and the determination of main business activities is a judgement to make early.
Management-defined performance measures
Where an entity uses subtotals of income and expenses in public communications outside the financial statements, such as adjusted EBITDA or underlying profit, IFRS 18 requires them to be disclosed in a single note with a reconciliation to the nearest IFRS subtotal, an explanation of how they are calculated and why they provide useful information, and the tax and non-controlling interest effect of reconciling items. Listed groups in the region that present adjusted measures in investor presentations should inventory them now.
Aggregation and disaggregation
The standard sets principles for grouping items by shared characteristics and prohibits the use of the label "other" without explanation for material items. Chart-of-accounts structures and reporting templates may need refinement to produce the required detail, in particular for operating expenses presented by function, where disclosure of specific expenses by nature is also required.
What to do in 2025
Map current line items to the five categories, identify judgements on main business activities, inventory management performance measures, and design the 2026 chart of accounts and consolidation templates so that comparatives are captured in the new format from January 2026. This is a modest project if started now and an uncomfortable one if left to late 2026.