There is always a temptation, when a new accounting standard lands, to reach for the compliance checklist and get on with it. Tick the boxes, update the manual, brief the auditors. Job done.
IFRS 18, Presentation and Disclosure in Financial Statements, deserves a different response. Yes, it replaces IAS 1, Presentation of Financial Statements. Yes, it restructures the income statement. But finance leaders who treat this as a presentation exercise will find themselves on the back foot – with auditors, investors, analysts and their boards.
New anchor
The most visible change under IFRS 18, which is effective from 1 January 2027, is the introduction of a defined operating profit subtotal. For years, companies have been free to present operating profit more or less however they liked; and many have taken full advantage of that freedom. Some excluded items that others included. Analysts learned to adjust. Investors learned to be suspicious.
Think of the operating profit line as the new EBIT – except, this time, the definition is not up for debate
IFRS 18 brings some discipline to this. The new operating profit line will be calculated on a consistent basis, and it will likely become the number investors and analysts use to assess performance. Think of it as the new EBIT – except, this time, the definition is not up for debate.
That shift matters more than it might initially appear. If operating profit becomes the anchor for external performance discussions, it needs to align credibly with how the business is actually managed. Companies that have historically presented adjusted figures that diverge significantly from their statutory numbers will need to think carefully about how they explain that gap.
The MPM challenge
Which brings us to management performance measures, or MPMs in the standard’s language. IFRS 18 does not ban alternative performance measures. Companies can still present their adjusted EBITDA, their underlying earnings, their cash-adjusted whatever. But they now have to work harder to justify them.
MPMs that are presented in the financial statements will need clear definitions, robust governance and, critically, a reconciliation back to the nearest IFRS equivalent. That reconciliation will be subject to audit. This is not a trivial change.
It is easy to underestimate the operational lift involved
In many organisations, alternative performance measures (APMs) have grown organically over time; they were introduced to explain a specific transaction or period and then retained long after the original rationale has faded. IFRS 18 forces a proper review. Finance teams will need to ask: does this measure still reflect how management actually runs the business? Is the definition documented clearly enough to withstand scrutiny? Would an analyst be able to follow the reconciliation without needing a footnote to the footnote?
Some measures will not survive that review, and that is probably healthy.
Operational reality
Implementation will not be confined to the accounting policy manual. That is worth saying plainly because it is easy to underestimate the operational lift involved.
Classification under IFRS 18 – whether an item falls into operating, investing or financing – will need to be applied consistently across often complex group structures. For diversified businesses, this can be genuinely difficult in practice. A treasury gain that would clearly be financing in one entity might sit differently in another part of the group. Policies need to be clear and embedded where decisions are made: in enterprise resource planning systems, charts of accounts and the consolidation process.
Performance targets tied to internal KPIs may need to be revisited
Finance teams that leave classification decisions to be resolved at the reporting stage will find themselves with inconsistencies they cannot easily explain. The documentation and internal controls around those decisions need to be built in from the start, not retrofitted at year-end.
Ripple effects
Some of the more consequential implications of IFRS 18 may not show up in the income statement at all.
Debt covenants often reference EBIT or EBITDA, sometimes with bespoke definitions that have been negotiated over years. If the classification of certain items changes under IFRS 18 – interest income treated differently, for example, or certain gains moving between categories – covenant calculations could be affected. Companies should be reviewing their financing arrangements now rather than discovering a technical breach after the fact.
Similarly, performance targets tied to internal KPIs, and remuneration metrics linked to financial outcomes, may need to be revisited. If the way operating profit is calculated changes, even modestly, the integrity of those metrics could be called into question. Remuneration committees will want to understand the impact before it becomes an issue in the AGM season.
The bigger opportunity
There is a real opportunity here, and it would be a shame to miss it by focusing too narrowly on compliance.
For too long, the proliferation of non-GAAP measures has made genuine like-for-like comparison between companies harder than it should be. Investors have had to work around inconsistent presentations, adjust for items that different companies treat differently, and essentially reconstruct the numbers they actually want. IFRS 18 does not solve all of that, but it moves in the right direction.
Finance leaders who approach implementation thoughtfully – who use it as an opportunity to align their external reporting with how the business is genuinely managed, to streamline their APMs, to tell a cleaner and more consistent performance story – will find that it strengthens rather than complicates their investor communications.
That is the version of IFRS 18 worth aiming for – not the one that generates a project plan and a disclosure update. This is the one that makes your numbers easier to understand, harder to second-guess and more credible to the people who matter most.
More information
Read our article ‘Queries about IFRS 18‘
Watch our latest video from Adam Deller on ‘The fundamentals of IFRS 18′
