Two companies operate in the same industry, under similar conditions, in the same year. One includes share-based payment expense in operating profit; the other excludes it. One includes a goodwill impairment; the other presents it below that line. Both comply with IFRS, yet investors end up “comparing apples to oranges,” Blake Oliver, CPA, said on an episode of Standard Practice.
IFRS 18 was created to address that problem. Host Meredith Mednick, CPA, CA, walked through the new standard with Blake. His first reaction to replacing IAS 1 fell “somewhere between mild panic and deep curiosity.”
Issued in April 2024, IFRS 18 applies to annual periods beginning on or after January 1, 2027. It doesn’t change when companies recognize transactions or how they measure them. Instead, it changes how they present and disclose financial performance. That may sound limited, but the implementation work isn’t.
Operating profit gets a standard foundation
Under IAS 1, companies had broad discretion over how they classified income and expenses and the subtotals shown above profit or loss. Most presented operating profit, but there was no standard definition of what belonged in it.
IFRS 18 introduces five required categories for income and expenses:
- Operating
- Investing
- Financing
- Income taxes
- Discontinued operations
Operating is the residual category. You first ask whether an item belongs in one of the other four categories. If it doesn’t, it is operating. As Blake explained, “If it doesn’t meet the criteria for another category, it’s operating, full stop.”
That means a company can’t remove a cost from standardized operating profit simply because it is large, volatile, or unusual. For example, restructuring costs remain in operating even if management considers them one-time charges. A gain or loss on production machinery also goes to operating, although the related cash proceeds may appear in investing activities under IAS 7.
That distinction is important because the investing and financing categories under IFRS 18 don’t match the categories with the same names in the cash flow statement.
Classification follows the economics
Although IFRS 18 reduces presentation choices, it doesn’t eliminate judgment. Instead, accountants must determine how an asset or liability produces its return or cost.
The investing category includes specified income and expenses from associates, joint ventures, unconsolidated subsidiaries, cash and cash equivalents, and other assets that generate returns individually and largely independently of the company’s other resources. Dividends or fair value gains from listed shares may qualify. Depreciation on a delivery fleet doesn’t qualify because those vehicles work with employees, warehouses, and other operating resources.
The financing category focuses on liabilities. Its treatment depends on whether a liability arises only from raising finance:
- Bonds, bank loans, and similar financing arrangements can place several related gains and expenses in financing
- Trade payables, leases, pension liabilities, and provisions generally place only separately identified interest and interest-rate effects in financing
For example, current service cost on a defined benefit plan is operating, while separately identified net interest is financing. Foreign exchange differences generally follow the underlying item: FX on a supplier payable is operating, while FX on a bond payable is financing. Limited relief allows operating classification when allocation would require undue cost or effort, but inconvenience alone is not enough.
Once IFRS 18 establishes those general rules, it adds an important exception for certain business models.
Core financial activities may stay in operating
Investing in assets or providing financing to customers may be a company’s main business activity. This can apply to investment entities, investment property companies, insurers, banks, other lenders, and manufacturers that finance customer purchases.
These entities may have to include items that would normally fall under investing or financing in operating. Otherwise, a lender’s operating profit could exclude the interest spread at the center of its business.
This is a fact-based assessment rather than an accounting policy choice. Evidence may include gross-profit-style measures such as net interest income and information reported under IFRS 8. The assessment also occurs at each reporting level. A subsidiary and its consolidated parent can reach different conclusions, creating a need for consolidation adjustments.
Once you settle those classifications, the new statement structure begins to take shape.
New subtotals and disclosures improve comparability
IFRS 18 introduces two key subtotals: operating profit and profit or loss before financing and income taxes. The second combines operating profit with the investing category, allowing users to compare performance before financing costs and taxes.
An exception applies when an entity provides financing to customers as a main business activity and elects to classify in operating the income and expenses from all its finance-raising liabilities, including those unrelated to customer financing. It can’t present a subtotal labeled “before financing” because that description would be misleading.
Companies may still communicate adjusted measures, such as operating profit before restructuring costs. However, qualifying management-defined performance measures used in public communications will require disclosures in the financial statements. Blake described this as bringing non-GAAP measures into the statements “in a controlled and transparent way.”
IFRS 18 also requires the analysis of operating expenses to appear in the statement of profit or loss by nature, function, or a mix. If the financial statements present expenses by function, the footnotes must also disclose key nature amounts, including employee benefits (including share-based payments), depreciation, amortization, impairments, and inventory write-downs, by function. Companies should use labels like “other” only when they don’t have a more informative description available.
These changes lead directly to the most urgent issue of timing.
The practical deadline arrives before year-end 2027
IFRS 18 applies retrospectively. For a company with a December year-end, that means:
- They must apply IFRS 18 to their 2027 annual statements
- They must restate their 2026 comparative statement
- The financial statements must present a reconciliation from the previous IAS 1 presentation
- Its first 2027 interim report must already use IFRS 18 headings and subtotals and include the required comparative reconciliation
As Meredith warned, implementation must be “substantially completed before the first interim financial reporting date of the adoption year, not just before the annual year-end.”
Start by assessing main business activities at every reporting level. Then map each income and expense item to a category, identify data gaps, review your expense presentation, inventory externally reported performance measures, and plan the required systems, training, and consolidation changes.
IFRS 18 doesn’t change what a company earns. It changes how clearly financial statement users can understand and compare that performance. For the full classification walkthrough and implementation discussion, listen to the Standard Practice episode.