IAS 1 vs IFRS 18: What Changes for Financial Statement Presentation

What IFRS 18 replaces and what it keeps from IAS 1

IFRS 18 replaces IAS 1 in its entirety, but the IASB didn’t rewrite everything. The IASB focused on the statement of profit or loss. Requirements for the statement of financial position, the statement of changes in equity, and the notes were largely retained. Some paragraphs migrated: general financial statement requirements (fair presentation, going concern, accrual basis) moved to a renamed IAS 8 (now titled “Basis of Preparation of Financial Statements”). Material accounting policy disclosure requirements moved to IAS 8 as well. IFRS 7 absorbed certain disclosure paragraphs related to financial instruments.

The practical result: if you’re looking for the going concern assessment requirement, it’s now in IAS 8, not IFRS 18. The requirement itself hasn’t changed. Its address has.

What did change substantially is the structure of the statement of profit or loss. Under IAS 1, entities had considerable flexibility in presenting income and expenses. There was no requirement to present “operating profit” at all (IAS 1 didn’t define the term). Entities could present subtotals, but there was limited guidance on what those subtotals should contain. IFRS 18 replaces that flexibility with a prescribed structure. The five categories, the mandatory subtotals, and the rules for classifying items into categories are all new.

The five categories and two new mandatory subtotals

IFRS 18 requires every item of income and expense in the statement of profit or loss to be classified into one of five categories: operating, investing, financing, income taxes, and discontinued operations.

The operating category functions as a residual. If an item doesn’t meet the definition of one of the other four categories, it goes in operating. This is a significant conceptual shift. Under IAS 1, entities could define their own view of what constituted “operating.” Under IFRS 18, operating profit is defined by exclusion: it’s whatever remains after removing investing, financing, tax, and discontinued items.

The investing category captures income and expenses from assets that generate returns individually and largely independently of the client’s other resources. Associates and joint ventures (equity-accounted), unconsolidated subsidiaries, investment properties, and financial assets held as investments all produce investing-category income and expenses. Depreciation on investment property, gains or losses on disposal, and dividends from equity investments all sit here.

The financing category captures income and expenses from liabilities that arise from transactions involving only the raising of finance (bank loans, bonds, lease liabilities under IFRS 16) and certain interest income and expenses on other liabilities. Foreign exchange differences follow the item that generated them: FX on trade receivables goes to operating, FX on a foreign-currency loan goes to financing.

Two new subtotals are mandatory. “Operating profit or loss” is the total of all operating-category income and expenses. “Profit or loss before financing and income taxes” is operating profit plus all investing-category income and expenses. The second subtotal is not presented by entities whose main business activity is providing financing to customers (where the distinction between operating and financing would be misleading).

For the auditor, these subtotals matter because they become defined terms. When a client says “operating profit” in its annual report, analyst presentations, or covenant calculations, the IFRS 18 definition applies. If the client’s financial ratios are tied to operating profit through bank covenants, the reclassification could move the ratio even though the underlying economics haven’t changed.

How classification works for entities with specified main business activities

The default classification rules assume a non-financial corporate entity. Banks, insurers, investment funds, and investment property companies operate differently. For a bank, interest income from customer loans is the core business activity, not an “investing” or “financing” item.

IFRS 18 addresses this with the concept of “specified main business activities.” An entity must assess whether it has a main business activity of investing in assets, providing financing to customers, or both. If it does, certain income and expenses that would otherwise fall in the investing or financing category move to operating.

For an entity that invests in assets as a main business activity (investment property company, investment fund), income and expenses from those investment assets are classified as operating. Rental income, fair value gains on investment property, and dividends from the fund’s portfolio all sit in operating profit rather than the investing category.

For an entity that provides financing to customers as a main business activity (bank, finance company), interest income from customer loans, impairment on those loans, and related FX differences are classified as operating. The entity also has an accounting policy choice for income and expenses on liabilities incurred to fund customer financing: operating or financing.

The classification assessment happens at the reporting entity level. In consolidated financial statements, the group assesses its main business activities at the group level. A subsidiary that provides financing to customers as a main business activity might classify interest income as operating in its own financial statements, but at the group level (if financing is incidental), the same income could be reclassified to the financing category. This creates a consolidation adjustment that didn’t exist under IAS 1.

Management-defined performance measures

IFRS 18 introduces a formal definition and disclosure requirement for management-defined performance measures (MPMs). An MPM is a subtotal of income and expenses that the entity uses in public communications outside the financial statements to communicate management’s view of the financial performance of the entity as a whole.

“Adjusted EBITDA,” “adjusted operating profit,” “underlying profit,” and similar measures that entities currently report in earnings releases, investor presentations, or management commentary all fall within this definition if they are subtotals of income and expenses used publicly. The definition is narrower than “alternative performance measures” or “non-GAAP measures” because it only covers subtotals of income and expenses (not ratios, per-share measures, or cash flow measures) and only those used to describe the entity as a whole (not segment-level measures).

For each MPM, IFRS 18 requires disclosure in a single note in the financial statements. The disclosure must include a description of how the MPM is calculated, why management believes the MPM provides useful information, and a reconciliation from the MPM to the most directly comparable IFRS 18 subtotal (typically operating profit). The reconciliation must show each reconciling item, its tax effect, and identify which items are not included in the IFRS 18 subtotals.

This matters for the audit because MPM disclosures are now within the audited financial statements. Under IAS 1, most alternative performance measures appeared in the management report or press releases, outside the scope of the financial statement audit. IFRS 18 pulls them inside. If the client’s “adjusted operating profit” excludes share-based payment expense and restructuring costs, the reconciliation note is auditable. The amounts must agree to the financial statements, the descriptions must be accurate, and the note must be complete (all MPMs used publicly must be disclosed).

Identify the client’s MPMs early in the engagement. Review the most recent earnings release, investor presentation, and management commentary. Any subtotal of income and expenses used publicly to describe performance needs to be on the list.

Consequential changes to IAS 7 and IAS 8

IFRS 18 triggers changes to two other standards. IAS 7 (Statement of Cash Flows) now requires the indirect method to start from operating profit or loss, not profit or loss for the period. This changes the top of the indirect cash flow statement for every entity. The reconciliation from operating profit to cash flows from operating activities will look different from the current IAS 1 presentation because the starting point has moved down the income statement.

IAS 7 also removes the existing classification options for interest and dividends. Under the current IAS 7, entities can choose to classify interest paid in operating or financing, and interest received in operating or investing. IFRS 18 eliminates those choices. For corporate entities without specified main business activities: interest paid is financing, dividends paid are financing, interest received is investing, and dividends received are investing. For entities with specified main business activities, the cash flow classification follows the income statement classification.

IAS 8 is retitled “Basis of Preparation of Financial Statements” and absorbs the general requirements that previously lived in IAS 1: fair presentation, going concern, accrual basis, materiality, offsetting, frequency of reporting, and accounting policy disclosures. The substance hasn’t changed, but when you cite the paragraph that requires a going concern assessment, the reference is now IAS 8, not IAS 1.

What you actually need to do on the file

The client’s first IFRS 18 financial statements will be for periods beginning on or after 1 January 2027. Retrospective application is required, meaning the 2026 comparatives must be restated under IFRS 18. For entities with a December year-end, this means the transition work happens during the 2027 audit, but the 2026 financial statements (as comparative) must be presented under IFRS 18.

Expect a transition reconciliation. IFRS 18 requires the client to provide a reconciliation between the restated comparative amounts and the amounts previously presented under IAS 1 for the comparative period. This reconciliation is also required for interim financial statements prepared under IAS 34.

One concession: the client doesn’t have to disclose the quantitative impact on each financial statement line item that IAS 8 normally requires when changing accounting policies. This reduces the disclosure burden for a standard that changes presentation but not recognition or measurement.

Your planning for 2027 engagements should include: confirming the client has mapped income and expenses to the five categories, verifying the classification is consistent with the IFRS 18 definitions, testing the operating profit subtotal, identifying MPMs and confirming completeness against public communications, and reviewing the restated 2026 comparative.

Worked example: Dijkstra Logistics B.V.

Client scenario: Dijkstra Logistics B.V. is a Rotterdam-based transport and warehousing company with €58M annual revenue. Its current IAS 1 statement of profit or loss presents: revenue, cost of sales, gross profit, other income, administrative expenses, finance costs, share of profit of associate, and profit before tax. “Other income” contains €180,000 in rental income from a warehouse sub-let, €95,000 in FX gains, and a €420,000 gain on disposal of a 30% interest in an associate. Dijkstra has a €12M bank loan (4.1% interest) and lease liabilities of €4.8M under IFRS 16. Dijkstra does not invest in assets or provide financing to customers as a main business activity.

1. “Other income” disaggregation

The €180,000 rental income from the warehouse sub-let: Dijkstra does not invest in assets as a main business activity. The warehouse generates a return largely independently of Dijkstra’s logistics operations. Classified as investing.

The €95,000 FX gains: Dijkstra needs to trace the FX differences to their source. If the gains arose on trade receivables (operating activity), they’re classified as operating. If on the bank loan (financing liability), they’re financing. Suppose €60,000 relates to trade receivables (operating) and €35,000 to the bank loan (financing).

The €420,000 gain on disposal of the associate interest: the associate is an investing-category item. Classified as investing.

2. New subtotals

Under IAS 1, Dijkstra presented:

Under IFRS 18, the statement restructures as:

The bottom-line profit is unchanged. The route to get there has changed entirely.

3. MPM assessment

Dijkstra’s 2026 annual report includes a “management summary” with “adjusted EBITDA” (adding back depreciation of €2.1M and the €420,000 associate disposal gain to operating profit). This is a subtotal of income and expenses used in public communications to describe overall performance. It qualifies as an MPM. Dijkstra must disclose the measure, its calculation, the rationale, and a reconciliation to operating profit in the 2027 IFRS 18 financial statements.

Practical checklist for your next engagement

1. For 2027 and later engagements: confirm the client has performed the IFRS 18 income and expense classification. Every P&L line item must sit in one of the five categories. Ask for the mapping document.
2. Test the “operating profit” subtotal. Verify that no investing or financing items are included, and that the operating category is correctly functioning as a residual. The most common classification errors will involve “other income” items that mix categories.
3. Assess whether the client has specified main business activities. For non-financial corporates, the answer is usually no. But a property company with material investment property income, or a company that provides extended financing to customers, may need to reclassify items to operating. Document the assessment.
4. Identify all MPMs the client uses in public communications. Cross-reference against the earnings release, investor presentation, management commentary, and any analyst briefing materials. Each MPM needs a note with a reconciliation to the closest IFRS 18 subtotal.
5. Verify the comparative period has been restated. The 2026 P&L must be presented under IFRS 18 as a comparative. The client must provide a reconciliation between the restated amounts and the originally presented IAS 1 amounts.
6. Check the cash flow statement starting point. The indirect method now starts from operating profit, not profit for the period. Interest and dividend classifications follow the new IFRS 18 rules (no more IAS 7 options for corporate entities). Verify the opening line and the classification of interest paid, interest received, and dividends.

Common mistakes

• Treating IFRS 18 as a recognition and measurement change. IFRS 18 changes presentation and disclosure only. No asset or liability balances change. No revenue or expense amounts change. The numbers stay the same. Only their location and labelling in the financial statements change. This means there is no IAS 8 quantitative impact disclosure to provide.
• Classifying all “other income” as operating by default. Under IAS 1, the “other income” line was a catch-all that sat above or near operating profit. Under IFRS 18, each item in “other income” must be assessed against the category definitions. Rental income from non-operating assets, FX gains on financial liabilities, and gains on disposal of associates all belong outside operating.
• Missing MPMs that appear outside the annual report. If the CFO uses “adjusted operating profit” in a quarterly press release or investor call, that measure is public and within scope. The audit team needs to monitor public communications beyond the annual report to ensure all MPMs are captured.

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