IFRS 18 Presentation and Disclosure in Financial Statements: What Changes from IAS 1 and What Auditors Need to Do

What actually changed from IAS 1?

The IASB did not rewrite financial statement presentation from scratch. IFRS 18 carries forward most of IAS 1’s requirements. The statement of financial position, the statement of changes in equity, and the general principles (fair presentation, going concern, accrual basis, materiality) remain largely unchanged. Some of those general principles moved to IAS 8, which was retitled “Basis of Preparation of Financial Statements,” but the substance is the same.

The changes concentrate on the statement of profit or loss. Under IAS 1, entities had broad discretion in structuring the income statement. There was no required definition of operating profit, no mandatory subtotals beyond profit or loss and total comprehensive income, and no required categorisation of income and expenses beyond the distinction between profit or loss and other comprehensive income. Different entities in the same industry could present fundamentally different income statement structures and still comply with IAS 1.

IFRS 18 removes most of that discretion. The standard now prescribes five categories for classifying income and expenses, requires specific subtotals, defines operating profit as a residual category (everything not classified elsewhere), and introduces disclosure requirements for management-defined performance measures. Early adoption is permitted, and entities that adopt early must disclose that fact (IFRS 18.133).

The before/after comparison is stark. Under IAS 1, an entity could present a single line for “other income” that bundled investment returns, foreign exchange gains, sublease income, and miscellaneous items. Under IFRS 18, each of those items must be classified into the correct category based on the nature of the underlying asset, liability, or transaction that generated it.

What you actually need to do

Start with the 2026 comparative period. IFRS 18 requires retrospective application under IAS 8. Your client must restate the 2026 comparatives under the new structure when they report for 2027. IFRS 18.133 provides a concession: entities do not need to disclose the quantitative impact on each line item as normally required by IAS 8, but they must present a reconciliation between the restated amounts and the amounts previously reported under IAS 1.

For the audit team, this means 2026 is not too early to begin assessing which of the client’s income and expense line items will move categories. If you wait until the 2027 reporting season, you will be reclassifying and auditing simultaneously.

The five categories and how classification works

IFRS 18.47 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 income taxes and discontinued operations categories carry forward from existing IFRS requirements (IAS 12 and IFRS 5 respectively) without significant change.

The operating category functions as a residual. An item is classified as operating if it does not meet the definition of any other category (IFRS 18.48). This is a meaningful shift. Under IAS 1, “operating” was not a defined term. Many entities excluded items like impairment losses, restructuring costs, or foreign exchange differences from their self-defined operating profit. Under IFRS 18, those items must be classified in the operating category unless they specifically meet the investing or financing category definitions.

The investing category captures income and expenses from assets that generate returns individually and largely independently of the entity’s other resources (IFRS 18.51). This includes income from investments in associates and joint ventures accounted for under the equity method, income from debt and equity investments, rental income from investment properties, and related gains, losses, impairments, depreciation, and disposal effects. The key test is whether the asset generates its return independently.

The financing category captures income and expenses from liabilities that arise from transactions involving only the raising of finance, plus interest income and expenses from other liabilities where those amounts relate to the time value of money or changes in interest rates (IFRS 18.52). A bank loan is a financing liability. A trade payable is not (though the unwinding of any discount on a long-term payable would be a financing item). Lease liabilities under IFRS 16 fall into the financing category for most entities.

Foreign exchange differences follow the category of the item that gave rise to them (IFRS 18.B63). FX on trade receivables goes to operating. FX on a foreign-currency loan goes to financing. This rule eliminates the current practice of lumping all FX gains and losses into a single line.

The two mandatory subtotals are operating profit or loss (the total of the operating category) and profit or loss before financing and income taxes (operating plus investing). The second subtotal is not required for entities that provide financing to customers as a main business activity.

The “specified main business activities” assessment

The classification rules described above apply to most entities. But IFRS 18.54–56 introduces an exception for entities whose main business activities include investing in assets or providing financing to customers. For these entities, some items that would otherwise sit in the investing or financing categories are reclassified to operating.

The logic is straightforward. A bank’s interest income from customer loans is part of its core operations, not a peripheral financing activity. If IFRS 18 forced banks to classify all loan interest as financing, the resulting “operating profit” would be meaningless. So the standard requires entities to assess whether they have a “specified main business activity” and, if so, to reclassify the relevant income and expenses to operating.

The assessment is entity-specific and performed at the reporting entity level. A consolidated group might reach a different conclusion from one of its subsidiaries. IFRS 18 provides guidance: investing in assets is likely a main business activity if the entity uses a subtotal similar to gross profit that includes income from those assets as an important performance indicator (IFRS 18.B40). Property companies that include rental income in their gross profit calculation would typically conclude that investing in assets is a main business activity. Banks and insurers will typically conclude they both invest in assets and provide financing to customers as main business activities.

For auditors, this assessment introduces a new judgment area. The classification outcome changes the face of the income statement. If your client is on the boundary (a manufacturing group with a material financing arm, or a holding company with significant investment property alongside operating subsidiaries), the assessment requires documentation. The answer is not always obvious.

Management-defined performance measures

IFRS 18.117–124 introduces a 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 entity’s financial performance as a whole.

If an entity reports “adjusted EBITDA” in its press releases, investor presentations, annual report narrative, or bondholder communications, and that measure is a subtotal of income and expenses used to convey management’s view of performance, it is an MPM under IFRS 18. The entity must now disclose it in the notes to the financial statements, provide a reconciliation to the most similar IFRS-defined subtotal, explain why it provides useful information, and disclose the income tax effect and effect on non-controlling interests.

This is a significant change. Under IAS 1, alternative performance measures existed in a grey area. Securities regulators (ESMA in Europe, the SEC in the US) issued guidance on non-GAAP measures, but there was no requirement to include them in the audited financial statements. IFRS 18 brings a subset of these measures inside the financial statements. That means they fall within the scope of the audit.

For auditors at non-Big 4 firms, the practical implication is that you need to identify which performance measures your client uses in external communications and assess whether they meet the MPM definition. Review the client’s annual report, investor presentations, earnings press releases, loan facility submissions, and any public communications referencing financial performance subtotals. If a measure qualifies, the note disclosure must be audited, including the reconciliation arithmetic and the consistency of the measure’s application across periods.

Changes to aggregation, disaggregation, and notes

IFRS 18 provides more detailed guidance on aggregation and disaggregation than IAS 1 did. The principle is that entities must aggregate or disaggregate items to present useful structured summaries in the primary financial statements and to provide material information in the notes without obscuring it (IFRS 18.68–72).

In practice, this means the standard now gives preparers and auditors clearer criteria for deciding when a line item needs to be disaggregated into separate components on the face of the statement, versus when the disaggregation belongs in the notes. Items should be grouped based on shared characteristics. The guidance applies to all primary financial statements and notes, not just the income statement.

IFRS 18 also requires entities that present operating expenses by function (cost of sales, administrative expenses, distribution costs) to provide a nature-of-expense disclosure in the notes for specific items. This is an extension of the existing IAS 1 requirement. If the client presents expenses by function, you need to verify that the nature-of-expense note is complete and consistent.

Consequential amendments to IAS 7 and IAS 8

IFRS 18 amends IAS 7 Statement of Cash Flows in two ways. First, entities using the indirect method must now start from operating profit or loss as defined by IFRS 18, not from profit or loss before tax as commonly done under IAS 1. Second, IAS 7’s options for classifying interest and dividends paid and received are removed. For most entities (those without specified main business activities), interest paid is financing, interest received is investing, dividends paid is financing, and dividends received is investing. The optionality that currently exists under IAS 7.33 disappears.

IAS 8 absorbs several paragraphs previously in IAS 1, including the requirements for fair presentation, going concern, accrual basis, materiality, and accounting policy disclosures. The standard is retitled “Basis of Preparation of Financial Statements.” The substance of these requirements does not change, but their location does. Update your permanent file references.

The cash flow statement change is not cosmetic. If your client currently classifies interest paid as operating (a common IAS 7 election), the restated 2026 comparative cash flow statement will show interest paid as financing. Operating cash flow will increase by the amount of interest paid. This will affect debt covenants and analyst metrics that rely on operating cash flow. Flag this with the client early.

Worked example: reclassifying an income statement under IFRS 18

Client: Brouwer Techniek B.V., a Dutch industrial services company with €62M revenue. Brouwer holds two investment properties (carrying value €4.8M, rental income €0.41M), has a 30% interest in an associate (equity method income €0.22M), and carries a €12M bank loan (interest expense €0.54M). Brouwer also reports “adjusted operating profit” in its annual report, defined as operating profit excluding restructuring costs. The prior year income statement under IAS 1 shows operating profit of €5.1M after deducting €0.9M of restructuring costs.

Before (IAS 1 structure, 2026 financial year)

After (IFRS 18 structure, same period restated)

A reviewer opening this file sees the line-by-line reclassification, the specified main business activity assessment, the MPM identification, and the IAS 7 impact analysis.

Practical checklist for your file

1. Map every income and expense line item in the client’s current income statement to one of the five IFRS 18 categories. Flag items that change classification from the IAS 1 presentation. Do this during 2026 planning, not during 2027 fieldwork.
2. Document the “specified main business activities” assessment for any client with material investment income, rental income, or financing income. Reference IFRS 18.54–56 and IFRS 18.B40.
3. Identify all performance measures the client uses in external communications (annual report, press releases, investor presentations, bank submissions). Assess each against the MPM definition in IFRS 18.117. For each MPM, verify the note disclosure includes the reconciliation, the tax effect, the NCI effect, and period-over-period consistency.
4. Verify the restated comparative income statement. Confirm the reconciliation between IAS 1 and IFRS 18 classifications is complete and accurate (IFRS 18.133).
5. Check the restated comparative cash flow statement. Confirm interest and dividend classification follows the amended IAS 7 (options removed). Flag any covenant implications to the client.
6. Update the permanent file. IAS 8 is retitled and now contains paragraphs previously in IAS 1. Verify that working paper references to fair presentation, going concern, materiality, and accounting policy requirements point to the correct standard.

Common mistakes

• Assuming IFRS 18 only affects the income statement. The consequential amendments to IAS 7 change the cash flow statement structure, and the aggregation guidance affects all primary financial statements and notes. The BDO technical guidance on IFRS 18 notes that entities should start preparing in 2026 because charts of accounts will need to change to tag income and expenses to the five categories.
• Ignoring the MPM requirement because the client is a private company. IFRS 18 applies to all IFRS-reporting entities, public and private. If a private company uses “adjusted EBITDA” or any similar measure in bank presentations, shareholder reports, or bondholder communications, the MPM disclosure requirement applies.
• Treating the operating category as equivalent to the entity’s prior “operating profit.” Under IFRS 18, operating is a residual. Items the entity previously excluded from operating profit (impairments, restructuring, FX) will now sit in operating unless they meet the specific definition of another category.

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