IFRS 18 implementation: the work programme

A work programme for a December year-end group adopting from 1 January 2027

This is the second article in our IFRS 18 series. The first, IFRS 18 is a 2026 problem, covers what changes and why the standard is already a 2026 management problem.

This article is written for whoever has to turn IFRS 18 into a deliverable plan. The objective is a set of four artefacts produced from real data and capable of surviving audit: an IFRS 18 income statement, the management-defined performance measure note, the transition reconciliation, and the control framework that supports both.

It covers the statement of profit or loss, the MPM disclosures, the operating expense analysis, the consequential amendments to the cash flow statement and the other primary statements, systems and tagging, transition, and the contractual and communication consequences. It does not deal with sector-specific application for banks, insurers or investment entities, which needs its own analysis, and it does not address local endorsement.

1. Governance, ownership and resourcing

IFRS 18 needs a named executive sponsor and a single technical owner. The working group will normally draw on Group Financial Reporting, FP&A, Treasury, Tax, Investor Relations, Legal, Finance Systems and Internal Controls. Involve the external auditor early on the difficult judgements, but keep the conclusions with management: an auditor who has been asked to decide the classification cannot then form an independent view on it.

WORKSTREAMS AND OWNERSHIP

Put a resourcing estimate in front of the sponsor at the outset. The cost is driven by four things: how many ledgers and consolidation tools the category has to travel through, how many reporting entities need a specified main business activity assessment, how many performance measures the group publishes, and whether tax and non-controlling interest data can be produced at the level of an individual adjustment. A single-ERP group with three or four measures is a matter of weeks of senior reporting time plus a systems change; a group with several ledgers, a finance subsidiary and a long history of adjusted reporting should expect a funded programme running across several quarters. The common failure is neither technical nor financial - it is an unfunded workstream absorbed into the month-end cycle and repeatedly deferred.

2. Decompose the income statement

Do not start by dragging last year’s line items under new headings. Start with transaction types and balances, because the lines most likely to cause difficulty are the ones that already combine items with different IFRS 18 outcomes: other operating income, finance costs, and any line containing foreign exchange or derivative movements.

One general rule prevents most of the errors we see. Where a liability did not arise purely from raising finance - a lease liability, a provision, a defined benefit obligation, a contract liability - only the interest element and the effect of changes in interest rates go to financing. Every other movement on that same liability follows the underlying transaction and will usually be operating. The consequence catches people out in both directions: the unwinding of discount on a decommissioning provision is financing, while current and past service cost on a pension plan is operating.

For the judgement-heavy items, the practical objective is not simply to reach an answer but to preserve how it was reached. Quillon’s technical accounting AI agent can support controlled drafting of classification position papers, while its research agent follows the relevant IFRS paragraph references and cross-references through the literature. The resulting analysis remains subject to management review and approval, but the source trail and rationale can be retained with the conclusion rather than reconstructed at audit.

CLASSIFICATION REFERENCE - GROUP WITH NO SPECIFIED MAIN BUSINESS ACTIVITY

3. Specified main business activities

Before applying the general model, assess whether the entity has a main business activity of investing in assets, providing financing to customers, or both. Perform the assessment for each reporting entity and again for the consolidated group. It is an evidenced conclusion rather than a policy election.

Useful evidence includes how the activity is described in the business model and strategy, whether management monitors it using a gross-margin style subtotal, whether it appears as a segment, how it features in budgets and forecasts, how much senior management attention it attracts, and whether it drives external communication or remuneration. Document the evidence at the time; reconstructing it later is materially harder.

A subsidiary can hold a specified main business activity that the group does not. A captive finance company inside a manufacturing group is the standard case. The subsidiary may then classify items in operating that the group classifies as financing, which produces genuine consolidation adjustments and means the group reporting instructions must tell subsidiaries what to submit on both bases. Two of the open Interpretations Committee items bear directly on this assessment, including one on manufacturers that also lease, so keep the conclusion documented in a form that can be revisited.

4. Build the MPM inventory

Review the written public communications: annual and interim reports, results releases, formal investor presentations, and comparable written external material. Do not spend time on oral communications, transcripts of oral communications or social media posts, which fall outside the definition. Exclude measures that describe only a segment, because the definition looks at the entity as a whole. What counts as a public communication is itself before the Interpretations Committee, so record the boundary you applied.

This inventory can also be informed by external benchmarking. Quillon’s SEC research agent can search and compare peer filings and disclosures, including how comparable companies define, reconcile and explain adjusted performance measures. Peer practice does not determine the IFRS 18 conclusion, but it can expose terminology, adjustments and disclosure patterns that the internal inventory might otherwise miss and give Investor Relations a useful benchmark for the eventual presentation.

The test, in order

• Is the measure a subtotal of income and expenses? Ratios, per-share figures, cash flow measures and operational statistics are not (IFRS 18.B116).
• Is it used in qualifying written public communications outside the financial statements?
• Does it communicate management’s view of an aspect of the financial performance of the entity as a whole? Note that this is presumed once the measure is used publicly, and rebutting the presumption requires reasonable and supportable information (IFRS 18.119–120 and B124).
• Is it outside the list of subtotals excluded from the definition (IFRS 18.118)? Operating profit before depreciation, amortisation and specified impairments is on that list, so a strictly defined EBITDA is not an MPM - although most company-specific adjusted versions will be.

An MPM may also be presented as an additional subtotal on the face of the income statement where it meets the criteria for an additional subtotal and contributes to a useful structured summary. The note disclosures are still required.

What the note must contain

• All MPM disclosures in one note (IFRS 18.122).
• A statement that the measures represent management’s view of an aspect of the financial performance of the entity as a whole and may not be comparable with similarly labelled measures of other entities.
• A description of the aspect of performance each measure communicates and why it provides useful information.
• How each measure is calculated.
• A reconciliation to the most directly comparable total or subtotal required by IFRS.
• For each reconciling item, the income tax effect and the effect on non-controlling interests, and an explanation of how the tax effect was determined.
• Additions to, removals from and changes in the measures used, with the reasons, and comparative information where required.

Worked reconciliation

The presentation below separates the reconciliation itself from the tax and non-controlling interest effects, because they are not the same thing and combining them is the most common source of confusion in draft notes.

ADJUSTED OPERATING PROFIT RECONCILED TO IFRS 18 OPERATING PROFIT - ILLUSTRATIVE, CU MILLION

Three points the example is chosen to make. The amortisation adjustment also appears in the by-nature expense disclosure, so the two notes must agree. The derivative adjustment depends on the classification analysis in section 2, which means the MPM workstream cannot be completed before the classification workstream. And the note must still explain, in words, why adjusted operating profit is useful and how each adjustment is defined - the table on its own does not discharge the requirement.

5. Operating expenses and the notes

An analysis of operating expenses must appear on the face of the income statement, by nature, by function, or on a mixed basis, whichever gives the most useful structured summary. Mixed presentation is permitted, but each individual line item must be aggregated on one basis only - a line cannot blend nature and function.

Where any expenses are presented by function, a single note must disclose five specified expenses by nature: depreciation, amortisation, employee benefits, impairment losses and reversals of impairment losses, and write-downs of inventories and their reversals. A cost of sales function line must also include the total inventory expense described in IAS 2.38 (IFRS 18.82(a)).

Make the first-year choice deliberately. Changing the basis later is a change in accounting policy: it requires restated comparatives and a demonstration that the new presentation is reliable and more relevant. That is a high bar to clear in year two, so test the disclosure against real data before choosing, rather than choosing and then discovering the data does not support it.

Separately, the standard raises the bar on aggregation and disaggregation. Broad captions such as other income, other expenses and other liabilities need to be justified rather than inherited. The word other is not prohibited, but it should not be where material or dissimilar items go to avoid explanation. Give this an owner: it is note-level work that tends to fall between the classification and MPM workstreams and get picked up late.

6. The other primary statements

IFRS 18 amends other standards, and these changes carry their own data and template requirements. They are the most frequently omitted part of an IFRS 18 plan.

Statement of cash flows

• The indirect method reconciliation begins with operating profit rather than profit before tax, and the IAS 7 caption cash generated from operations is replaced by cash from operating activities before income taxes.
• Non-cash adjustments are only made for items inside the operating category. Items such as the share of results of associates, gains and losses on financial instruments where investing is not a main business activity, and depreciation of investment property held at cost no longer need adding back, because they were never in operating profit.
• The presentation choices for interest and dividends paid and received are removed. Dividends paid are always classified as financing.
• Practically: the reconciliation template changes, the tie-out to the income statement changes, and the comparative cash flow statement is restated alongside the P&L.

Statement of financial position and earnings per share

• Goodwill is presented as a separate line item.
• The numerator permitted for additional per-share measures is restricted. If the group publishes an adjusted EPS, that restriction has to be reconciled with the MPM register - the two workstreams share a population.

Structured digital reporting

Where the group files in a structured electronic format, the taxonomy changes with the standard and category information has to be tagged. Confirm early who owns the filing build and whether the tagging tool supports the updated taxonomy, because that deadline is fixed by the regulator rather than by the project.

7. Systems and the tagging model

The central systems question is how IFRS 18 classification travels through the reporting chain. The realistic options are an attribute on the chart of accounts, a separate reporting dimension, or tagging at transaction level, and the choice depends mainly on how much of the classification is determined by the account and how much by the underlying transaction. Foreign exchange, derivatives and interest on non-financing liabilities are the cases where account-level tagging usually proves insufficient on its own.

Whichever design is chosen, it has to survive local submission, intercompany elimination and manual consolidation journals. Top-side entries are where category information is most often lost, because they are posted at a level of aggregation above the tagging.

The reporting layer should preserve the same control rather than forcing the approved classifications back into a spreadsheet at the end of the process. Quillon’s financial statement compilation and rollforward workflow is designed for that role: the approved IAS 1-to-IFRS 18 mapping, disclosure structure and supporting judgements can be applied to the restated financial statements, reviewed in a controlled workflow and then carried forward into subsequent reporting periods.

• Assign ownership of every account or transaction tag, and a rule for new accounts and changes in use.
• Capture separable data for FX by source, derivatives by risk managed, the five specified nature expenses and each MPM adjustment.
• Prevent local entities from overriding group classifications without approval, while allowing for legitimate differences arising from a local specified main business activity conclusion.
• Build a report that reconciles local submissions, consolidation adjustments and the final presentation, so the classification can be evidenced rather than asserted.

Decide the tagging model now. Every month that passes is a month of 2026 comparatives that will have to be reconstructed analytically rather than captured as posted - slower, weaker as audit evidence, and harder to repeat at each interim.

8. Transition and interim reporting

IFRS 18 is applied retrospectively. In the first annual financial statements the group must reconcile each line item in the comparative statement of profit or loss from the amount previously presented under IAS 1 to the restated IFRS 18 amount. This is a line-by-line reconciliation, not a bridge between subtotals, and it is the single most under-scoped deliverable in most plans.

Comparable requirements apply in the first year of interim reporting, and the MPM disclosures apply in condensed interim financial statements. For a December year-end group the first external IFRS 18 deliverable is therefore the 2027 half-year report, several months before the annual accounts.

The 2026 dry run should produce the restated income statement, the transition reconciliation, the draft MPM note, the revised cash flow reconciliation and the new expense disclosures - using the same close timetable, systems and review process that will apply in 2027. A dry run performed offline in a spreadsheet by one person tests the technical answer but not the process, and it is the process that fails under time pressure.

A useful test is whether the dry run can become the opening point for the next reporting cycle without being rebuilt. In Quillon, the conversion can be retained as a controlled reporting baseline, with approved classifications, note architecture and supporting accounting positions rolled forward and updated only where facts or conclusions change. That turns the 2026 exercise from a one-off conversion into the first operating cycle of the new reporting process.

9. Contracts, covenants and remuneration

Pull the facility agreements, private placement terms, earn-out and deferred consideration clauses, and remuneration plans that refer to operating profit, EBIT, EBITDA or any similar term. For each, determine whether the definition is frozen to the accounting framework in force at signing, floats with the framework as it changes, or is silent.

A frozen definition preserves the old basis and becomes a reporting obligation on a superseded measure. A floating definition changes automatically with IFRS 18, which may move headroom without anyone deciding to. Silence requires legal interpretation. The answer determines whether the group faces a legal amendment, a lender conversation, or an internal reporting adjustment - and the first two need lead time.

10. Alignment with existing performance measure regimes

The MPM note sits inside the audited financial statements. Outside them, the group remains subject to whatever alternative performance measure or non-GAAP regime applies in its market, and to the review practice of its regulator. Establish with Legal and Investor Relations whether the definitions used inside the MPM note and those used in the front half of the annual report and in results releases will be identical. Divergence is possible but needs a reason and creates a permanent reconciliation burden.

Two practical questions follow. Whether existing APM tables in the front half can cross-refer to the MPM note rather than duplicate it, which reduces the risk of the two drifting apart. And, for groups reporting into more than one market, whether the MPM presentation is consistent with the non-GAAP requirements of the other regime.

11. Auditor engagement and evidencing completeness

Agree three things with the auditor early, because each one changes the volume of work.

• The evidence standard expected for classification judgements and for each MPM adjustment.
• A materiality threshold below which income and expense lines need not be decomposed to transaction level. Without one, the mapping exercise expands indefinitely.
• How completeness of the MPM population will be evidenced. This is the hardest control in the programme: it requires a defined universe of written public communications, a named reviewer, and sign-off at the point of publication rather than a reconstruction at year end. The most durable answer is usually to make MPM identification a standing gate in the existing disclosure or results approval process, so the evidence is generated as communications go out.

Expect the auditor to test the transition reconciliation and the tax effect methodology in detail in the first year. Both are new, both are judgemental, and both are calculated outside the general ledger in most groups.

Timetable

The timetable below reflects a start in the second half of 2026. That is later than ideal - a group beginning now has one full close left before the comparative year closes - so it front-loads the two decisions with the longest lead times, which are the tagging model and the classification of the contentious items. Where a step slips, the consequence is not a missed deadline but more of 2026 reconstructed after the fact.

DECEMBER YEAR-END GROUP ADOPTING FROM 1 JANUARY 2027

Completion checklist

• Every material income and expense stream has an approved category, documented at transaction level.
• The general rule on non-financing liabilities has been applied - provisions, pensions, leases and contract liabilities split between financing interest and operating movements.
• Each reporting entity has a documented specified main business activity conclusion, with the evidence retained.
• The MPM population is complete, reviewed by Financial Reporting, FP&A, IR and Legal, and supported by a control that operates when communications are published.
• Tax and non-controlling interest effects are reproducible per reconciling item, with the method documented.
• The consolidation system carries category information through eliminations and top-side journals, and a report exists that evidences it.
• The operating expense analysis basis has been chosen, tested against real data and approved, on the understanding that changing it later is a change in accounting policy.
• The revised cash flow reconciliation, the separate goodwill line and any additional per-share measures have been addressed.
• The 2026 transition reconciliation has been produced from real data, line by line.
• Contracts, covenants and remuneration metrics have been assessed and any required action has an owner and a date.
• Definitions used in the MPM note and in external communications are aligned, or the divergence is documented and justified.
• The first 2027 interim has an owner, a timetable and a review plan.