IFRS 18 is a 2026 problem

An awareness article for CFOs, audit committees, VPs of Finance and financial controllers

IFRS 18 applies to annual periods beginning on or after 1 January 2027. For a December year-end group that makes 2026 the comparative year, which is why a standard with a 2027 effective date is already a 2026 management problem. The figures being posted this month will be restated and republished under a different presentation model, and the judgements behind that restatement are far easier to make while the underlying transactions are still fresh.

Net profit does not change. Very little above it is left untouched.

Why "presentation only" understates it

IFRS 18 is a presentation and disclosure standard, and that description is both accurate and the main reason the standard gets underestimated. Nothing in it alters recognition or measurement, and nothing changes what goes to other comprehensive income. What it does change is the structure of the income statement, the content of operating profit, the way operating expenses are summarised, the level of detail expected in the notes, and the status of the adjusted profit measures the company publishes.

The awkward part is that all of those outputs sit at the very end of the reporting process while the data needed to produce them sits close to the beginning. Classifying a foreign exchange difference according to the item that gave rise to it is a simple rule and a hard data problem for a group that has always calculated and posted FX at balance level. That pattern repeats across the standard, and it is why IFRS 18 belongs in the controlled reporting change process rather than in the year-end drafting cycle.

Operating profit is now defined for you

Under IAS 1 a company could present an operating profit subtotal and, within reason, decide what belonged in it. IFRS 18 removes that latitude. Every item of income and expense is classified into one of five categories - operating, investing, financing, income taxes and discontinued operations (IFRS 18.47, with the detailed rules at 52 to 68) -and operating profit is then simply the total of the operating category (IFRS 18.69–70).

Operating is the residual. An item stays there unless a specific requirement moves it elsewhere, so nothing leaves operating because management regards it as unusual, one-off or outside the underlying business. Restructuring costs, impairments and litigation settlements all remain inside operating profit. Groups that currently present the share of results of associates or treasury income above their operating profit line will report a lower subtotal; groups that currently strip out non-recurring charges will report a more volatile one.

The second subtotal, and who does not present it

Most companies will also present profit or loss before financing and income taxes, which is operating profit plus everything classified as investing (IFRS 18.69 and 71). It resembles EBIT without being the same thing, and for most groups it will not equal the EBIT figure they publish today.

There is one exception worth understanding at board level. A company that provides financing to customers as a main business activity, and does not also invest in assets as a main business activity, has accounting policy choices over where income and expenses from cash and from its own borrowings are classified (IFRS 18.56(b)(ii) and 65(a)(ii)). Where such a company classifies all of that in the operating category, the second subtotal is not required. The relief therefore follows from the elections the company makes rather than automatically from the kind of company it is, which matters to lenders, leasing businesses and captive finance subsidiaries.

Published performance measures move inside the audited accounts

The requirement most likely to consume management time is the one dealing with management-defined performance measures. A measure meets the definition if it is a subtotal of income and expenses, is used in public communications outside the financial statements, communicates management’s view of an aspect of the financial performance of the entity as a whole, and is not one of the subtotals the standard lists as excluded (IFRS 18.117 and 118). Adjusted operating profit, underlying earnings and most company-specific versions of adjusted EBITDA will qualify. Ratios, per-share figures, free cash flow and operational statistics will not, because they are not subtotals of income and expenses (IFRS 18.B116). Nor will a measure that describes only a segment, since the definition looks at the entity as a whole.

Two features of the requirement deserve attention before the technical work starts. The first is that the standard works from a presumption: a subtotal used in public communications is presumed to communicate management’s view, and rebutting that presumption requires reasonable and supportable information (IFRS 18.119–120, with the supporting factors at B124). Rebuttal is available, but it is an evidenced position rather than an assertion.

The second is location. Everything the standard asks for -why the measure is useful, how it is calculated, a reconciliation to the most directly comparable IFRS subtotal, the tax effect and the non-controlling interest effect of every reconciling item, an explanation of how the tax effect was determined, and a statement that the measures represent management’s view and may not be comparable with similarly labelled measures of other companies -goes into a single note inside the financial statements (IFRS 18.121 to 125, with the single-note requirement at 122). It is therefore audited.

For most groups that is the substantive change. A measure maintained for years in an investor relations spreadsheet now needs a named owner, a documented calculation, traceable source data, a review step and a change log -to the standard expected of financial statement information rather than of a slide.

This is also where controlled reporting technology becomes useful. A platform such as Quillon can keep the approved definition, source data, reconciliation logic and review evidence together with the financial statement drafting process, so that an MPM is treated as governed reporting content rather than rebuilt from an investor relations spreadsheet at each reporting date.

The changes outside the income statement

IFRS 18 also amends other standards. These are easy to lose because they sit away from where the attention is, and each one carries its own data requirement.

• Statement of cash flows. The indirect method starts from operating profit rather than profit before tax, and non-cash adjustments are only made for items that sit inside the operating category -the share of results of associates, for example, no longer needs adding back because it was never in operating profit. The presentation choices for interest and dividends paid and received are removed, and dividends paid are always classified as financing.
• Statement of financial position. Goodwill is presented as a separate line item.
• Earnings per share. The numerator permitted for any additional per-share measure is restricted, which bears directly on adjusted EPS and connects the EPS note to the MPM population.
• Interim reporting. The MPM disclosures apply in condensed interim financial statements as well, alongside specific transition requirements. For a December year-end group the first external IFRS 18 deadline is the 2027 half-year, not the 2027 annual report.

None of these is large in isolation. Together they mean the project cannot be scoped as an income statement exercise, and that the systems work has to serve more than one primary statement.

What it looks like in practice

The table below takes eight items a mid-sized manufacturing group would recognise in its own accounts and shows where they typically sit today against where IFRS 18 puts them.

ILLUSTRATION -MANUFACTURING GROUP, NO SPECIFIED MAIN BUSINESS ACTIVITY

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Five of the ten lines move. Net profit is identical before and after. Operating profit is not, and neither is the finance cost line that analysts use to estimate the cost of debt.

Eight questions for the board and audit committee

None of these can be answered with a nod, and the answers tell you fairly quickly how far the work has actually progressed.

1. Have we mapped underlying transaction types into the five categories, or have we only relabelled last year’s line items?
2. Which of our published performance measures meet the MPM definition, and who has signed off that the population is complete?
3. Can we produce the tax effect and the non-controlling interest effect of every adjustment in every measure we publish, and explain the method we used?
4. Do any subsidiaries reach a different conclusion on specified main business activities from the group, and have we planned the consolidation adjustments that follow?
5. Can the consolidation system carry category information through local submissions, intercompany eliminations and top-side journals, or will the classification be rebuilt by hand every period?
6. Which facility agreements, private placements, earn-outs and remuneration plans refer to operating profit, EBIT or EBITDA, and are those definitions frozen, floating or silent?
7. What will restated 2026 operating profit be, and what do we intend to say to lenders and to the market about the difference?
8. Who owns the 2027 half-year deliverable, and by what date must the dry run be finished?

Where the answers are not yet settled

The standard is final; its application is not entirely settled. In June the IFRS Interpretations Committee published tentative agenda decisions on, among other matters, the classification of income and expenses from cash and cash equivalents; classification where providing financing to customers is a main business activity; the assessment of specified main business activities for a manufacturer that also leases; whether a measure containing hypothetical income and expenses can be an MPM; and what counts as a public communication for MPM purposes. In each case it concluded that the standard provides an adequate basis to answer the question, and those decisions are expected to be finalised in the coming months.

That last item sits underneath the exercise this article recommends starting first. The sensible response is not to wait, since the work is the same either way, but to document conclusions in a form that can be revisited cleanly, and to avoid taking an external position on a marginal measure earlier than necessary.

The same principle applies to the technical analysis behind those conclusions. Quillon’s technical accounting and research agents are designed to retain the relevant IFRS paragraph trail, follow cross-references through the literature and support controlled drafting of position papers for review and approval. That does not replace management judgement; it makes the judgement, its sources and subsequent changes easier to evidence and revisit as the Interpretations Committee’s work develops.

The next six months

Two exercises generate most of the value. Decompose the current income statement into underlying transaction types and map those to the five categories. Then build a complete inventory of the performance subtotals the company publishes in writing. The first shows how far the reported income statement will move. The second usually exposes the harder problem, which is governance rather than technical accounting: the same measure calculated slightly differently in different documents, adjustments that accumulated without anyone deciding, and no clear owner.

For groups already redesigning the reporting process, the opportunity is to avoid creating a one-off IFRS 18 conversion workbook. Quillon’s financial statement compilation and rollforward workflow can use the approved mapping and disclosure decisions to produce the restated presentation, retain the link back to the IAS 1 financial statements and carry approved treatments into subsequent periods. Its SEC research capability can also be used alongside that process to benchmark how relevant peers describe and reconcile comparable performance measures, while keeping the company’s own IFRS conclusions separate from peer practice.

There is one full close left before the comparative year is complete. A group that settles its account tagging model now can capture classification prospectively for part of 2026. A group that settles it in the first quarter of 2027 will reconstruct the whole of 2026 analytically, which is slower, weaker as audit evidence and harder to repeat at each interim. Early application is permitted and deserves a deliberate decision rather than a default, although it brings the comparatives, the systems work and the audit effort forward with it and depends on local endorsement.

The companies that find IFRS 18 expensive will not be the ones that misread the standard. They will be the ones that arrive at the 2027 half-year without the data, the documented judgements and the controlled measures it assumes they already had.