IFRS 18 Explained: What Changes in Your Income Statement from 2027

IFRS 18 Presentation and Disclosure in Financial Statements applies to annual reporting periods beginning on or after 1 January 2027. Earlier application is permitted, provided the business discloses it (paragraph C1), and the Standard supersedes IAS 1 (paragraph C8).

It is often described as a new layout for the income statement. That undersells it. IFRS 18 fixes the definition of operating profit, brings company-chosen adjusted profit figures inside the audited accounts, and tightens how numbers are grouped. Net profit does not change. The figures that analysts, lenders and boards quote most often will move, even though no underlying transaction has.

Five categories and two compulsory subtotals

Every item of income and expense now sits in one of five categories: operating, investing, financing, income taxes or discontinued operations. Operating is the residual. Anything not classified elsewhere lands there, including unusual and one-off items. That ends the practice of parking awkward costs below a self-defined operating line.

Investing broadly captures returns from associates and joint ventures, from cash and cash equivalents, and from assets that generate a return largely independently of the business's other resources, such as shares held as investments or investment property. Financing captures the cost of raising finance, together with interest on items such as lease liabilities and pension obligations.

Two subtotals become mandatory: operating profit or loss, and profit or loss before financing and income taxes. Because operating profit now has one definition, it becomes comparable across companies. Expect visible shifts. For a typical trading company, interest earned on surplus cash moves out of operating results and into investing.

The key judgement for banks, insurers and investment companies

Each business must assess whether investing in assets, or providing financing to customers, is a main business activity. If it is, the related income and expenses are classified in operating rather than investing or financing. A bank's interest income stays in operating profit. So does an investment property company's rental income.

IFRS 18 describes this as a matter of fact, not merely an assertion, and it calls for judgement backed by evidence: for example, whether the business uses a subtotal such as net interest income to explain its performance, and what its segment information shows. Groups with in-house finance companies or treasury-heavy holding companies should document the assessment early, because the outcome must be disclosed.

Adjusted profit figures move inside the audit

Management-defined performance measures are subtotals of income and expenses, such as "adjusted operating profit", that a business uses in public communications outside the financial statements to give management's view of its performance. They must now be explained in a single note: how each is calculated, a reconciliation to the most directly comparable IFRS subtotal, and the income tax and non-controlling interest effect of each reconciling item.

Two details matter. Paragraph 118 excludes some subtotals from the definition, including gross profit and operating profit before depreciation, amortisation and impairments within the scope of IAS 36. And a subtotal used in public communications is presumed to reflect management's view unless the business has reasonable and supportable information showing otherwise.

The real consequence is governance. Figures once shaped freely by investor relations now fall within the audit, and changing a definition requires an explanation and restated comparatives.

Grouping, splitting and the end of "other"

Items are aggregated only where they share characteristics, and must be disaggregated where they do not and the information is material. A business may label an item "other" only if it cannot find a more informative label.

Operating expenses are presented by nature, by function, or a mix, whichever gives the most useful structured summary. Under paragraph 83, a business presenting any expenses by function, such as cost of sales and administrative expenses, must also disclose in a single note its depreciation, amortisation, employee benefits, impairment losses and inventory write-downs, and how much of each sits in each line item. Many ledgers cannot produce that cleanly today.

Transition: the comparatives are already running

IFRS 18 applies retrospectively. Under paragraph C3, the first annual statements must reconcile each line of the restated comparative income statement to the amount previously reported under IAS 1. Under paragraph C4, a business preparing condensed interim statements under IAS 34 in the first year must present the headings and subtotals it expects to use, and paragraph C5 requires the line-by-line reconciliations there too.

The practical agenda: map the chart of accounts to the five categories; review where foreign exchange and derivative gains will land; redesign reporting packs; agree performance measure definitions with the board; and check loan covenants and bonus schemes linked to operating profit or EBITDA, which may move without any change in actual performance.

The bottom line

IFRS 18 does not change what a business earns. It changes how that performance is defined, compared and challenged. Businesses that treat it as a data and governance project, not a reformatting exercise, will report with confidence in 2027. Those that wait risk restating under pressure and explaining unexpected shifts to lenders and investors.

How BIFI Partners helps

BIFI Partners starts with an impact assessment that shows how the income statement, subtotals and key ratios will change. We then map the chart of accounts to the five categories, document the main business activity assessment, identify which publicly used measures will need disclosure with their reconciliations and tax effects, prepare restated comparatives and transition reconciliations, review covenants and incentive schemes linked to operating profit, and work with your auditors and finance team so the new requirements become routine.