IFRS 18 Implementation: Why Companies Should Start Preparing in 2026

IFRS 18 Presentation and Disclosure in Financial Statements becomes effective for annual reporting periods beginning on or after 1 January 2027. For many companies, however, implementation cannot wait until 2027.

The Standard is applied retrospectively. Calendar-year entities will therefore generally need to present their 2026 comparative information in accordance with IFRS 18. The new requirements will also be relevant for interim financial statements prepared under IAS 34 in the first year of application.

This makes 2026 the critical preparation year.

IFRS 18 at a glance

IFRS 18 replaces IAS 1 Presentation of Financial Statements and introduces new requirements for the presentation and disclosure of financial performance.

The most visible change is the revised structure of the statement of profit or loss. However, implementation may also affect classifications, note disclosures, performance measures, reporting processes and systems.

Companies should therefore consider:

• the classification of income and expenses;

• the new required subtotals;

• the presentation of operating expenses;

• management-defined performance measures;

• aggregation and disaggregation; and

• consequential changes to the statement of cash flows.

The actual impact will depend on the entity’s business model, reporting structure and existing processes.

Who is affected by IFRS 18?

IFRS 18 applies to entities preparing financial statements in accordance with IFRS Accounting Standards.

The implementation effort may be greater for companies that:

• operate complex group structures or several business models;

• have material investment or financing activities;

• communicate adjusted earnings measures publicly;

• present operating expenses by function; or

• use highly aggregated accounts and reporting structures.

Even where only limited changes are expected, companies will need an appropriate assessment to support that conclusion.

When does IFRS 18 become effective?

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027. Earlier application is permitted.

Because the Standard is applied retrospectively, the comparative period presented in the first IFRS 18 financial statements must generally also reflect the new requirements.

For a calendar-year entity, this means that the 2027 financial statements will include 2026 comparative information prepared under IFRS 18.

Companies preparing interim financial statements under IAS 34 should also consider that IFRS 18 will already be relevant for their first interim reporting period in 2027. The first mandatory reporting deadline may therefore arise before the 2027 annual report.

What are the key changes introduced by IFRS 18?

New categories and subtotals

IFRS 18 requires income and expenses to be classified into five categories:

• operating;

• investing;

• financing;

• income taxes; and

• discontinued operations.

The operating category is the residual category and includes income and expenses not classified in any of the other categories.

The Standard also introduces required subtotals, including:

• operating profit or loss;

• profit or loss before financing and income taxes, subject to specific requirements; and

• profit or loss.

Although these labels may appear intuitive, the classification of individual items requires an analysis of the underlying assets, liabilities and transactions. It cannot always be derived directly from the current account name or financial statement line item.

Operating expenses by nature or by function

Operating expenses must be presented in a way that provides the most useful structured summary, using expenses by nature, by function or a combination of both.

Where expenses are presented by function, additional information about specified expenses by nature will be required in the notes.

Companies using a functional presentation should therefore assess whether their existing reporting systems can provide the necessary information reliably. The detailed disclosure requirements can then be analysed as part of the implementation project.

Management-defined performance measures

IFRS 18 introduces disclosure requirements for management-defined performance measures, or MPMs.

An MPM is a subtotal of income and expenses that an entity uses in public communications outside its financial statements to communicate management’s view of an aspect of the financial performance of the entity as a whole.

Not every alternative performance measure is an MPM. For example, cash flow measures, ratios and non-financial KPIs do not qualify merely because they are used in external communications.

Where a measure meets the definition, IFRS 18 requires additional information in a single note, including an explanation of the measure and a reconciliation to the most directly comparable IFRS total or subtotal.

Companies should therefore review the adjusted earnings measures used in press releases, management reports and investor presentations.

Aggregation and disaggregation

IFRS 18 strengthens the principles for grouping information in the primary financial statements and the notes.

Material information should not be obscured through excessive aggregation, while unnecessary detail should not reduce the usefulness of the financial statements.

In practice, this may require companies to revisit broad “other” categories, mixed accounts and financial statement line items that have developed over time.

Statement of cash flows

IFRS 18 also resulted in amendments to IAS 7.

Among other changes, operating profit or loss becomes the starting point for the indirect method of presenting cash flows from operating activities. Companies should therefore consider whether existing cash flow mappings and reporting instructions need to be updated.

Why the real challenge often lies in the analysis

The revised statement of profit or loss is the most visible result of IFRS 18. The more difficult part may be determining how individual income and expense items should be classified.

A direct mapping of existing financial statement line items may not be sufficient. One account can contain transactions that require different treatment under IFRS 18.

Areas that may require a closer analysis include:

• interest income and expenses;

• foreign exchange differences;

• derivatives and hedging instruments;

• leases;

• investment property;

• cash and cash equivalents; and

• mixed holding or financing structures.

The level of detail required will depend on the company’s facts and circumstances. Some classifications may be determined at account level, while others may require an analysis of the underlying transactions or contracts.

Even where the final conclusion is that the existing presentation remains largely appropriate, the reasoning should be documented and consistently applied.

What is a specified main business activity?

For the classification of income and expenses, IFRS 18 requires an entity to assess whether it has a specified main business activity.

This refers specifically to a main business activity of:

• investing in particular types of assets; or

• providing financing to customers.

It does not require the company to identify and catalogue every commercial activity it performs.

The assessment is relevant because companies with a specified main business activity may classify some income and expenses in the operating category that other companies would classify in the investing or financing category.

The conclusion depends on the reporting entity’s facts and circumstances and requires judgement. It may also differ between a consolidated group, a parent’s separate financial statements and an individual subsidiary.

Practical example: owner-occupied buildings and investment property

Consider a manufacturing company that owns several buildings used for production and administrative purposes.

It also owns separate buildings that are leased to third parties and accounted for as investment property. Assume that investing in such assets is not a main business activity of the company.

The owner-occupied buildings are used together with employees, machinery and other resources to generate the company’s operating output. They do not generate returns individually and largely independently of the entity’s other resources.

Depreciation relating to these buildings is therefore classified in the operating category.

The investment property, by contrast, generates rental income largely independently of the company’s other resources.

The rental income is therefore classified in the investing category. If the investment property is measured using the cost model, the related depreciation is also classified in the investing category. Where the fair value model is applied, the relevant fair value gains or losses are classified in the investing category instead.

The example demonstrates why classification cannot be based solely on the balance sheet caption. Although both types of buildings are assets, the related income and expenses are not necessarily presented in the same category.

Common IFRS 18 implementation pitfalls

Companies should avoid treating IFRS 18 as a simple formatting exercise.

Typical risks include:

• starting the analysis only in 2027;

• overlooking the 2026 comparative information;

• focusing only on the annual financial statements;

• mapping existing line items without analysing mixed accounts;

• misunderstanding the term “specified main business activity”;

• assuming that every adjusted KPI is automatically an MPM; and

• failing to document important judgements and classification decisions.

What should companies do in 2026?

Companies should use 2026 to understand the potential impact of IFRS 18 and identify the areas requiring more detailed analysis.

An initial assessment should cover the existing statement of profit or loss, relevant accounts and transactions, expense presentation, publicly communicated performance measures and the availability of comparative information.

The outcome will determine whether changes to reporting processes, systems, controls or disclosures are required.

This early assessment provides the basis for a proportionate implementation approach and helps avoid time pressure before the first mandatory reporting period.

Conclusion

IFRS 18 is more than a new layout for the statement of profit or loss.

The Standard introduces new categories and subtotals, additional disclosure requirements and classification questions that may require detailed judgement.

For calendar-year entities, the effective date of 1 January 2027 means that 2026 is the key preparation year. Comparative information will need to be restated, and the first mandatory IFRS 18 reporting deadline may already arise with the first interim financial statements in 2027.

A timely impact assessment enables companies to determine the actual implementation effort based on their specific facts and circumstances rather than assumption.