IFRS 18 vs. IAS 1: Key Changes Affecting Your Company

Introduction

The IASB has issued IFRS 18 Presentation and Disclosure in Financial Statements, which replaces IAS 1 Presentation of Financial Statements effective 1 January 2027. The new standard reshapes how financial performance is presented, introduces stricter rules on subtotals and management-defined performance measures, and provides new guidance on aggregation and disaggregation. Here’s a breakdown of the most important changes.

Statement of Profit or Loss

Under IFRS 18, the statement of profit or loss is organised into five categories of income and expenses, of which three are new:

• Operating (New)

  • Default category: includes any income and expenses not classified elsewhere.
  • If an asset is integral to the entity’s main business activities, related income and expenses are also included here.

• Investing (New)

  • Income and expenses from:
    • investments in associates, joint ventures and unconsolidated subsidiaries,
    • cash and cash equivalents,
    • other assets that generate returns largely independently of other resources.
  • Exception: if investing is the main business activity and assets are not equity-accounted, the results are classified as operating.

• Financing (New)

  • Income and expenses related to obtaining finance to fund the entity’s operations and/or investing activities.

• Income tax

  • Tax expense or income under IAS 12, plus related foreign exchange differences.

• Discontinued operations

  • Results of discontinued operations under IFRS 5.

New Required Subtotals

Entities must now present two new subtotals in addition to profit or loss:

• Operating profit or loss
• Profit or loss before financing and income taxes

Profit or loss before financing and income taxes is not required in certain cases (see paragraph 73)

Presentation of Operating Expenses

Entities must now show an analysis of operating expenses on the face of the profit or loss statement. Disclosure only in the notes is no longer sufficient.

Two methods are permitted:

• By nature: expenses are grouped according to their type, e.g. salaries, depreciation, raw materials, amortisation.
• By function: expenses are grouped according to the activity they support, e.g. cost of sales, administrative expenses, selling expenses.

IFRS 18 allows a mixed approach, but when the function method is used, additional note disclosures are required to show a nature-based breakdown. These must include at least:

• Depreciation
• Amortisation of intangible assets
• Employee benefits
• Impairment losses and reversals
• Inventory write-downs and reversals

If cost of sales exists as a function, it must always be shown separately.

Other Considerations

• Classification by main business activities: placement of certain items depends on whether they relate to core operations.
• Foreign exchange differences: shown in the same category as the related income or expense.

Statement of Financial Position

There have been minimal changes to the statement of financial position (balance sheet). The most notable is that:

• Goodwill must now be presented as a separate line item, increasing consistency across entities.

Statement of Cash Flows

IAS 7 has also been updated along with IFRS 18, which brings important changes to the statement of cash flows:

• Under the indirect method, cash flow reporting now begins with the new operating profit subtotal, rather than profit or loss.
• Entities may need to reconsider how dividends and interest cash flows are classified.

Management-Defined Performance Measures (MPMs)

One of the most significant innovations of IFRS 18 is the treatment of management-defined performance measures.

Definition

An MPM is a subtotal of income and expenses that:

• is used in public communications outside the financial statements,
• reflects management’s view of performance of the entity as a whole, and
• is not a subtotal specifically required or permitted by IFRS standards.

Not Considered MPMs

The following are not MPMs (as they are prescribed subtotals):

• Gross profit (revenue minus cost of sales)
• Operating profit before depreciation, amortisation, and impairment
• Operating profit and results of equity-accounted investments
• Operating profit combined with investing results (where paragraph 73 applies)
• Profit before tax
• Profit from continuing operations

Disclosure Requirements

MPMs must be presented in a single note including:

• A statement that they represent management’s view and are not necessarily comparable across entities.
• A description of the performance aspect communicated.
• Why management considers the measure useful.
• How the measure is calculated.
• A reconciliation to the closest required subtotal, with disclosure of:
  • income tax effects,
  • non-controlling interest effects,
  • line-item connections in the financial statements,
  • explanation of reconciling items.

Aggregation and Disaggregation

IFRS 18 strengthens principles for grouping information:

• Classify and aggregate items with shared characteristics.
• Disaggregate where items differ materially.
• Ensure aggregation does not obscure material information.

Roles of the Statements

• Primary financial statements: provide structured summaries for comparability and trend analysis.
• Notes: provide the detail needed to understand and supplement the line items.

Use of “Other”

The standard is explicit that the use of “other” should be discouraged and only applied where no more informative label is possible (paragraph B25).

Examples of better practice include:

• If material and immaterial items are aggregated, label the category with reference to the material item.
• If immaterial items are aggregated:
  • Group those with similar characteristics under a descriptive label.
  • If grouped with dissimilar items, use a label that reflects those differences.
• If “other” cannot be avoided:
  • Use a precise label such as “other operating expenses” or “other finance expenses”.
  • Where “other” includes only immaterial items, assess whether the total is still large enough to raise questions about materiality.
    • If so, disclose additional detail — for example:
      • an explanation that no material items are included, or
      • an outline of the immaterial items aggregated, with the nature and amount of the largest item.

Final Thoughts

IFRS 18 introduces a more structured, comparable, and transparent approach to financial performance presentation. The new profit or loss categories, required subtotals, and MPM disclosures will increase consistency, while the aggregation and disaggregation rules aim to eliminate the uninformative use of “other”.

For preparers, the most significant impacts will likely be:

• Redesigning the income statement format
• Providing reconciliations for MPMs
• Expanding disclosures on the nature of expenses
• Adjusting cash flow statements to align with the new subtotals

These changes mean greater discipline in presentation, but ultimately more decision-useful information for users of financial statements.

For clarification, guidance, or feedback, reach out at insight@leash.co.za.