Introduction
IFRS 18 Presentation and Disclosure in Financial Statements introduces a new framework for presenting financial performance and significantly enhances transparency around entity-specific performance measures. One of its most important innovations is the formal introduction of Management-Defined Performance Measures (MPMs) into IFRS Accounting Standards.
MPMs aim to enhance the consistency, discipline and comparability of performance measures used by management that are not specified by IFRS, while acknowledging that such measures continue to play a significant role in communicating financial performance to users.
We recently posted an article summarising the key changes from IAS 1 to IFRS 18, which you can find here.
What are Management-Defined Performance Measures?
Under IFRS 18, a Management-Defined Performance Measure is defined as a subtotal of income and expenses that meets all of the following criteria:
- it is used in public communications outside the financial statements (for example, annual reports, investor presentations or press releases);
- it provides management's view of an aspect of the financial performance of the entity as a whole; and
- it is not a subtotal required or specifically defined by IFRS Accounting Standards.
Accordingly, MPMs must convey management's perspective about performance and may differ from subtotals defined elsewhere in IFRS. IFRS 18 also explicitly requires a disclosure that MPMs are not necessarily comparable with measures sharing similar labels or descriptions provided by other entities.
Typical examples of MPMs include "adjusted operating profit", "EBITDA" and other entity-specific adjusted profit measures. Subtotals required by IFRS — such as gross profit, operating profit or profit before tax — are not MPMs even if management emphasises them.
MPMs are a defined subset of non-IFRS measures and do not include ratios, operational metrics, cash flow measures or performance measures that are not subtotals of income and expenses.
Rationale for Regulating MPMs
In communicating financial performance, entities often make use of terminology that may differ from the terminology used in the financial statements. Prior to IFRS 18, these performance measures were often presented without consistent definitions, reconciliations or explanations. This reduced comparability between entities and increased the risk that such measures could be misleading. The IASB introduced MPM requirements to:
- increase transparency around entity-specific performance measures;
- improve comparability between entities and across periods;
- ensure users understand how MPMs relate to IFRS-defined measures; and
- retain management's ability to communicate performance, while imposing discipline on disclosures.
By bringing MPMs into the audited financial statements, IFRS 18 significantly strengthens the credibility of measures previously communicated outside the financial statements.
Identification and Scope of MPMs
Entities must identify MPMs based on how performance measures are used in public communications relating to the reporting period, including:
- management commentary in annual or interim reports;
- press releases;
- investor presentations and earnings announcements.
Public communications exclude oral communications, written transcripts of oral communications and social media posts for this purpose. Measures used solely for internal management purposes, or metrics that are not subtotals of income and expenses, also fall outside the scope of MPMs.
Disclosure Requirements
For each MPM, IFRS 18 requires detailed disclosures designed to allow users to fully understand the measure and how it relates to IFRS figures. In a single note, an entity should disclose:
- a statement that the MPM provides management's view of an aspect of financial performance and that it is not necessarily comparable with similar measures reported by other entities;
- a clear description of the MPM and the aspect of financial performance it communicates;
- an explanation of why the measure provides useful information about financial performance;
- a description of how the measure is calculated;
- a reconciliation between the MPM and the closest comparable IFRS-defined subtotal;
- disclosure of the income tax effect and the effect on non-controlling interests for each reconciling item; and
- an explanation of any changes to the calculation of the MPM compared with prior periods.
In limited circumstances, an MPM may also be presented on the face of the income statement as an additional subtotal if it meets specified criteria consistent with the structure of the financial statements. These disclosures aim to provide users with clear insight into the composition of MPMs, their basis and their differences from IFRS measures.
Impact on Financial Statement Preparation
The introduction of MPMs may require changes to:
- financial reporting processes and systems;
- internal controls over non-IFRS measures;
- documentation supporting management judgement; and
- coordination between finance, investor relations and executive management.
Given that MPM disclosures are subject to audit, entities will need robust processes to ensure the completeness and consistency of measures used across all public communications.
Illustrative Example
An entity presents "Adjusted operating profit" in its investor presentations, excluding restructuring costs from IFRS operating profit. Under IFRS 18, the entity would be required to:
- identify "Adjusted operating profit" as an MPM;
- disclose it in a single note to the financial statements;
- reconcile it to IFRS operating profit;
- explain the nature of the restructuring costs and why management excludes them;
- disclose the related income tax and non-controlling interest effects; and
- include the statement that the MPM reflects management's view of performance and is not necessarily comparable with other entities' measures.
Effective Date and Transition
IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted. The standard is applied retrospectively, subject to specific transition provisions, which means comparative information must also be restated. Entities that currently use multiple adjusted performance measures are encouraged to assess the impact of the MPM requirements early and consider how to align existing measures with the new disclosure obligations.
Conclusion
Management-Defined Performance Measures represent a significant enhancement to the transparency and credibility of performance reporting under IFRS 18. While entities retain flexibility to communicate performance using entity-specific measures, the new requirements impose clear and robust disclosure obligations.
Early preparation will be critical to ensure compliance, align external communications with financial statement disclosures, and maintain credibility with users of financial statements.
For clarification, guidance, or feedback, reach out at insight@leash.co.za.