IFRS 18 – Presentation and Disclosure in Financial Statements
Every other standard in this paper tells you how to measure something. IFRS 18 tells you how to present it.
IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board in April 2024 and applies for accounting periods beginning on or after 1 January 2027, with earlier application permitted. It replaces IAS 1 Presentation of Financial Statements.
It reaches the F2 syllabus twice: F2B2(a) names it among the financial reporting standards for the key areas of group accounts, and F2C1 names it again among the standards used to prepare group accounts. That repetition is deliberate. You cannot build a consolidated statement of profit or loss without knowing which category each line belongs to, so the presentation basis has to come first — and every consolidated statement in the chapters that follow is presented on the basis this chapter sets out.
1 . Why there is a presentation standard at all
IAS 1 prescribed almost nothing about the structure of the statement of profit or loss. It listed a handful of line items that had to appear and left the order, the grouping and the subtotals to the preparer. Three consequences followed, and IFRS 18 addresses each of them.
“Operating profit” was not defined anywhere in IFRS. Companies presented it, or did not, and defined it as they liked — some excluded restructuring costs, some excluded impairments. Two companies in the same industry could report a different operating profit on identical facts.
Aggregation was preparer habit. Material “other operating expenses” lines were common, unexplained, and impossible for a user to analyse.
The measures management actually talked about sat outside the financial statements. “Adjusted EBITDA” and “underlying earnings” appeared in results announcements and investor presentations — unaudited, unreconciled and ungoverned.
1.1 IAS 1 and IFRS 18 side by side
IAS 1 (to 2026) | IFRS 18 (from 2027) | |
Structure of the statement | Almost none prescribed. A handful of line items had to appear; order, grouping and subtotals were the preparer's. | Every item of income and expense is classified into one of five categories, and presented in category order. |
“Operating profit” | Not defined anywhere in IFRS. Presented, or not, and defined as the preparer liked. | A defined, required subtotal: the total of the operating category. |
Comparability of that figure | Two companies in the same industry could report a different figure for identical facts. | Same facts, same figure — because the category boundaries are the standard's, not the preparer's. |
Where investment income sat | Anywhere. Often inside “other income” above a self-styled operating result. | The investing category, below operating profit. |
Where finance costs sat | Conventionally near the bottom, but not required to be. | The financing category, below profit before financing and income taxes. |
Alternative measures (“adjusted EBITDA”) | Outside the financial statements entirely. Unaudited, unreconciled, ungoverned. | Management-defined performance measures — inside the audited accounts, in one note, reconciled. |
Aggregation guidance | Thin “structure and content” wording. | Explicit aggregation and disaggregation principles, and a labelling rule. |
Recognition and measurement | — | Unchanged. Not one number in the accounts changes because of IFRS 18. |
Presentation, not measurement
IFRS 18 does not change when anything is recognised, or at what amount. It changes where the numbers appear, and it adds one note. Section 7 sets out that boundary in full, because confusing the two is the fastest source of wrong exam answers.
1.2 Two things that arrived with it, and are not F2 topics
IFRS 18 also renamed IAS 8, which became Basis of Preparation of Financial Statements and now holds the general features of preparation — going concern, the accrual basis, materiality, offsetting and comparative information — that used to sit in IAS 1. That is an F1 topic and this chapter does no more than name it. IFRS 18 was also issued alongside IFRS 19 Subsidiaries without Public Accountability: Disclosures, which lets an eligible subsidiary apply IFRS with reduced disclosure. IFRS 19 is not a topic to be covered in F2. It is named here only because it is about subsidiaries and therefore looks like group content — it is not on your syllabus and you are not examined on it.
2 . The five categories
IFRS 18 requires every item of income and expense to be classified into one of five categories. Three of them restructure the statement; the other two sit where you already expect them.
Category | What it holds |
Operating | The residual category — everything not classified in one of the other four. In practice: revenue, cost of sales, distribution costs, administrative expenses, depreciation and amortisation of operating assets, impairment losses on operating assets, and operating provisions. |
Investing | Income and expenses from (a) investments in associates, joint ventures and unconsolidated subsidiaries; (b) cash and cash equivalents; and (c) other assets that generate a return individually and largely independently of the entity's other resources — investment property, for example. |
Financing | Income and expenses on liabilities that arise from transactions involving only the raising of finance (borrowings, bonds, redeemable preference shares), plus the interest expense and interest-rate effects on other liabilities — lease liabilities, the unwinding of the discount on a provision, net interest on a defined benefit obligation. |
Income taxes | The income tax expense within the scope of IAS 12. |
Discontinued operations | The post-tax result of discontinued operations within the scope of IFRS 5, presented as a single line. |
Five categories, three of them main
Do not write — or accept in a question — “IFRS 18 defines three categories”. It defines five: operating, investing, financing, income taxes and discontinued operations. Three of them are the main categories, and those three are what change the shape of the statement. The count is exactly the sort of thing an objective question tests.
2.1 Operating is the residual, and that is the design
Because operating is the residual category, you do not need a definition of ‘operations’ to use it – you simply remove anything that belongs in investing or financing, and what is left is operating. That is deliberate: it makes operating profit a complete, comparable measure of the entity's main business performance.
“Operating” is not “what the business does”
The test is not “is this part of our main business?”. It is “does this belong in investing or in financing? If not, it is operating.” Work the two named categories first and let operating take the remainder.
2.2 The exception for a specified main business activity
An entity whose specified main business activity is investing in assets, or providing financing to customers — a bank, an insurer, some lessors — classifies some investing and financing income and expenses in the operating category instead, and is not required to present the second subtotal. F2 examines groups of ordinary trading companies, so this chapter names the exception and does not work it. It is worth one line of memory for a different reason: it is the standard's sharpest limitation on comparability, because two entities holding an identical asset can classify the same income differently according to what their main business is. That is an assessment of the facts, not a free policy choice, and the analysis chapter picks it up when it discusses the limitations of ratio analysis.
2.3 Exchange differences follow the item that produced them
An exchange difference recognised in profit or loss is classified in the same category as the income and expenses of the item that gave rise to it. An exchange loss on a foreign currency trade payable is operating; an exchange gain on retranslating a foreign currency bond is financing. Where identifying the source would involve undue cost or effort the difference goes to operating — that is a relief, not a default, and an entity may not simply elect to sweep every exchange difference into one line. Chapter 10 carries the same rule from the IAS 21 side.
2.4 Interest on liabilities that are not financing liabilities
A lease liability, a discounted provision and a net defined benefit liability do not arise from transactions involving only the raising of finance, so they are not financing liabilities. The interest element of the charge on each of them is nevertheless classified in the financing category, while the rest of the charge follows its own category. Depreciation of a right-of-use asset is operating; the current service cost of a pension is operating; the increase in a provision is operating. Only the interest moves.
3 . The two required subtotals
IFRS 18 requires these totals and subtotals on the face of the statement of profit or loss:
Operating profit or loss — the total of the operating category. (new)
Profit or loss before financing and income taxes — operating profit plus the investing category: performance before the effects of how the business is financed. (new)
Profit or loss — as before.
Profit before tax and profit for the year then complete the statement, as before. Analysts have always calculated an ‘operating profit’ figure – the difference is that companies used to define it however they liked. Under IFRS 18 it is a defined, mandatory subtotal, calculated the same way by every ordinary trading company (entities whose specified main business activity is investing or financing classify some items differently — the exception is named, not taught).
Learn the two subtotals by their position: everything down to operating profit is the operating category; add the investing category to reach profit before financing and income taxes; deduct the financing category to reach profit before tax. In the exam, classification questions are quick marks – park each item in its category first, then build the subtotals.
3.1 Two labels that do not survive to 2027
PBIT is not profit before financing and income taxes
“Profit before interest and tax” was an analyst's construct with no standard behind it. The new subtotal is operating profit plus the whole investing category. For a company with no investment income the two coincide; for one with investment property or significant associates they do not. Use the standard's words — profit before financing and income taxes, “financing” and the plural — and retire PBIT.
“Profit from operations” goes the same way. It was a self-defined caption; operating profit is now a defined subtotal and is the caption to use.
Two captions that do survive. Gross profit is not one of the required subtotals, but nothing in IFRS 18 forbids it and every real statement presents it — keep it. Profit before tax is in the same position: it is presented universally and no statement should drop it, but it is not one of the three totals and subtotals that IFRS 18 requires.
4 . Presenting operating expenses
Within the operating category, expenses are presented by nature, by function, or in a mixed presentation — whichever gives the most useful structured summary of the entity's expenses. Under IAS 1 nature-or-function was a free policy choice. Under IFRS 18 it is a judgement against a stated criterion, and choosing function carries a disclosure price.
Presentation | What the line items look like | What it costs |
By nature | Raw materials and consumables used; employee benefits expense; depreciation and amortisation; other expenses. | Nothing extra — the nature information is already on the face. |
By function | Cost of sales; distribution costs; administrative expenses. | A single note disclosing the amounts of certain expenses by nature included in each function line item. |
Mixed | Some line items by function, some by nature — where that combination is the most useful structured summary. | The by-nature note applies to any operating expenses presented by function. |
The by-function note
An entity that presents any operating expenses by function must disclose, in a single note, the amounts of certain expenses by nature included in each function line item. The nature captions are depreciation, amortisation, employee benefits, impairment losses (and reversals), and write-downs of inventories (and reversals).
5 . Aggregation and disaggregation
IFRS 18 turns what used to be preparer habit into a stated judgement. Four principles carry it, and you should be able to state them in your own words.
Classify by shared characteristics. Items are grouped into line items on the basis of characteristics they share — their function, or their nature.
Aggregate on the face, disaggregate in the notes. The primary financial statements provide a useful structured summary; the detail behind each line belongs in the notes. Both are required — one is not a substitute for the other.
Do not aggregate dissimilar items. Combining items with different characteristics obscures material information, and obscuring material information is a failure of the standard, not a presentational preference.
Label faithfully. A line item's label must describe what is in it. A material line labelled “other” is a signal that the aggregation is not informative: where such a line is used and is material, the entity must explain what is in it.
This replaces the much thinner ‘structure and content’ guidance in IAS 1 and is aimed squarely at a real-world problem: large, unexplained ‘other operating expenses’ lines that users could not analyse.
5.1 What this means for a group
A consolidated statement aggregates a parent and its subsidiaries, and the aggregation principles apply to the consolidated line items, after elimination. A group cannot hide a material subsidiary's cost base inside a group “other expenses” line.
Segment reporting (IFRS 8) is not on the F2 syllabus, and IFRS 18 does not change it. The comparability of segment information remains an analytical limitation, but it is not taught here.
Aggregation is not consolidation
Consolidation is required by IFRS 10 and decides whose numbers go in. Aggregation is required by IFRS 18 and decides which line they land on. The two happen in that order and they answer different questions — keeping them apart is a genuine source of confusion at F2.
6 . Management-defined performance measures
Definition
A management-defined performance measure (MPM) is a subtotal of income and expenses that (1) is used in public communications outside the financial statements; (2) communicates management's view of an aspect of the financial performance of the entity as a whole; and (3) is not a total or subtotal specified by IFRS Accounting Standards.
Measures you will recognise: “adjusted operating profit”, “underlying earnings”, “EBITDA before exceptional items”, “profit before special items”. The abbreviation MPM is the live term; “alternative performance measure” or “APM” is what these were called before 2027 and is not used here.
What is not an MPM follows from the third limb, and it is the mechanism you should learn rather than a list: a subtotal that IFRS itself specifies or lists is not an MPM. Operating profit is required by IFRS 18, so it can never be an MPM however prominently management quotes it; the same reasoning applies to profit before financing and income taxes and to profit for the year.
Two boundaries that make good objective questions
The definition is confined to subtotals of income and expenses. Free cash flow is not an MPM — it is a cash flow measure. Net debt is not an MPM — it is a measure of financial position. Both may be quoted far more prominently than any earnings measure, and neither is caught. That is a real limitation of the reform: the discipline reaches earnings-based measures and not cash or leverage measures.
Oral communications are excluded. A measure mentioned only on an earnings call, in a transcript of one, or in a social media post is not brought into scope by that alone. A measure that also appears in a written results announcement, a published investor deck or the annual report is in scope — and in practice that is where these measures always appear.
6.1 The disclosure
For each MPM the entity gives, in a single note:
a statement that the measure is management's view of an aspect of performance and is not necessarily comparable with measures described similarly by other entities;
why the measure is used — what aspect of performance it communicates — and how it is calculated;
a reconciliation between the MPM and the most directly comparable subtotal specified by IFRS, usually operating profit; and
for each reconciling item, the income tax effect and the effect on non-controlling interests, and how the tax effect was determined.
Changes matter too. If an entity introduces an MPM, stops using one, or changes how one is calculated, it says so, explains why, and restates comparatives.
Inside the audit
Because the MPM information is disclosed in a note, it forms part of the financial statements and is therefore within the scope of the audit. That is the whole point of the reform — the numbers management was already using are now defined, reconciled, tax-effected and audited. Management can still present its own view of performance – but it must now do so transparently, in one place, reconciled to the IFRS numbers. Users get the story and the bridge back to the audited figures.
6.2 Why MPMs are a group topic
The per-reconciling-item effect on non-controlling interests is the F2 hook, and it is the reason MPMs are not simply an F1 topic repeated. An MPM is a measure of the entity as a whole; in a group that means the whole group, including the profit attributable to the non-controlling interests. The note must therefore show, for each adjustment management makes, how much of that adjustment belongs to the owners of the parent and how much to the NCI.
This is also the one place a subtotal is broken down between the parent's owners and the NCI. On the face of the statement, attribution happens once — at profit for the year and at total comprehensive income. There is no “operating profit attributable to the non-controlling interests” line, and there never will be.
What you must be able to do at F2: recognise a measure as an MPM from the three-part definition; state the four disclosure requirements; identify the correct IFRS subtotal to reconcile to; and explain why the tax and NCI effects of each reconciling item are required. You are not required to prepare an MPM note to a mark scheme.
7 . What IFRS 18 does not change
This is the boundary students get wrong most often, and the fastest source of wrong exam answers. Every chapter that carries an IFRS 18 note in this paper repeats some part of it.
Unchanged | Detail |
Recognition | IFRS 18 does not change when any asset, liability, income or expense is recognised. Revenue is still IFRS 15; leases still IFRS 16; provisions still IAS 37; financial instruments still IFRS 9 and IAS 32; intangibles still IAS 38; income taxes still IAS 12. |
Measurement | No amount changes. Goodwill, non-controlling interests at fair value or at the proportionate share, fair value adjustments, unrealised profit eliminations and the equity-method carrying amount are all measured exactly as before. Not one number in the accounts moves because of IFRS 18. |
The statement of financial position | Unchanged in substance. The current and non-current classification tests carry forward from IAS 1. The consolidated statement of financial position is presented in 2027 exactly as it is now. |
The statement of changes in equity | Unchanged. The consolidated statement of changes in equity — parent column, NCI column, total — is unaffected. |
Other comprehensive income | The split between profit or loss and OCI is unchanged, as is the recycling of the items that recycle, and the single-statement or two-statement choice is retained. The categories apply to profit or loss only — there is no operating, investing or financing analysis of OCI. |
Consolidation itself | IFRS 10 control, IFRS 3 acquisition accounting, IAS 28 equity accounting, IFRS 11 joint arrangements and IFRS 5 held for sale and discontinued operations are all untouched. IFRS 18 changes where their results are presented, not what they are. |
Earnings per share | IAS 33 is not rewritten: basic and diluted EPS are computed and presented exactly as before. There is one consequential amendment — an additional per-share amount may be presented only where its numerator is a total or subtotal specified by IFRS 18 or is a disclosed MPM, and it must be given equal prominence to, and reconciled to, the required figures. |
7.1 The one statement that does change outside profit or loss
When IFRS 18 was issued it also amended IAS 7, and the group statement of cash flows chapter applies the amended standard: the indirect method now starts from operating profit (not profit before tax), and interest and dividend cash flows have fixed homes — interest and dividends received are investing activities, and interest and dividends paid are financing activities. The old free choices have gone.
Older study materials get this wrong
Older study materials (and questions written before 2027) put interest paid in operating activities and allowed choices for interest and dividends. Under IAS 7 as amended by IFRS 18 the classification is fixed for an ordinary trading company: interest received and dividends received are investing inflows; interest paid and dividends paid are financing outflows. (Different rules apply to banks and other entities whose main business is financing or investing — beyond F2.)
Note also that the three cash flow headings — operating activities, investing activities, financing activities — are deliberately parallel to the three main profit or loss categories but are not the same classification. Tax paid is an operating activity in the statement of cash flows and an income taxes category item in the statement of profit or loss. Never call the profit or loss category “operating activities”.
7.2 Transition
IFRS 18 is applied retrospectively, so the comparative period is restated and presented on the new basis. On adoption the entity discloses a reconciliation showing, for each line item in the comparative statement of profit or loss, the amounts previously presented restated into the IFRS 18 categories. The detailed transition provisions are beyond F2.
8 . The consolidated statement of profit or loss and other comprehensive income
This is the shape every group chapter that follows instantiates with numbers. The two subtotals in the accent rows are the new required ones. Present in this order — do not reorder it to match a pre-2027 pro-forma.
Consolidated statement of profit or loss and other comprehensive income for the year ended [date]
$000 | |
Continuing operations | |
Revenue | X |
Cost of sales | (X) |
Gross profit | X |
Distribution costs | (X) |
Administrative expenses | (X) |
Other operating income / (expenses) | X / (X) |
Operating profit | X |
Share of profit of associates | X |
Investment income | X |
Profit before financing and income taxes | X |
Finance costs | (X) |
Profit before tax | X |
Income tax expense | (X) |
Profit from continuing operations | X |
Discontinued operations | |
Profit / (loss) for the year from discontinued operations | X / (X) |
Profit for the year | X |
Other comprehensive income: | |
Exchange differences on translating foreign operations | X |
Gains on property revaluation | X |
Share of other comprehensive income of associates | X |
Other comprehensive income for the year, net of tax | X |
Total comprehensive income for the year | X |
Profit for the year attributable to: | |
Owners of the parent (β) | X |
Non-controlling interests (NCI% × S's profit for the year) | X |
X | |
Total comprehensive income attributable to: | |
Owners of the parent (β) | X |
Non-controlling interests (NCI% × S's total comprehensive income) | X |
X |
Four points about the shape, each of which a pre-2027 pro-forma gets wrong:
Gross profit survives. It is not one of the two new subtotals, but nothing forbids it and every real statement presents it.
A single “other income” caption cannot survive. Rental income from investment property and dividends received are investing; sundry operating income is operating. Split the caption or drop it.
Other comprehensive income is not categorised. Do not add operating, investing or financing headings inside OCI.
Attribution happens twice and no more often. At profit for the year, and at total comprehensive income. The two new subtotals are not attributed.
8.1 Where the old labels go
The map from the caption a pre-2027 statement actually shows to its home under IFRS 18.
Old IAS 1 label | IFRS 18 category and location |
Revenue; cost of sales; distribution costs; administrative expenses | Operating — above operating profit |
Gross profit | Not a required subtotal; permitted and retained, above operating profit |
Other operating expenses | Operating — above operating profit; the label must be explained if the line is material |
“Other income” (a mixed caption) | Split: operating income stays above operating profit; rental, dividend and interest income go to investing |
Depreciation and amortisation; impairment of goodwill or of operating assets | Operating — above operating profit |
“Profit from operations” / a self-defined “operating profit” | Replaced by the defined subtotal operating profit |
“Profit before interest and tax (PBIT)” | Not an IFRS subtotal; replaced by profit before financing and income taxes |
Investment income; interest received; dividends received from investments outside the group; rental income from investment property | Investing — between operating profit and profit before financing and income taxes |
Share of profit of associates and joint ventures (equity method) | Investing — same position; it moves up from below finance costs |
Finance costs / interest on borrowings; interest on lease liabilities | Financing — between profit before financing and income taxes and profit before tax |
Unwinding of the discount on a provision; net interest on a defined benefit obligation | Financing — the interest element only; the rest of the charge follows its own category |
A single “net exchange gain / loss” caption | Split: each difference goes in the category of the item that gave rise to it |
Profit before tax | Retained by convention; not one of the required subtotals |
Income tax expense | Income taxes category — below profit before tax |
Post-tax result of discontinued operations | Discontinued operations category — a single line below tax |
Profit for the year; other comprehensive income; total comprehensive income; the attribution lines | Unchanged |
8.2 The three traps in that map
Three traps
1. PBIT is not profit before financing and income taxes. The old label meant profit before interest and tax. The new subtotal is operating profit plus the whole investing category. For a company with no investment income they coincide; for one with investment property or significant associates they do not.
2. The share of associate profit has moved. Every pre-2027 pro-forma put it immediately before profit before tax. It is now above the second subtotal. Reproduce the old layout in the exam and you lose the subtotal.
3. “Operating” is the residual, not “what the business does”. Ask whether the item belongs in investing or financing. If it does not, it is operating.
9 . Worked examples
Classifying income and expenses
Kestrel, a group of ordinary trading companies, has the following items in its consolidated statement of profit or loss for the year ended 31 December 20X7.
Depreciation of the group's delivery vehicles
Interest paid on a five-year bank loan
Rental income from a building held as an investment property
The group's share of the profit of an associate
The interest charge on a lease liability
The post-tax result of a discontinued operation
An exchange loss on a foreign currency trade receivable
The income tax expense
Interest income on the group's bank deposits
The unwinding of the discount on a decommissioning provision
State the IFRS 18 category of each item.
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Building the statement
The Kestrel group's consolidated results for the year ended 31 December 20X7, after all consolidation adjustments, are as follows.
$000 | |
Revenue | 42,600 |
Cost of sales | 25,900 |
Distribution costs | 3,400 |
Administrative expenses | 4,750 |
Impairment loss on goodwill | 600 |
Rental income from investment property | 1,150 |
Dividend income from a 5% equity investment | 240 |
Interest income on cash and cash equivalents | 180 |
Share of profit of associate | 820 |
Interest on bank borrowings | 1,260 |
Interest on lease liabilities | 340 |
Unwinding of the discount on a decommissioning provision | 90 |
Exchange loss on retranslating a foreign currency loan | 150 |
Income tax expense | 1,800 |
Kestrel presents its operating expenses by function. It has no discontinued operations. The amounts above are shown as positive figures — deciding the sign, the category and the position of each is the requirement.
Prepare the consolidated statement of profit or loss for the year ended 31 December 20X7, down to profit for the year, showing both required subtotals.
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Management-defined performance measures
Kestrel's annual report and investor communications refer to the following measures.
“Adjusted operating profit before restructuring costs”, quoted in the group's published preliminary results announcement.
Operating profit, presented on the face of the consolidated statement of profit or loss.
“Free cash flow”, quoted prominently in the front half of the annual report.
Net debt, quoted in the published investor presentation.
“Underlying earnings”, mentioned by the finance director on the results conference call and nowhere else.
(a) State, with reasons, which of these is a management-defined performance measure.
(b) For any that is, state what the entity must disclose.
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IFRS 18 Presentation and Disclosure in Financial Statements replaces IAS 1 for accounting periods beginning on or after 1 January 2027. It changes presentation, not recognition or measurement: not one number in the accounts moves because of it. Every item of income and expense is classified into one of five categories — operating, investing, financing, income taxes and discontinued operations — of which the first three are the main ones, and operating is the residual. Two new subtotals are required on the face of the statement of profit or loss: operating profit, the total of the operating category, and profit before financing and income taxes, which adds the investing category to it. Operating expenses are presented by nature, by function or in a mixed presentation, and presenting any of them by function triggers a single note analysing them by nature. Aggregation is now a stated judgement, and a material line labelled “other” must be explained. Management's own measures come inside the accounts as management-defined performance measures, disclosed in one note, reconciled to the most comparable IFRS subtotal, with the tax effect and the non-controlling interests effect of every reconciling item — which is what makes them a group topic. The statement of financial position, the statement of changes in equity and other comprehensive income are unchanged; IAS 7 was amended so that the indirect method starts from operating profit.
10 Test your knowledge
IFRS 18 – Presentation and Disclosure in Financial Statements
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