New IFRS standard will reshape the statement of profit or loss

International Financial Reporting Standard (IFRS) 18, Presentation and Disclosure in Financial Statements, is set to overhaul the way income and expenses are presented in financial statements. Key changes include:

• A defined structure for the statement of profit or loss, including a mandatory “operating profit” subtotal
• A requirement to disclose management-defined performance measures, and to reconcile any non-GAAP measures back to IFRS
• Principles regarding aggregation and disaggregation that apply to all primary statements and notes

“IFRS 18 contains some of the most significant changes to how financial statements are presented in the past decade,” he continues. “These changes affect both interim and full-year financial statements. Entities will need to consider not only the structure of their statement of profit or loss within their financial statements, but also the basis and appropriateness of performance measures included in their current communications with external stakeholders.”

Key facts

IFRS 18 focuses on new requirements for the statement of profit or loss. It will replace the current International Accounting Standard (IAS) 1, Presentation of Financial Statements, and will affect all entities reporting under IFRS, with varying levels of impact.

“Effective Jan. 1, 2026, IFRS 18 creates a pivotal shift in financial reporting for Canadian companies. Systems, processes and performance metrics may be impacted, demanding enterprise-wide readiness,” says Liam Neilson, a financial consulting partner at RSM Canada.

IFRS 18 will be effective for reporting periods beginning on or after Jan. 1, 2027 , with earlier application permitted. Comparative information in financial statements must be restated in the year of initial adoption.

Though it will not change how companies recognize and measure items in their financial statements, IFRS 18 will affect the way companies present and disclose information in those statements.

Objectives of IFRS 18

IFRS 18 was developed to provide greater consistency between different sets of financial statements and enhance users’ ability to view an entity “through the eyes of management.”

It responds to the increased use of alternative performance measures by listed entities to explain their financial performance. The lack of information about how these measures are determined or calculated has long been a source of concern for investors and regulators.

“IFRS 18 will require entities to scrutinize carefully which performance measures they use in communicating with external stakeholders, and ensure that their method of calculation is clear, consistent and appropriate,” explains Norris.

Key new requirements

In addition to existing requirements brought forward from IAS 1, IFRS 18 contains key new presentation requirements , focusing on the statement of profit or loss and disclosures around financial performance.

Categorization of the statement of profit or loss

Income and expenses must be classified into one of three defined categories—operating, investing or financing. The aim is to increase comparability by ensuring consistent presentation and classification within the statement of profit or loss.

The classification may differ depending on the entity’s main business activity. For example, a bank would classify interest income as operating income. Similarly, a property investment company would classify rental income as operating income.
Income tax and the results of discontinued operations will be shown separately from the three categories above.

New statement of profit or loss subtotals

Generally, entities are required to report two new defined subtotals in the statement of profit or loss:

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

The following example is based on the above requirements.

Management-defined performance measures (MPMs)

MPMs are a new concept introduced by IFRS 18. The term applies to subtotals of income and expenses, such as adjusted operating profit, that are not defined by IFRS but are used in public communications other than the financial statements to communicate management’s view of an aspect of a company’s financial performance.

IFRS 18 requires a single disclosure note providing information on MPMs, including:

• Why each MPM is reported, including why it provides useful information about the entity’s financial performance
• How each MPM is calculated
• Details of any changes to the MPMs and the reason for each change
• A reconciliation to the most directly comparable IFRS-defined subtotal

As the disclosure note will form part of the financial statements, the information will also be subject to audit. The note will include a statement that the MPMs provide management’s view of an aspect of the financial performance of the entity as a whole and are not necessarily comparable with measures sharing similar labels or descriptions provided by other entities.

Grouping and aggregation

IFRS 18 provides new guidance on whether information should be included in the primary financial statements or instead disclosed in the notes. In addition, it includes requirements to help companies determine meaningful descriptions for aggregated items. It also requires additional information for items labeled as “other” in the statement of profit or loss.

IFRS 18 also introduces enhanced requirements for the grouping of information in the financial statements, i.e., aggregation and disaggregation. Companies will need to analyze their operating expenses directly on the face of the statement of profit or loss by nature, function or a mixed presentation. This presentation should provide a “useful structured summary” of those expenses. If any items are presented by function on the face of the statement of profit or loss (e.g., cost of sales), then the entity must provide more detailed disclosures about their nature within the notes.