IFRS 18 and the practical implications of its adaption

published on 18 June 2025 | reading time approx. 6 minutes

The new standard IFRS 18 “Presentation and Disclosure in Financial Statements”, which has been published in the spring of 2024, already makes massive waves. Although its application is mandatory only from financial years 2027 onwards, due to the fundamental changes especially of the structure of the income statement, however, companies should give thought to its practical implications early on. A comprehensive analysis of its diverse consequences helps to avoid snares and guarantee a successful implementation.

New regulations of IFRS 18 – Overview

IFRS 18 supersedes the currently applicable IAS 1 concerning “Presentation of Financial Statements” for financial years beginning on or after January 1st, 2027 with earlier application being permitted, provided the pending endorsement of the EU. The standard must be applied retrospectively, meaning comparative figures must be adjusted accordingly during the first-time adoption. Although much of the content from IAS 1 will be adopted by the new IFRS 18 largely unchanged or will be moved to IAS 8 concerning the rules surrounding accounting policies, IFRS 18 still brings along many fundamental changes.

Please find below an overview of the scope of IFRS 18:

New structure of the income statement

The most severe innovation is arguably the new structure of the income statement (see illustration below). In the future, this statement will be divided into five categories. Besides a separate presentation of income taxes and the result from discontinued operations as already practiced, a new subdivision of the remaining income and expenses into the categories operating, investing and financing is introduced. Such a subdivision is already known from the cash flow statement and now finds its way to the income statement as well, even if the categories are not directly comparable with those from the cash flow statement in detail.

The three categories each encompass:

Operating: Residual category, which encompasses all income and expenses that do not fall into any other category;
Investing: All income and expenses from assets that generate a return individually and largely independently from other resources, from unconsolidated subsidiaries, associates and joint ventures as well as from cash and cash equivalents;
Financing: All income and expenses from liabilities from transactions that involve only the raising of finance (e.g., bank loans) as well as interest expense and effects from changes in interest rates from other liabilities.

IFRS 18 includes special rules for the allocation of individual positions to the categories for companies with a specified main business activity, such as banks, investment or real estate firms. For these entities the corresponding parts from the categories investing and financing are allocated to the operating category instead.

Please click to enlarge

The allocation of individual income and expenses to the three new categories will be straight-forward in many cases. However, in other cases, such as exchange rate differences or the result from derivatives, there might be demarcation problems. In some circumstances a further subdivision of individual accounts might be necessary to enable a proper allocation.

A fixed detailed scheme for the breakdown of the income statement – as is known from German GAAP – is not to be found in IFRS 18. Companies are still urged to elaborate an individual detailed breakdown, for which the new guidelines of IFRS 18 concerning aggregation and disaggregation of information are useful. These guidelines must be applied for all elements of the financial statements (meaning the primaries and the notes) and support the decision in which detail individual positions in each element must be split up.

Within the operating category a subdivision according to the total cost method (nature of expenses) or the cost of sales method (expenses according to functions, but with additional disclosure of the expenses according to the nature of expense including an allocation to the functions) is both still possible. IFRS 18 also allows hybrid forms between the two. Here, entities must decide individually, which form of presentation provides the most decision useful information for financial statement users. Newly defined, however, are clear subtotals for the operating profit or loss and the profit or loss before financing and income taxes. A list of minimum items to be presented on the income statement can be found in IFRS 18.75.

New disclosure requirements for management-defined performance measures

If companies report individually defined performance measures outside of the financial statements (e.g., in a management commentary), such as EBIT based on their own definition, this might lead to additional information needing to be presented in the notes in the future. In this regard, IFRS 18 requires new information on so-called management-defined performance measures (MPMs) to be provided . MPMs are performance measures that are communicated outside of the financial statements, are not defined according to the provisions of IFRS and shall present management’s view on an aspect of the financial performance. For such MPMs alongside a description a reconciliation to the most directly comparable IFRS figure is required among others.

Other effects on the primaries

Beside the effects on the income statement and the notes, there are also a few specific changes to the further elements of the financial statements. On the balance sheet, IFRS 18 requires a separate presentation of goodwill. Regarding the cashflow statement the accounting option for the classification of interest and dividend payments is abolished. Instead, at least for entities without a specified main business activity, interest and dividend payments received are now defined to be part of the investment activities, and interest and dividend payments made are now part of the financing activities. This conforms to the German GAAP regulation for the cashflow statement according to DRS 21. Furthermore, IFRS 18 newly introduces a standardized starting point for the presentation of the cashflow from operating activities according to the indirect method, which is the operating profit or loss.

Transition to IFRS 18 and the consequences in practice

Especially the changed structure of the income statement and the requirement to present MPMs in the notes could bring along far-reaching consequences surrounding external, but also internal reporting. First of all, it is obvious that the new categories operating, investing and financing must be integrated into the existing reporting structure. Concerning this, existing reporting processes (including reporting packages for the subsidiaries) must be revised and especially the IT systems must be adjusted as well. The new structure could, for example, be implemented using new accounts for the income statement and a corresponding mapping of existing accounts.

The implementation of IFRS 18, however, is not only a technical challenge. Instead, a company-specific analysis of its content must be made based on the current structure to identify which shifts will occur within the income statement and how the breakdown can be developed in detail in the future, based on the new guidelines on aggregation and disaggregation, among others. The new structure could, for instance, have effects on (existing) covenants in credit agreements or the performance-related remuneration of the management. Thus, it must be reconsidered for internal processes as well, if and how the new categories of the income statement shall be considered.

Regarding internal management the additional question arises, if the currently used performance measures shall continue to be used. The introduction of new required subtotals by IFRS 18 can be an occasion to reassess the current internal reporting structure. The question arises especially against the background of externally communicated individual performance measures potentially being classified as MPMs and having to be described in the notes.

Finally, it must be considered that the income statement often constitutes a key reporting element with widespread use within the company, e.g., as the basis for business planning. Changes at such a pivotal place always require an elaborate (group-wide) communication including training of the relevant employees. Thus, the consequences of such a change should not be underestimated.

Conclusion

With the income statement IFRS 18 reforms a reporting element that is of key importance for external as well as internal reporting. The practical implications are company-specific and should be analyzed early on. The early inclusion of all departments concerned enables coming to grips with the diverse consequences and ensures that the implementation of the new rules, which is subject to some judgement, is optimally tailored to the company-specific needs.