Strategic Business Reporting (International) · Presentation and disclosure in financial statements

IFRS 18 Presentation and Disclosure in Financial Statements

Updated 11 October 2026 · Fact-checked

IFRS 18 replaces IAS 1 for the presentation of financial statements. It requires income and expenses in the statement of profit or loss to be classified into operating, investing and financing categories, with defined subtotals, and it requires disclosure of management-defined performance measures in a single note. Solve questions by classifying each item, then building the subtotals.

Understand IFRS 18 Presentation and Disclosure in Financial Statements

IFRS 18 is the IASB's standard on presentation and disclosure in financial statements. It replaces IAS 1. Its aim is better comparability of the statement of profit or loss and more transparent information about performance measures that management uses outside the financial statements. IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027. It is applied retrospectively, so comparatives are restated.

The core change is structure. Income and expenses in profit or loss are placed in one of five categories: operating, investing, financing, income taxes and discontinued operations. Operating is the default category. It holds everything not classified in another category. Investing holds income and expenses from cash and cash equivalents and from other assets that generate returns individually and largely independently of other resources. For an entity with no main business activity of investing, this covers returns on cash, cash equivalents and similar assets, and equity-accounted investments. Financing holds income and expenses from liabilities that arise from transactions that only involve raising finance (such as borrowings and lease liabilities). It also holds the effects of interest rates and changes in them on other liabilities, such as the unwinding of discount on pensions and provisions. This applies to an entity with no main business activity of providing financing. Lease liabilities arise from raising finance, so lease interest is in the financing category.

The standard introduces two new defined subtotals: operating profit and profit before financing and income taxes. All entities must present them in the statement of profit or loss. Operating profit is the total of the operating category. Profit before financing and income taxes adds the investing category to operating profit. Profit before income taxes is then profit before financing and income taxes less financing category expenses (net of any financing income, which is rare). Financing expenses include the interest-rate effects on other liabilities. Some entities have a specific main business activity, for example investing in assets as a main activity or providing financing to customers. They apply special rules on classification. For example, a bank may classify some items in operating that other entities would put in investing or financing.

IFRS 18 also introduces management-defined performance measures (MPMs). These are subtotals of income and expenses that a company uses in public communications outside the financial statements to explain management's view of performance, and that are not among the subtotals specified by IFRS Accounting Standards. Companies must disclose them in a single note, with a reconciliation to the most directly comparable total or subtotal required by IFRS Accounting Standards (operating profit, profit before financing and income taxes, or profit or loss). They must also show the tax and non-controlling interest effect of each reconciling item. They must explain why the measure is useful. Presentation also gets tighter rules on aggregation and disaggregation, and on how to label items, with extra guidance on 'other' lines. Operating expenses can be shown by nature, by function or mixed. If you present by function, specified disclosure by nature is also required in a note.

In the cash flow statement, IFRS 18 amends IAS 7. Operating cash flows under the indirect method start from operating profit, not profit or loss. IFRS 18 also removes the choices in IAS 7 for interest and dividends. For an entity with no specified main business activities, interest paid and dividends paid are classified in financing activities. For that same entity, interest received and dividends received are classified in investing activities. Banks and similar entities with specified main business activities follow different rules.

Key rules to remember

Operating profit: Operating profit = Revenue − all income and expenses classified in the operating category; Operating is the residual category. Anything not investing, financing, tax or discontinued stays here.
Profit before financing and income taxes: Profit before financing and income taxes = Operating profit + investing category income − investing category expenses; Investing items include income from cash and equity-accounted investments for most entities.
Profit before tax: Profit before income taxes = Profit before financing and income taxes + financing category income − financing category expenses; The financing category covers income and expenses on liabilities that arise from transactions that only involve raising finance (borrowings, lease liabilities). It also covers the effects of interest rates on other liabilities such as pensions and provisions, for an entity with no main business activity of providing financing.
Profit or loss: Profit or loss = Profit before income taxes − income tax expense ± discontinued operations result; Income taxes and discontinued operations are their own categories.
MPM reconciliation: MPM = most directly comparable total or subtotal required by IFRS Accounting Standards ± reconciling items; That subtotal is operating profit, profit before financing and income taxes, or profit or loss. Disclose the tax and NCI effect of each reconciling item separately. Do not deduct them from a pre-tax MPM. Disclose in one note, with an explanation of why the measure is useful.

How to solve IFRS 18 Presentation and Disclosure in Financial Statements questions

Use this method for any question asking you to present, classify or explain under IFRS 18.

1Read the requirement. Decide whether you must classify items, build the statement, or discuss MPMs.
2Identify the entity type. Check whether it has a specific main business activity such as investing or providing financing to customers, because classification rules differ.
3Classify each income and expense into operating, investing, financing, income taxes or discontinued operations. Start with the specific categories and leave the rest as operating.
4Build the subtotals in order: operating profit, profit before financing and income taxes, profit before tax, then profit for the period.
5For any non-GAAP style measure, test whether it is an MPM: used in public communications, a subtotal of income and expenses, and not a specified IFRS subtotal.
6Prepare the MPM note: the reconciliation to the most directly comparable IFRS-required total or subtotal, the tax and NCI effect of each item, and a statement of why it is useful.
7Apply to the scenario. Comment on comparability, transparency and any misleading presentation, and state your conclusion.

Quickest way: Classify, subtotal, test

When to use it: Use this when time is short and the question gives a list of income and expense items.

Write four labels: Operating, Investing, Financing, Tax/Discontinued.
Tag each item. Interest on borrowings and lease interest go to Financing. Returns on cash and associates go to Investing for a typical entity.
Everything left is Operating.
Total each category and compute operating profit, then profit before financing and tax, then profit before tax.
For an MPM, write one line: measure, reconciling items, and the most directly comparable IFRS-required subtotal (operating profit, profit before financing and income taxes, or profit or loss). Show the tax and NCI effect of each item separately.

Common mistakes in IFRS 18 Presentation and Disclosure in Financial Statements

Treating IFRS 18 as only a relabelling of IAS 1.
The statements look similar, so students miss the new categories and subtotals.
Fix: State that IFRS 18 adds mandatory categories, defined subtotals and an MPM note.
Putting items in operating by default without checking investing and financing first.
Operating is the residual category, so students mix up the order of testing.
Fix: Test for investing, financing, tax and discontinued first. Whatever remains is operating.
Calling every non-GAAP measure an MPM.
Students overlook the definition.
Fix: An MPM must be a subtotal of income and expenses used in public communications and not specified by IFRS Accounting Standards. EBITDA and adjusted operating profit are typical MPMs. Ratios, cash-flow measures and any measure that is not a subtotal of income and expenses are not MPMs.
Leaving out the tax and NCI effect in the MPM reconciliation.
Students only reconcile the pre-tax amounts.
Fix: Show the income tax effect and non-controlling interest effect for each reconciling item as a separate disclosure. Reconcile a pre-tax MPM to a pre-tax IFRS subtotal.
Applying normal-entity classification to a bank or an investment entity.
The special rules for main business activities are forgotten.
Fix: Check whether investing or providing financing to customers is a main business activity before classifying.
Putting lease or pension interest in operating.
Students think only bank loan interest is financing.
Fix: Lease interest is financing, because lease liabilities arise from transactions that only involve raising finance. For an entity with no main business activity of providing financing, the effects of interest rates on other liabilities, such as pension unwinding, are also in financing.

Worked examples

Example 1

Entity A, a non-financial company, reports for the year: revenue $900,000; cost of sales $520,000; distribution and administrative costs $140,000; interest income on bank deposits $12,000; share of profit of an associate $30,000; interest on bank loans $25,000; income tax $60,000. Prepare the profit or loss subtotals under IFRS 18.

Show the solution

Operating category: revenue 900,000 − cost of sales 520,000 − distribution and administrative costs 140,000 = 240,000. Operating profit = $240,000.
Investing category: interest income on deposits 12,000 + share of associate profit 30,000 = 42,000.
Profit before financing and income taxes = 240,000 + 42,000 = $282,000.
Financing category: interest on bank loans = 25,000 expense.
Profit before income taxes = 282,000 − 25,000 = $257,000.
Profit for the year = 257,000 − 60,000 = $197,000.

Answer: Operating profit $240,000; profit before financing and income taxes $282,000; profit before income taxes $257,000; profit for the year $197,000.

Example 2

A listed company reports profit for the year of $400,000 and tells investors in its results presentation that 'adjusted operating profit' is $520,000. It reaches this by adding back restructuring costs of $100,000 and an impairment of $40,000 to operating profit of $380,000. Tax at 25% applies to these items and there is no NCI. Explain whether this is an MPM and prepare the reconciliation.

Show the solution

Test the definition: it is a subtotal of income and expenses, used in public communications, and it is not a subtotal specified by IFRS Accounting Standards. So it is an MPM.
The most directly comparable specified subtotal is operating profit of $380,000. Both figures are before tax. The profit for the year of $400,000 is a different subtotal and is not the starting point.
Pre-tax reconciliation: operating profit 380,000 + restructuring 100,000 + impairment 40,000 = 520,000.
Separately disclose the tax effect of each reconciling item: restructuring 100,000 × 25% = 25,000; impairment 40,000 × 25% = 10,000; total 35,000. The NCI effect is nil.
The $35,000 is a disclosure about the items. It does not reduce the $520,000, which stays a pre-tax measure.
The note must also explain why the measure gives useful information about management's view of performance.

Answer: Adjusted operating profit is an MPM. It reconciles from operating profit of $380,000 plus $100,000 restructuring and $40,000 impairment to $520,000. The note separately discloses the tax effect of $25,000 and $10,000 (total $35,000) and a nil NCI effect, and explains why the measure is useful.

Exam tips

Expect a scenario with a list of income and expense items. Marks are for correct category, subtotal and brief reason for each classification.
When discussing MPMs, write the definition test first, then the reconciliation requirement. Examiners reward the link between the definition and the scenario.
Use professional skills marks: challenge whether an MPM could be misleading, for example by excluding recurring costs, and comment on the ethical issue.
Compare with IAS 1 only where asked. Focus on what is new: categories, subtotals, MPMs and aggregation rules.
Always state the entity type assumption, such as non-financial entity, before classifying.

Practice questions from Presentation and disclosure in financial statements

IFRS 18 Presentation and Disclosure in Financial Statements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IFRS 18 Presentation and Disclosure in Financial Statements: frequently asked questions

What is the main difference between IAS 1 and IFRS 18?

IAS 1 allowed entities to choose their own subtotals and layout in profit or loss. IFRS 18 requires five categories, mandatory operating profit and profit before financing and income taxes subtotals, and an MPM note. Many IAS 1 requirements, such as going concern and the basics of a complete set of statements, carry over.

What are the operating, investing and financing categories?

Operating is the default category for items not in the others. Investing covers returns from assets that generate returns largely independently, such as cash and associates. Financing covers income and expenses from financing liabilities, such as borrowings and leases, and the effects of interest rates on other liabilities such as pensions, for an entity with no main business activity of providing financing.

What is a management-defined performance measure?

It is a subtotal of income and expenses that management uses in public communications to convey its view of performance, and that IFRS Accounting Standards do not specify. It must be disclosed in one note with a reconciliation, tax and NCI effects, and an explanation of why it is useful.

Does IFRS 18 change profit for the year?

No. It changes how items are presented, not how they are recognised or measured, so total profit or loss stays the same. The categories and subtotals change, and so does the information given about performance measures.