IAS 1 vs IFRS 18: What Stays, What Changes and What You Need to Do Before 2027
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Sai Manikanta Pedamallu
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IAS 1 vs IFRS 18: What Stays, What Changes and What You Need to Do Before 2027
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
Posts 4 and 5 in this series covered what IFRS 18 introduces: the five income categories, the two mandatory subtotals, and the Management Performance Measures framework. This post does something different. It sits the two standards side by side, area by area, and answers the question that finance directors and Dip IFRS students both ask: what exactly is changing, what is staying, and where does the real work lie before 2027?
I want to be direct about something before we start. Most of IFRS 18 carries forward IAS 1 unchanged. The IASB was explicit about this: it did not reconsider all aspects of IAS 1 when developing IFRS 18. The focus was the income statement, the MPM framework, and the cash flow statement. If you are expecting a wholesale rewrite of how financial statements are prepared, that is not what IFRS 18 is. What it is, for the areas it does touch, is a meaningful and operationally demanding change.
Area 1: The Complete Set of Financial Statements
What Stays
The five components of a complete set of financial statements remain identical under IFRS 18. Statement of financial position, statement of profit or loss and OCI, statement of changes in equity, statement of cash flows, and notes. The requirement for a third balance sheet when prior periods are restated also carries forward unchanged.
The general features, going concern, accrual basis, consistency of presentation, materiality, offsetting, and comparative information requirements all carry forward from IAS 1 without substantive change.
| Requirement | IAS 1 | IFRS 18 |
|---|---|---|
| Complete set of financial statements | 5 components | 5 components, unchanged |
| Third balance sheet on restatement | Required | Required, unchanged |
| Going concern assessment | Required | Required, unchanged |
| Accrual basis | Required | Required, unchanged |
| Consistency of presentation | Required | Required, unchanged |
| Comparative periods | Minimum 1 prior period | Minimum 1 prior period, unchanged |
| Offsetting prohibition | Yes | Yes, unchanged |
| Materiality framework | Yes | Yes, unchanged |
What Changes
Nothing in this area changes substantively. The general features section of IFRS 18 is a clean carry-forward.
Area 2: The Statement of Financial Position
What Stays
Minimum line items for the statement of financial position are retained without change. Current and non-current classification requirements carry forward. The liquidity presentation option for banks and similar entities remains. The rules on what constitutes a current liability, including the covenant breach reclassification, are unchanged.
| Requirement | IAS 1 | IFRS 18 |
|---|---|---|
| Minimum line items on face | Prescribed list | Same list, unchanged |
| Current/non-current split | Required for most entities | Required, unchanged |
| Liquidity presentation option | Available for banks | Available, unchanged |
| Covenant breach reclassification | Triggers current classification | Unchanged |
| Subtotals on face | Permitted when relevant | Permitted, unchanged |
What Changes
Nothing changes in the statement of financial position under IFRS 18. This is one of the areas the IASB left entirely intact.
Area 3: The Statement of Profit or Loss
This is where the substantive change sits. The income statement under IFRS 18 looks different from IAS 1 in structure, mandatory subtotals, and classification requirements.
What Stays
The minimum line items that must appear on the face of the income statement, revenue, finance costs, tax expense, share of profit of equity-accounted investments, profit from discontinued operations, and profit or loss for the period, all carry forward. The option to present expenses by nature or by function remains. The requirement to disclose depreciation, amortisation, and employee benefit costs when presenting by function also carries forward.
What Changes
The five mandatory income and expense categories. Under IAS 1, there was no requirement to classify income and expenses into defined categories. Companies could structure their income statement largely as they chose, subject only to the minimum line items. IFRS 18 requires every item to sit in one of five defined categories: operating, investing, financing, income taxes, and discontinued operations.
The detailed mechanics of each category are covered in Post 4. For the comparison here, the key shift is from format flexibility to defined classification.
Two mandatory subtotals. IAS 1 had no mandatory subtotals on the income statement beyond profit or loss for the period. EBIT, EBITDA, gross profit, operating profit: all optional, all defined differently by different companies. IFRS 18 introduces two that are mandatory for all entities.
| Subtotal | IAS 1 | IFRS 18 |
|---|---|---|
| Gross profit | Optional | Optional, unchanged |
| Operating profit | Optional, no standard definition | Mandatory, precisely defined as operating + investing categories |
| EBIT | Optional, commonly used, no standard definition | Not defined; operating profit is the closest equivalent but not identical |
| EBITDA | Optional, no standard definition | Not defined; MPM if used externally |
| Profit before financing and income taxes | Optional | Mandatory |
| Profit or loss for the period | Mandatory | Mandatory, unchanged |
Where items land may change. Under IAS 1, companies had flexibility in where they placed items like treasury income, associate earnings, and FX differences on borrowings. Under IFRS 18, classification follows the five-category rules. For some companies, this will move items that previously appeared below the "operating profit" line they informally presented into the mandatory operating profit subtotal, changing the number.
A manufacturing company that previously showed share of profit of associates below its informal EBIT will now find those earnings included in IFRS 18's operating profit if the associate is integral to operations, or in the investing category, which also feeds into operating profit. Either way, the associate earnings move into the mandatory subtotal. The IFRS 18 operating profit number will be different from that company's previous voluntary "operating profit" presentation.
Nature of expense disclosure for function presenters. This requirement existed under IAS 1 but IFRS 18 retains and strengthens it. Entities presenting expenses by function must disclose in the notes the amount of depreciation and amortisation, employee benefits expense, and impairment losses by nature. IFRS 18 extends this to require disclosure of these items broken down by the income statement category they fall into, not just in aggregate.
| Income Statement Area | IAS 1 | IFRS 18 |
|---|---|---|
| Income/expense classification | No mandatory categories | Five mandatory categories |
| Operating profit subtotal | Optional | Mandatory |
| Profit before financing & tax subtotal | Optional | Mandatory |
| Definition of "operating" | Not defined | Defined: operating category + investing category |
| Associate earnings classification | Flexible | Defined by category rules |
| Nature of expense for function presenters | Aggregate disclosure required | Category-level disclosure required |
| Additional subtotals | Permitted | Permitted, subject to conditions |
Area 4: The Statement of Cash Flows
What Stays
The overall structure of the statement of cash flows, operating, investing, and financing sections, remains intact. The direct and indirect methods for presenting operating cash flows both remain available. The definition of cash and cash equivalents is unchanged.
What Changes
Two changes here, both consequential amendments from IFRS 18 to IAS 7.
Starting point for the indirect method changes. Under IAS 1, the indirect method started the reconciliation from profit before tax. Under the amended IAS 7, it starts from operating profit as defined by IFRS 18. Since operating profit is now a mandatory, defined subtotal, this creates a consistent starting point across all entities. Some reconciling items that previously appeared in the operating cash flow reconciliation will shift, because the starting number is different.
For a company that previously started its indirect method cash flow from profit before tax of Rs. 500 crore and added back finance costs of Rs. 80 crore and tax of Rs. 120 crore as reconciling items, the new starting point would be operating profit. If operating profit under IFRS 18 is Rs. 700 crore (after adding back finance costs and taxes to arrive at the IFRS 18 defined operating profit), the reconciliation structure changes even though the cash generated from operations figure at the bottom is the same.
Classification optionality for interest and dividends removed. This is a significant change for many companies. Under IAS 1 and the existing IAS 7, entities had a choice:
- Interest received: operating or investing
- Dividends received: operating or investing
- Interest paid: operating or financing
- Dividends paid: operating or financing
Under the amended IAS 7 that accompanies IFRS 18, the optionality is gone. For most non-financial entities:
| Cash Flow Item | IAS 7 (current) | IAS 7 (amended by IFRS 18) |
|---|---|---|
| Interest received | Operating OR investing | Investing |
| Dividends received | Operating OR investing | Investing |
| Interest paid | Operating OR financing | Financing |
| Dividends paid | Operating OR financing | Financing |
The rule is that classification in the cash flow statement must be consistent with how the corresponding income or expense is classified in the profit or loss statement under IFRS 18. Since interest received and dividend income are investing category items for most non-financial entities under IFRS 18, the cash inflows go to investing. Since interest paid is a financing category expense, the cash outflows go to financing. Since dividends paid are distributions to owners, they go to financing.
This will change reported operating cash flow for any company that currently classifies interest received, dividends received, or interest paid within operating activities. A capital-intensive Indian manufacturer that classifies interest paid as operating under current IAS 7 will see its operating cash flow increase when interest paid moves to financing under the amended IAS 7. Operating cash flow looks better. Financing cash outflows increase. The total cash movement is identical.
For banks and entities whose main business is providing financing, different rules apply because their core income is interest income, which sits in the operating category.
Area 5: Management Performance Measures
What Stays
Nothing from IAS 1 carries forward here because IAS 1 had no MPM framework. This area is entirely new.
What Changes
Everything. Post 5 covers this in full. In brief: if a measure is a subtotal of income and expenses, used in public communications, communicates overall entity performance, and is not an IFRS-defined measure, it is an MPM and requires a dedicated note in the audited financial statements covering description, calculation, reconciliation to the nearest IFRS subtotal, and tax effects. This note is within the scope of the statutory audit.
Area 6: Aggregation and Disaggregation
What Stays
The basic principle, material items must be presented separately, immaterial items may be aggregated, carries forward from IAS 1.
What Changes
IFRS 18 introduces more granular guidance on how aggregation and disaggregation decisions are made, applying separately to the face of the financial statements and to the notes. The standard introduces the concept of "similar items" more precisely: items with the same nature and function can be aggregated. Items that differ in nature or function must be presented separately if material.
| Area | IAS 1 | IFRS 18 |
|---|---|---|
| Aggregation principle | Material separately, immaterial can aggregate | Same, with more precise guidance |
| "Similar items" definition | Not defined | Defined by nature and function |
| Notes disaggregation | Broad principle | More detailed requirements |
| "Other" line items | Permitted for immaterial items | Still permitted, but harder to use for diverse items |
In practice, a company with a large "other income" or "other expenses" line that contains disparate items of different natures will face more challenge under IFRS 18 in justifying that aggregation. If the items are material and differ in nature, IFRS 18 requires separate presentation or explanation in the notes.
Area 7: Notes to the Financial Statements
What Stays
The structure and content requirements for notes largely carry forward from IAS 1. The recommended note ordering, accounting policies first, then line item support, then other disclosures, is retained. The requirement for material accounting policy disclosures (from the 2021 IAS 1 amendment) carries through.
What Changes
Two additions. First, the MPM note, which is entirely new. Second, the nature of expense disclosure for function presenters now requires category-level breakdown, not just an aggregate figure.
The Transition: What IFRS 18 Requires on First Application
This is the section that matters most for finance teams preparing now.
IFRS 18 requires retrospective application. That means the comparative period (for most entities, the year ending 31 December 2026) must be restated under IFRS 18 when 2027 financial statements are prepared. The 2026 income statement, cash flow statement, and any relevant notes must be reclassified and re-presented as if IFRS 18 had always applied.
One specific relief applies: entities do not need to present the full IAS 8 quantitative disclosures about the effect of the change on every line item for the current period (2027). But they do need to present a reconciliation showing, for the comparative period (2026), the differences between the IAS 1 amounts previously presented and the IFRS 18 restated amounts, line by line.
This reconciliation is mandatory. It covers every restated line in the income statement and the cash flow statement. Each difference must be explained. For the income statement, the main drivers of differences will be reclassification between categories and the new mandatory subtotals. For the cash flow statement, the main drivers will be the interest and dividend classification changes and the new starting point for the indirect method.
| Transition Requirement | Required? | Notes |
|---|---|---|
| Retrospective application | Yes | 2026 comparative must be restated |
| Restatement of statement of financial position | No | Balance sheet not affected |
| Restatement of income statement comparative | Yes | Reclassify into IFRS 18 categories |
| Restatement of cash flow statement comparative | Yes | Reclassify interest/dividend flows |
| IAS 8 quantitative disclosures for current period | Exempt | Relief provided |
| Reconciliation of comparative period | Yes | Mandatory, line by line |
| Disclosure of early adoption | Yes if adopted early | Must state in notes |
What You Need to Do Before 2027: A Practical Checklist
I want to be specific here. Generic checklists that say "assess the impact" are not useful. Here is what the work actually involves.
1. Map Every Income and Expense Item to the Five Categories
Go through the chart of accounts. Assign each income and expense account to one of the five IFRS 18 categories. For the vast majority of operating costs, this is straightforward. The judgment calls cluster in four places:
- Treasury income: is this investing (standalone assets generating returns) or operating (integral to the business for a financial entity)?
- Associate and joint venture earnings: investing for most companies, operating for holding companies and investment entities
- FX differences on borrowings: financing
- Pension finance costs (net interest on defined benefit liability): financing
For each judgment call, document the rationale. Your auditors will ask for it.
2. Rebuild the 2026 Income Statement Under IFRS 18
Once every item is mapped, reconstruct what the 2026 income statement would look like under IFRS 18. Calculate the two mandatory subtotals. Compare them to what was previously presented as voluntary operating profit or EBIT. Identify every line that changes category. Quantify the impact on the mandatory subtotals.
This exercise will surface surprises. Companies that have previously excluded associate earnings from their voluntary operating profit will see those earnings included in IFRS 18's mandatory operating profit. Companies with large treasury portfolios classified as operating income will see those move to investing. The mandatory operating profit number may be materially different from the number the company has been communicating to investors for years.
3. Reclassify the 2026 Cash Flow Statement
Identify all interest received, dividends received, interest paid, and dividends paid currently classified in operating activities. Under the amended IAS 7, these move to investing (income items) or financing (payment items) for most entities. Recalculate 2026 operating, investing, and financing cash flows. Quantify the impact on reported operating cash flow.
Brief the treasury team. If cash flow from operations is a metric referenced in covenants, management incentive plans, or investor guidance, the reclassification may affect those numbers.
4. Inventory All MPMs
This was covered in Post 5. Complete the MPM inventory before the end of 2025 if within IFRS 18's scope. Design the MPM note for each measure identified. Run it past the audit committee and external auditors.
5. Assess System Readiness
IFRS 18 requires income and expense items to be tagged to categories consistently throughout the year. If your ERP or consolidation system does not currently capture this categorisation, you need a system change or a manual mapping process before 2026 reporting begins. This cannot be done retrospectively from summary figures. You need transaction-level or account-level categorisation.
For Indian subsidiaries of IFRS-filing multinationals, the group consolidation team will specify the IFRS 18 categorisation requirements in the group reporting package instructions for 2026. Watch for those instructions in Q3 or Q4 of 2025 if they have not already arrived.
6. Review Contracts That Reference Financial Statement Line Items
Loan covenants, management bonus plans, earn-out arrangements, and other contracts that reference specific financial statement metrics may be affected by IFRS 18's reclassifications. IFRS 18 does not change contractual definitions, but if those definitions reference "as reported in the financial statements" without a specific formula, the reclassification may change the number.
Legal and treasury teams should review all material contracts. Where ambiguity exists, seek clarification or amendment with counterparties before 2027.
7. Brief Investors and Analysts
IFRS 18 will change the income statement that investors and analysts have been reading. If the mandatory operating profit is materially different from the voluntary operating profit the company has been communicating, investors need to understand why before the 2027 annual report lands.
The best approach: include an IFRS 18 impact section in the 2026 annual report or investor day presentation, showing what the 2025 and 2026 income statements would look like under IFRS 18. Proactive disclosure builds trust. Surprises in the 2027 results erode it.
The Dip IFRS Exam Angle
For Dip IFRS candidates, IFRS 18 is examinable. It is a recent standard with high relevance. Based on the typical Dip IFRS exam approach, expect questions in the following forms.
Scenario-based classification questions: given a list of income and expense items for a company, classify each into the correct IFRS 18 category and explain the reasoning. The judgment areas, treasury income, associate earnings, FX differences, will be the focus.
Comparison questions: explain how a specific area of financial statement presentation differs between IAS 1 and IFRS 18. The cash flow statement changes and the mandatory subtotals are the most likely targets.
MPM identification and disclosure questions: given a scenario where a company uses certain performance measures externally, identify which constitute MPMs and describe the required disclosures. The three-condition MPM definition and the four required disclosures are testable.
Transition questions: describe the transition requirements when an entity first applies IFRS 18. Retrospective application, the reconciliation requirement, and the IAS 8 exemption are likely to appear.
Know the five categories cold. Know the two mandatory subtotals and what feeds into each. Know the IAS 7 changes on interest and dividend classification. And know the MPM definition and its three conditions.
Ind AS Implications
As noted in Posts 4 and 5, IFRS 18 has not yet been adopted into Ind AS. Indian companies under Ind AS continue under Ind AS 1, which is based on IAS 1.
The practical implications depend on the entity's context.
Indian subsidiaries preparing IFRS reporting packages for foreign parents applying IFRS 18 from 2027 will need to apply IFRS 18 categorisation in those packages, even if their standalone Ind AS statements remain unchanged.
Indian companies with foreign exchange listings under full IFRS, including Tata Motors (London and New York), Infosys (New York), and Dr. Reddy's (New York), will apply IFRS 18 in their primary IFRS financial statements from 2027.
Indian companies purely under Ind AS without IFRS filing obligations will apply IFRS 18 only when ICAI formally adopts it. Based on historical convergence patterns, expect a lag of two to four years from the IASB's April 2024 issuance. An exposure draft of revised Ind AS 1 aligned with IFRS 18 is anticipated. Watch the ICAI's standard-setting announcements.
FAQ
Does IFRS 18 change how profit is calculated?
No. Measurement of income and expenses is governed by other standards. IFRS 18 changes classification and presentation, not calculation.
Is the statement of financial position affected by IFRS 18?
Not substantively. The income statement and cash flow statement are the primary areas of change. The balance sheet carries forward from IAS 1.
Will reported operating cash flow change under IFRS 18?
For companies currently classifying interest received, dividends received, or interest paid as operating cash flows, yes. Those items move to investing or financing under the amended IAS 7. The total cash movement is unchanged, but the split between operating, investing, and financing sections changes.
Can a company still present gross profit under IFRS 18?
Yes. Gross profit remains an optional subtotal. IFRS 18 mandates operating profit and profit before financing and income taxes, but does not prohibit additional voluntary subtotals where they provide useful information, subject to conditions about consistency and labelling.
What if a company's voluntary operating profit under IAS 1 is different from IFRS 18's mandatory operating profit?
This will be common. Companies should reconcile the two figures in their investor communications ahead of the 2027 effective date. The mandatory IFRS 18 operating profit may be higher or lower than the voluntary figure depending on what was previously included or excluded.
Is IFRS 18 relevant for the Dip IFRS exam?
Yes. It is examinable. Focus on the five categories, the two mandatory subtotals, the IAS 7 cash flow changes, and the MPM framework.
Does IFRS 18 apply to interim financial statements?
Yes. MPM disclosures are required in both annual and interim financial statements prepared under IAS 34. The income statement categorisation and subtotals also apply to interim statements.
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This is Post 6 of the Global Fin X IFRS Series. Previous: IFRS 18 Part 2: Management Performance Measures. Next: IAS 7 Statement of Cash Flows: Direct vs Indirect Method and Classification Pitfalls.