IFRS 18: Management Performance Measures and What They Mean for Financial Reporting

IFRS 18: Management Performance Measures and What They Mean for Financial Reporting

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

Every quarterly earnings season, something interesting happens. A company reports a loss under IFRS. The CEO goes on a call and talks about "adjusted EBITDA growth of 18%." The stock goes up. Analysts write positive notes. The IFRS loss sits in the financial statements, largely ignored.

I am not saying adjusted metrics are dishonest. Many are genuinely useful. What I am saying is that for two decades under IAS 1, there was no requirement to define them clearly, reconcile them transparently, or subject them to any audit scrutiny once they left the financial statements. Companies could say almost anything in an earnings presentation and call it a performance measure.

IFRS 18 ends that freedom for a specific category of measures. From 2027, if you use a metric derived from IFRS figures in your public communications and it reflects management's view of financial performance, it becomes a Management Performance Measure. It goes into the audited financial statements. It gets reconciled. It gets explained. Auditors test it.

This post is about what MPMs are, how they are defined, what the disclosure requirements look like in practice, and what this means for Indian companies using non-GAAP metrics today.

What Is a Management Performance Measure

IFRS 18 defines an MPM as a subtotal of income and expenses that meets three conditions simultaneously.

First: it is used in public communications outside the financial statements. Earnings releases, investor presentations, annual report narratives, management commentary, analyst calls. If management uses the measure to talk about the company's performance to the outside world, this condition is met.

Second: it communicates management's view of an aspect of the entity's overall financial performance for the period. Not segment performance in isolation. Not a balance sheet metric. Not a cash flow measure. A measure of income statement performance for the entity as a whole.

Third: it is not already defined or required by IFRS. If IFRS 18 already defines the subtotal, like operating profit or profit before financing and income taxes, using that measure is not an MPM. You are just using a standard IFRS measure.

All three conditions must be satisfied. A measure that meets two of the three is not an MPM.

What Is Not an MPM

This matters as much as the definition itself. IFRS 18 explicitly excludes several categories of measures from the MPM framework.

Non-financial measures are not MPMs. Carbon emissions per unit of output, employee headcount, customer satisfaction scores, occupancy rates. These do not involve income and expenses, so they fall outside the definition entirely.

Financial ratios are not MPMs. Return on equity, return on capital employed, net debt to EBITDA ratios. These combine income statement figures with balance sheet figures or cash flow figures. An MPM must be a subtotal of income and expenses only.

Cash flow measures are not MPMs. Free cash flow, operating cash flow, cash conversion. These come from the statement of cash flows, not the income statement.

Subtotals of only income or only expenses are not MPMs. An MPM must combine both income and expenses into a net figure. A measure that shows only gross revenue, or only total operating costs, without netting, is not within scope.

Segment-level performance measures that do not represent overall entity performance are not MPMs. If management reports EBITDA for its automotive segment separately but does not use a consolidated adjusted EBITDA figure to characterise the group's overall performance, the segment measure alone does not trigger MPM disclosure.

Understanding these exclusions matters because companies that are careful about how they frame their communications can keep certain measures outside MPM territory. Constant currency revenue growth, for example, is a revenue-only measure with no expense component. Under the strict definition, it is not an MPM because it is not a subtotal of both income and expenses. Infosys, which prominently reports constant currency revenue growth every quarter, would not need to disclose this as an MPM under IFRS 18.

Why MPMs Existed and Why They Proliferated

Before I get into the disclosure requirements, it is worth understanding why management performance measures became so widespread in the first place. This is not simply a story of companies trying to mislead investors.

Some genuinely useful information sits outside IFRS profit. A company going through a large restructuring will have significant one-off costs in the year. An investor trying to assess the underlying earnings power of the business needs to see profit excluding those restructuring charges, alongside a clear explanation of what was excluded and why. The IFRS profit number, in isolation, may genuinely understate sustainable earnings.

The problem was the asymmetry of accountability. Restructuring costs get excluded from adjusted profit when they are large. But restructuring benefits, when they materialise in later years, flow straight into reported IFRS profit and contribute to the narrative of "improvement." Over time, some companies found that consistently excluding certain costs from adjusted metrics made their performance look structurally better than the IFRS numbers would suggest.

The IASB studied alternative performance measure usage across a sample of companies before designing the MPM requirements. It found significant diversity: different companies excluded different items, defined similar measures differently, changed definitions between periods without clear explanation, and provided reconciliations of varying quality. Two companies both reporting "adjusted EBITDA" might be calculating it in entirely different ways.

IFRS 18 does not prohibit MPMs. It disciplines them.

The Four Required Disclosures for Each MPM

For every measure that qualifies as an MPM, IFRS 18 requires four disclosures, all in a single dedicated note in the financial statements.

1. Description and Purpose

Management must explain what the MPM is communicating and why it provides useful information to investors beyond what IFRS-defined measures already show. This is not a boilerplate statement. The explanation must be specific to that measure and that entity.

A generic statement like "adjusted EBITDA excludes non-recurring items and provides a better view of underlying performance" will not be sufficient. The note must explain what kinds of items are excluded, the basis for treating them as non-recurring or otherwise adjustable, and why a user of the financial statements would find this information useful that they could not get from the IFRS operating profit figure alone.

2. Calculation Methodology

The note must show how the MPM is calculated. This means identifying the starting point (which IFRS subtotal), listing all adjustments made, and explaining what each adjustment represents. If depreciation is excluded, the note must clarify which depreciation and from which asset classes. If share-based payment costs are excluded, the note must identify the charge being excluded.

3. Reconciliation to the Nearest IFRS Subtotal

This is the most operationally demanding requirement. For each MPM, there must be a line-by-line reconciliation back to the most comparable subtotal defined in IFRS 18 or another IFRS standard.

If the MPM is "adjusted EBITDA," the reconciliation would typically run from operating profit (the nearest IFRS 18 subtotal) to adjusted EBITDA, adding back depreciation and amortisation, then adding back or removing whatever adjustment items management applies. Each line in the reconciliation must be individually identified and explained.

The reconciliation must be consistent. If restructuring costs are excluded from the MPM in one period, the same treatment must apply in the comparative period. And if management changes what it excludes between periods, that change must be explained.

4. Tax Effect and Non-Controlling Interest Effect

For each adjustment in the reconciliation, the tax effect must be disclosed. Some companies exclude pre-tax items from their adjusted measures while presenting the adjusted figure as if it were after-tax. IFRS 18 requires the tax impact of each adjustment to be shown, so users can understand the after-tax effect of the exclusion.

Where non-controlling interests exist, the effect of the adjustments on NCI must also be shown. This is particularly relevant for Indian conglomerates with complex group structures where significant NCI sits in major operating subsidiaries.

The Audit Implication

Under IAS 1, management performance measures presented outside the audited financial statements were not subject to audit. Earnings releases and investor presentations were reviewed by legal and investor relations teams but not by auditors in the context of the annual financial statement audit.

Under IFRS 18, MPMs are required disclosures in the financial statements. They fall within the scope of the statutory audit. Auditors must test the MPM note the same way they test any other required disclosure.

This changes the conversation between management and auditors significantly. An auditor can now challenge the consistency of a reconciliation, the completeness of the tax effect disclosure, the appropriateness of treating certain costs as adjustable, and whether the description of the measure is accurate and not misleading.

For companies that have used non-GAAP measures loosely, this is a genuine constraint. For companies that have always been disciplined and transparent about their adjusted metrics, IFRS 18 mostly formalises what they were already doing.

Three Indian Companies and What Changes for Them

Infosys: Constant Currency Revenue Growth

Infosys reports constant currency revenue growth prominently in every quarterly earnings communication. This measure adjusts reported revenue growth for the effect of currency movements, showing what revenue growth would have been if exchange rates had not changed.

As I noted earlier, constant currency revenue growth is a revenue-only measure. It has no expense component. Under the strict IFRS 18 MPM definition, which requires a subtotal of both income and expenses, constant currency revenue growth does not qualify as an MPM. Infosys would not need to include it in the MPM note.

However, if Infosys also reports "adjusted operating margin" or "adjusted earnings per share" that excludes certain costs from the IFRS operating profit base, those measures would be MPMs and require full disclosure in the note.

The lesson: IFRS 18's MPM framework is more targeted than many people think. Not every non-GAAP measure becomes an MPM. The measure must be an income-and-expense subtotal that communicates overall financial performance.

Tata Motors and Jaguar Land Rover: Adjusted EBITDA

Tata Motors and its subsidiary Jaguar Land Rover have historically reported adjusted EBITDA as a key performance metric in investor communications. JLR, which files under IFRS with the UK FCA, has used adjusted EBITDA to communicate underlying automotive profitability after excluding restructuring charges, impairment, and other items management considers non-recurring.

Under IFRS 18, JLR's adjusted EBITDA would be an MPM. It is a subtotal of income and expenses, used in public communications, communicating management's view of overall financial performance, and not defined by IFRS.

The MPM note for JLR would need to show:

• What adjusted EBITDA means and why it is useful beyond IFRS operating profit
• The calculation: starting from IFRS operating profit, add back depreciation and amortisation, then add back or exclude specific items like restructuring charges or exceptional items
• A line-by-line reconciliation from IFRS operating profit to adjusted EBITDA with each adjustment individually identified
• The tax effect of each adjustment
• Comparative period figures on the same basis

If JLR changes what it excludes from adjusted EBITDA between 2026 and 2027, the 2026 comparative in the MPM note must be restated to match the new definition, with an explanation of the change.

Bharti Airtel: EBITDA Margin

Bharti Airtel presents EBITDA and EBITDA margin across its segments and at the group level in its investor presentations and quarterly results communications. EBITDA is also referenced in Airtel's debt covenants.

Airtel's group EBITDA communicates management's view of overall cash-generating capacity before financing costs, tax, depreciation, and amortisation. It is a subtotal of income and expenses. Used in public communications. Not an IFRS-defined figure. This is an MPM under IFRS 18.

What makes Airtel an interesting case is the covenant dimension. If lenders have defined covenants using Airtel's reported EBITDA, and IFRS 18's MPM note requires changes in how EBITDA is defined or reconciled, that could affect how covenant calculations are performed or communicated. Covenant definitions in loan agreements are contractual, not subject to IFRS 18 directly. But if the financial statement presentation of EBITDA changes, Airtel's legal and treasury teams need to confirm that the covenant definitions still work as intended.

One Important Relief: Commercially Sensitive Items

IFRS 18 includes a limited relief from the MPM disclosure requirements where the information is commercially sensitive. If including a specific reconciliation item in the audited financial statements would cause genuine commercial harm, management can apply to omit that specific item.

The bar for this relief is deliberately high. It is not available simply because management finds the disclosure inconvenient or because it reveals a competitive cost structure. The sensitivity must be genuine and specific. And even where the relief applies, the existence of the MPM must still be disclosed; only the specific reconciliation item can be omitted.

In practice, I expect this relief to be used rarely. Most reconciliation items, restructuring costs, impairment charges, share-based payments, are not commercially sensitive in the sense IFRS 18 intends. The relief is there for genuinely unusual situations, not as a broad carve-out.

What Companies Should Do Right Now

For any company within IFRS 18's scope from 2027, the MPM preparation process has two stages.

Stage 1: Inventory. Go through every earnings release, investor presentation, annual report narrative, management commentary section, and analyst call script from the past two years. Identify every performance measure used. For each measure, apply the three-part IFRS 18 definition: is it a subtotal of income and expenses? Is it used in public communications? Does it communicate overall entity performance? Is it not already an IFRS-defined measure? If the answer to all four is yes, it is an MPM.

Stage 2: Disclosure design. For each MPM identified, design the required note. Draft the description and purpose. Map the reconciliation from the nearest IFRS subtotal. Identify every adjustment line. Calculate the tax effect of each. Confirm the comparative period figures. Review with the audit committee and external auditors well before the 2027 filing date.

Companies that complete this work in 2025 or early 2026 will be in good shape. Companies that leave it to the second half of 2026 will find themselves under significant time pressure, especially if the reconciliation reveals that adjustments they have been making informally are difficult to justify or document under audit scrutiny.

The Broader Significance

I want to step back from the technical requirements for a moment and say something about what IFRS 18's MPM framework represents.

For twenty-plus years, a significant portion of investor communication happened outside the audited financial statements, in a space with no standards, no audit, and no accountability for consistency. Analysts developed their own adjustments because they did not trust management's adjustments. Companies developed increasingly elaborate "adjusted" metrics because the IFRS numbers did not tell the story they wanted to tell. The result was a system where audited financial statements and investor communications were often describing different companies.

IFRS 18 does not solve this entirely. Free cash flow, return metrics, and non-financial measures stay outside the framework. But it pulls the most commonly used income statement performance measures into the audited, regulated space. For investors, that is a significant improvement. For preparers who have been disciplined and transparent about their non-GAAP measures, it changes little. For those who have been loose with definitions and inconsistent with methodology, it is a meaningful constraint.

From a Dip IFRS exam perspective: understand the definition of MPM, the three conditions that must all be met, the four required disclosures, and the exemptions for non-MPM measures. The examiner will test whether you can apply the definition to a given scenario and determine whether MPM disclosure is required.

Ind AS Position on MPMs

As of 2025, Ind AS 1 has no equivalent MPM requirement. Indian companies under Ind AS can present non-GAAP measures in their annual report narratives, investor presentations, and earnings releases without any requirement to include those measures in the audited financial statements or reconcile them to IFRS figures.

SEBI has issued some guidance on alternative performance measures for listed companies, requiring that non-GAAP measures be given no more prominence than GAAP measures in certain communications. But this is a disclosure requirement in regulatory filings, not an audited financial statement requirement.

When ICAI eventually aligns Ind AS 1 with IFRS 18, the MPM requirements will come into Indian financial reporting. Given the prevalence of EBITDA and adjusted profit metrics in Indian listed company communications, particularly in sectors like telecom, real estate, infrastructure, and metals, the impact will be significant.

Finance professionals who understand the MPM framework now will be well placed to lead that transition in their organisations when it arrives.

FAQ

Does every company have MPMs?

No. A company that uses only IFRS-defined measures in its external communications has no MPMs. If management reports only revenue, operating profit as defined under IFRS 18, and profit after tax, no MPM note is required.

Is EBITDA always an MPM?

Only if it meets all three conditions: subtotal of income and expenses, used in public communications outside financial statements, and communicates overall entity performance. EBITDA presented only in internal management accounts and not communicated externally is not an MPM.

Can a company remove an MPM to avoid the disclosure requirements?

Technically yes, but IFRS 18 has a presumption built in: if a measure was used in public communications in the past, stopping its use simply to avoid MPM disclosure would be transparent and would itself attract scrutiny. Management should not treat the MPM framework as something to game by changing communication practices.

What if a company changes its MPM definition between periods?

The change must be disclosed and explained. The comparative period figure must be restated to reflect the new definition, or a clear explanation provided of why restatement is not possible. Changing definitions without explanation is precisely what IFRS 18's MPM framework is designed to prevent.

Are MPMs subject to the same audit standards as other financial statement items?

Yes. As a required disclosure under IFRS 18, the MPM note is within the scope of the statutory audit. Auditors apply the same professional standards to testing MPM disclosures as they apply to any other note.

Does the MPM note replace the narrative discussion of non-GAAP measures in the management commentary?

No. Management can still discuss performance using any measures it chooses in management commentary, earnings releases, and investor presentations. The MPM note is an additional requirement for the audited financial statements. It does not restrict what management says elsewhere.

How do I identify the "nearest IFRS subtotal" for a reconciliation?

IFRS 18 defines two mandatory subtotals: operating profit and profit before financing and income taxes. For most MPMs, one of these will be the starting point for the reconciliation. If the MPM is closer to profit after tax, that is also a defined IFRS figure. The choice of starting point should reflect which IFRS measure is most similar in nature to the MPM being disclosed.

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This is Post 5 of the Global Fin X IFRS Series. Previous: IFRS 18 Part 1: What Changes When IAS 1 Is Replaced in 2027. Next: IAS 1 vs IFRS 18: What Stays, What Changes and What You Need to Do Before 2027.