IFRS 18 Overview: Key Changes in Financial Statement Presentation

IFRS 18: What Changes When IAS 1 Is Replaced in 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

I want to start with the question I get most often when IFRS 18 comes up in class: "Is this really that big a deal, or is it just a renaming of IAS 1?"

It is a big deal. Not because net profit changes. It does not. IFRS 18 leaves measurement intact. What it changes is how the income statement is structured, what subtotals are mandatory, how management-defined performance measures must be disclosed, and how aggregation and disaggregation decisions are made. For companies that have spent years presenting adjusted EBITDA and "underlying profit" figures with minimal accountability, IFRS 18 is a significant discipline. For investors trying to compare two companies in the same sector, it is long overdue.

The IASB issued IFRS 18 in April 2024. It is effective for annual reporting periods beginning on or after 1 January 2027, with retrospective application required. Early adoption is permitted. The 2026 financial year is the last year under IAS 1 for most entities, and those 2026 figures become the IFRS 18 comparative when 2027 statements are filed. That means companies cannot wait until 2027 to think about this. The preparation work starts now, if it has not already.

This post covers what IFRS 18 actually does, the five income categories in depth with Indian examples, the new mandatory subtotals, and what preparation looks like for companies filing IFRS today or planning to. Post 5 covers Management Performance Measures and the IAS 1 vs IFRS 18 comparison in detail.

Why IAS 1 Needed Replacing

IAS 1 gave preparers almost complete freedom in structuring the income statement. The standard required certain minimum line items, but said very little about how income and expenses should be classified, what subtotals were required, or how management-defined performance measures should be presented.

The result was a patchwork. Two companies in the same industry, reporting under the same IFRS standards, could present income statements that looked nothing alike. One presents gross profit prominently. Another does not. One shows EBIT as a subtotal. Another shows EBITDA. A third shows neither and goes straight from revenue to profit before tax. Analysts spent significant effort adjusting for these differences before they could compare performance across companies.

Worse, the freedom around non-GAAP measures created real problems. Companies started publishing "adjusted profit," "underlying earnings," "normalised EBITDA," and other management-defined metrics in their annual reports, investor presentations, and earnings calls. These measures excluded items management considered non-recurring, restructuring costs, acquisition expenses, impairment charges, share-based payment costs. There was no requirement to define them consistently, no requirement to reconcile them prominently to IFRS profit, and no audit scrutiny over the adjustments made.

IFRS 18 addresses both problems. It introduces a defined structure for the income statement through five mandatory categories, two mandatory subtotals, and regulated disclosure requirements for management-defined measures. For the first time under IFRS, "operating profit" will mean something defined by the standard, not by management.

The Five Categories of Income and Expenses

Every item in the statement of profit or loss must be classified into one of five categories. No exceptions, no leftover buckets outside the framework.

1. Operating Category

The operating category is the default. Any income or expense that does not meet the definition of another category goes here. Think of it as the catch-all for the core business.

For a manufacturing company like Tata Steel, this includes revenue from steel sales, raw material costs, employee costs, depreciation on manufacturing plant and equipment, and impairment of trade receivables. All of these arise from running the main business.

The operating category also captures income and expenses from assets that are integral to the main business activity. If Tata Steel has a power plant that supplies electricity to its steel operations rather than selling to third parties, the depreciation and maintenance costs of that plant are operating, not investing. The asset is integrated into operations.

This is where most classification disputes will arise under IFRS 18. The boundary between "integral to operations" and "standalone investment asset" is not always obvious. I will come back to this when discussing the investing category.

2. Investing Category

The investing category captures income and expenses from assets that generate returns individually and largely independently of the entity's other resources. The key phrase is "individually and largely independently." These are assets the entity holds to earn returns in their own right, not assets deployed in service of the main business.

Typical examples:

• Interest income on a surplus cash portfolio held in bonds or fixed deposits
• Dividend income from equity investments not accounted for under the equity method
• Fair value gains and losses on equity investments at FVTPL
• Rental income from investment property
• Gains and losses on disposal of investments

Take Infosys. It holds a significant treasury portfolio of mutual funds, bonds, and fixed deposits. These are not integral to its IT services business. They exist to manage surplus cash and generate returns. Under IFRS 18, interest and gains from this portfolio go to the investing category.

Contrast this with a company like Bajaj Finance. Its main business is lending money. Interest income from loans is not in the investing category. It is in the operating category, because providing financing to customers is the main business activity. This distinction, between a company that earns interest as a sideline and one for which lending is the core business, is central to IFRS 18's classification logic.

Associates and Joint Ventures

Income and expenses from associates and joint ventures accounted for under the equity method go to the investing category for most companies. This includes the share of profit or loss of associates, impairment of equity-accounted investments, and gains or losses on disposal.

Exception: if the entity's main business activity is investing in associates, those results go to operating. A holding company whose entire purpose is owning and managing subsidiary and associate investments would classify equity-accounted results as operating.

3. Financing Category

The financing category covers income and expenses arising from liabilities that are part of the entity's financing structure. Borrowings, bonds, lease liabilities.

For a typical Indian corporate: interest expense on term loans, interest on commercial paper, the finance charge component of lease liabilities under IFRS 16, foreign exchange differences on borrowings denominated in foreign currency, and the unwinding of discount on long-term provisions.

A critical clarification from IFRS 18: foreign exchange differences on borrowings are financing category items. This matters because under IAS 1, many Indian companies presented FX differences on foreign currency loans within finance costs anyway, but some did not. IFRS 18 mandates this classification.

Exception for Main Business Activity

If providing financing to customers is the entity's main business, then interest income from loans to customers is operating, not investing. Banks are the clearest example. HDFC Bank's interest income from home loans is operating. The interest it pays on deposits and borrowings is still financing. The asymmetry reflects the nature of banking: earning spread income is the core business, and that income is operating.

4. Income Taxes Category

This is straightforward. Current tax expense and deferred tax expense, as determined under IAS 12, go here. No change from current practice in terms of what goes in this category. The change is that it is now a defined, mandatory category rather than a common convention.

5. Discontinued Operations Category

Income and expenses from discontinued operations as defined by IFRS 5 go here. Again, no measurement change. Discontinued operations are presented as a single line on the face of the income statement, with detail in the notes. This category formalises existing practice under IFRS 5.

The Two New Mandatory Subtotals

This is where IFRS 18 forces standardisation where none previously existed.

Subtotal 1: Operating Profit or Loss

All items in the operating category plus all items in the investing category sum to operating profit or loss. Financing costs, income tax, and discontinued operations are excluded.

For most non-financial companies, this means operating profit under IFRS 18 includes share of profit of associates. Under IAS 1, many companies excluded associate earnings from their "operating profit" subtotal and showed it below. Under IFRS 18, associates in the investing category feed into operating profit. Some companies will see their stated "operating profit" figures change when they restate 2026 comparatives.

Subtotal 2: Profit or Loss Before Financing and Income Taxes

This subtotal includes operating profit plus any items in the financing category that are income. For most entities, this will be close to what was previously called EBIT (earnings before interest and tax), though the exact composition will differ because IFRS 18's financing category is more precisely defined than most companies' informal EBIT definitions.

Together, these two subtotals create a defined framework within the income statement that investors can use to compare across companies and periods without adjusting for presentation differences.

What Stays the Same

IFRS 18 carries over substantially all of IAS 1's requirements for the statement of financial position, statement of changes in equity, and notes. The changes are concentrated in the income statement and disclosure of management performance measures.

General features including going concern, accrual basis, consistency, materiality, and offsetting remain unchanged. The minimum line items for the balance sheet remain. Comparative information requirements remain. The presentation and disclosure framework from IAS 1 is carried forward with refinements.

IAS 7 is amended by IFRS 18 to remove certain options. Under the amended IAS 7, for entities that are not banks or similar, dividends and interest received are presented as investing cash flows, and interest paid is presented as financing cash flows. The existing optionality that allowed these to be classified differently is removed.

Aggregation and Disaggregation: New Guidance

IFRS 18 introduces more detailed principles on aggregation and disaggregation, applying to both the face of the financial statements and the notes.

The core principle: items are aggregated when they share the same nature and when aggregated presentation provides more useful information than separate presentation. Items with different natures must be presented separately if they are material.

For the income statement, this means companies can no longer dump dissimilar items into a single "other income" or "other expenses" line and call it complete. If that line contains material items of different natures, those items must be presented separately or explained in the notes.

For Indian conglomerates with diverse income streams, this is a real challenge. A company like L&T has revenue from construction contracts, product sales, IT services, and financial services across its segments. The aggregation and disaggregation principles under IFRS 18 will require more granular presentation than many currently provide.

The Indian Context: Who Is Affected and When

IFRS 18 is mandatory for entities that apply full IFRS. Indian companies that prepare consolidated financial statements under Ind AS are not directly required to apply IFRS 18 until the ICAI formally adopts it as Ind AS 1 (revised) or a new Ind AS standard.

That said, there are three categories of Indian entities where IFRS 18 matters immediately or very soon.

Indian subsidiaries of foreign multinationals filing IFRS reporting packages: If a German parent requires an IFRS package from its Indian subsidiary for consolidation purposes, that package must comply with IFRS 18 from 2027. The Indian subsidiary's accounts team needs to understand the five categories, the mandatory subtotals, and the MPM requirements regardless of what Ind AS requires.

Indian companies listed on foreign exchanges: Infosys, Wipro, Dr. Reddy's, and others file with the US SEC under IFRS or reconcile to US GAAP. Their IFRS financial statements will move to IFRS 18 from 2027. Investor relations, finance, and audit teams are already working through the impact.

Indian companies and finance professionals preparing for the future: The ICAI will eventually align Ind AS 1 with IFRS 18. Based on historical patterns, that alignment typically follows the IASB issuance by two to four years, with MCA notification required. ICAI has an active project on this. Companies and professionals who understand IFRS 18 now will have a significant advantage when that transition comes.

For companies purely on Ind AS without any IFRS filing requirement, IFRS 18 does not apply today. But the principles, particularly around income statement structure and management performance measure disclosure, represent best practice that forward-thinking CFOs and finance controllers are already considering.

What Preparation Looks Like Right Now

For entities within IFRS 18's scope for 2027, 2026 is the critical year. The 2026 financial statements will be restated as IFRS 18 comparatives when 2027 statements are filed. Every income and expense item in 2026 must be classifiable under the five categories.

Step 1: Map existing income and expenses to the five categories. This requires going through the chart of accounts and assigning each line to operating, investing, financing, income taxes, or discontinued operations. For most manufacturing and services companies, the vast majority of items are straightforwardly operating. The judgment calls cluster around treasury income, associate earnings, FX differences on borrowings, and pension finance costs.

Step 2: Identify management performance measures currently used. Any metric that is derived from IFRS figures but is not itself defined by IFRS, adjusted EBITDA, underlying profit, organic revenue growth, is an MPM under IFRS 18. A full inventory of these measures is needed before determining what the disclosure requirements mean in practice. We cover MPMs in detail in Post 5.

Step 3: Assess system and process changes needed. Some companies will find their current general ledger and reporting system does not tag transactions at the level of granularity IFRS 18 requires. This is particularly true for the nature-of-expense disclosures mandated when expenses are presented by function. Companies that present operating expenses by function must disclose depreciation, amortisation, employee benefits expense, and impairment losses by nature in the notes. Many systems currently cannot generate this breakdown without manual intervention.

Step 4: Review covenant and KPI definitions. Many loan agreements and management incentive plans reference financial metrics defined by reference to financial statement line items. If IFRS 18 changes where items appear or what subtotals are defined, covenant headroom calculations may change. Legal and treasury teams need to review these definitions before 2027.

Step 5: Brief the audit committee. IFRS 18 will change how the income statement looks. Audit committees should understand the changes before they appear in the financial statements. The restatement of 2026 comparatives will require audit committee sign-off and auditor involvement well before the 2027 year-end audit.

A Practical Example: Tata Consultancy Services

TCS is a useful example because it has a relatively clean income statement but with some elements that will be classified differently under IFRS 18.

Under current practice, TCS presents revenue, employee benefit expenses, other expenses, depreciation, finance costs, and other income. The "other income" line typically includes interest on fixed deposits, gains on mutual fund investments, and dividends. Under IAS 1, this all sits above profit before tax without a prescribed subtotal structure.

Under IFRS 18:

• Revenue from IT services: operating category
• Employee benefit expenses, subcontracting costs, depreciation on IT infrastructure: operating category
• Interest income on fixed deposit portfolio and gains on mutual fund investments: investing category (these are standalone financial assets generating returns independently)
• Finance costs on lease liabilities and any borrowings: financing category
• Share of profit of any associates or joint ventures TCS holds: investing category

Two mandatory subtotals will appear. Operating profit covers operating plus investing. Profit before financing and income taxes covers operating profit plus any investing income not already included.

For TCS, the change is structural rather than transformational. The net profit number does not move. What changes is that investors can now immediately compare TCS's operating profit (as IFRS 18 defines it) with any other IFRS reporter's operating profit, knowing the definition is the same.

Ind AS vs IFRS 18: Current Status

Indian companies will need to watch the ICAI's standard-setting calendar. An exposure draft of Ind AS 1 (revised) aligned with IFRS 18 is expected. Once issued, companies will have a transition period, but given the system and process changes involved, early preparation is the right approach regardless of the formal effective date.

FAQ

Does IFRS 18 change how profit is measured?

No. Measurement of income and expenses is governed by other IFRS standards. IFRS 18 changes how items are classified and presented in the income statement, not how they are calculated.

Is IFRS 18 already in force?

It was issued in April 2024 and is effective from 1 January 2027. Early adoption is permitted. Most companies will apply it for the first time in their 2027 financial statements, with 2026 restated as the comparative.

Does IFRS 18 apply to Ind AS companies in India?

Not directly, until the ICAI formally adopts it as an amendment to Ind AS 1. Indian companies preparing IFRS packages for foreign parent companies or filing on foreign exchanges under full IFRS will be subject to it from 2027.

What is the difference between operating profit under IFRS 18 and EBIT?

EBIT is not defined in any IFRS standard. It is a convention. Operating profit under IFRS 18 is a defined subtotal that includes operating and investing category items, including share of profit of associates. Many companies' informal EBIT excluded associate earnings. The two measures will not always be equal.

Will the order of line items in the income statement change?

IFRS 18 requires items to be presented within their categories in a way that provides useful information. The categories appear in a defined order: operating, then investing, then financing, then income taxes, then discontinued operations. Within categories, entities retain flexibility in how they order individual line items.

What happens to companies with loan covenants tied to EBITDA?

The definition of EBITDA used in the covenant is a contractual matter between the company and the lender. IFRS 18 does not override contractual definitions. However, if the covenant references "EBITDA as reported in the financial statements," and IFRS 18 changes what appears in the income statement, the parties may need to renegotiate or clarify the definition.

Can a company early adopt IFRS 18 for its 2025 or 2026 financial statements?

Yes. Early adoption is permitted and must be disclosed. A company that early adopts for 2026 must present 2025 comparatives under IFRS 18 as well.

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This is Post 4 of the Global Fin X IFRS Series. Previous: IAS 1 Part 2: OCI, Going Concern, Offsetting and Disclosure Requirements. Next: IFRS 18 Part 2: The New Income Statement Categories and Management Performance Measures.