Navigating IFRS 18: An Overview and Practical Considerations

Introduction

IFRS 18, Presentation and Disclosure in Financial Statements, issued by the IASB, substantially changes the structure and presentation of financial statements. It brings a renewed focus on management-relevant metrics and investor-aligned disclosures. The key concepts introduced under IFRS 18 are:

Classification of Income Statement

• Assess main business activity
• Classify income and expenses into five categories – Operating, Investing, Financing, Taxes, and Discontinued Operations.
• Use of sub-totals such as operating profit or loss, Profit or loss before financing and income taxes, etc.
• Presentation of Income Statement based on Nature v/s Function or Both

Disclosure of Management-defined Performance Measures

• Performance measures shared publicly must now be formally included in financial statements and audited.
• Performance measures that represent subtotals of income and expenses will be included.
• Management-defined Performance Measures must be defined, disclosed, and reconciled with the nearest IFRS-compliant figures.

Enhanced guidance on aggregation and disaggregation

• Provides comprehensive guidance on the grouping (aggregation and disaggregation) of information to be included in ‘primary’ financial statements and on the information to be disclosed in the notes.
• Provides option to disclose summary of expenses, either nature-wise or function-wise, or both. In cases where expense under Operating are presented by function, entities are required to provide qualitative disclosures describing the nature of expenses included within each functional line item.

What does it mean for companies?

01. Structure of profit or loss and new categories

Reclassifying items such as FX gain/losses, non-operating income, dividend income, etc., into Operating, Investing, or Financing categories alters key metrics such as Operating Profit, requiring clear stakeholder communication. Conglomerates with multiple businesses must determine and document their “specified main business activities” (i.e., financing to customers, investing in assets), which drives whether certain items are classified as operating, investing or financing, affecting KPIs, and segment disclosures.

02. Systems, consolidation, and internal reporting

Consolidation and reporting systems must be updated to capture IFRS 18’s new categories, subtotals, and Management Performance Measures (MPMs) consistently across subsidiaries and segments, including revisions to the chart of accounts and mapping logic. Groups will also need to align internal management reporting and investor communications with the new structure for consistency across board packs, internal MIS, earnings releases, and statutory financial statements. Additionally, these changes could impact loan covenants by altering key financial ratios tied to operating profit and subtotal definitions, requiring a proactive review of debt agreements.

03. Disclosure of MPMs

Mandatory disclosure and audit of MPMs (e.g., Adjusted EBITDA, Core operating profit etc.) enhance investor trust but increase governance and system configurations to support such MPMs’ reconciliations with reported figures in the income statement. For conglomerates that use several alternative performance measures at group and segment level, requirement to disclose MPMs will significantly increase disclosure volume and discipline.

04. Aggregation, disaggregation, and note structure

IFRS 18 tightens guidance on when to aggregate or disaggregate income, expenses, assets, and liabilities, requiring more granular breakdowns where needed (e.g., key expense types like depreciation and employee benefits, even when presenting by function). The standard clarifies the different roles of primary statements and notes, which may drive a redesign of note order, cross-references, and how group-wide and segment-specific information (e.g., business lines, geographies) is organized.

Key Assessment Areas

Classification of Income Statement

a. Specified Main Business Activity

IFRS 18 requires entities to undertake an assessment of their main business activities to determine the appropriate presentation of the statement of profit or loss based on the facts at the time. This assessment involves evaluating whether the entity’s activities primarily relate to investing in assets, providing finance to customers, or a combination of both. The standard prescribes specific presentation requirements for entities falling within these categories, while general presentation principles apply to entities engaged in other types of business activities. As this assessment is required to be performed at the level of each reporting entity, it may result in differences in the presentation of the income statement between a parent entity and its subsidiaries, reflecting their respective business models and operational profiles.

The assessment of an entity’s main business activities is a matter of fact and not merely an assertion and as a result if facts undergo a change, the conclusions could also change. Accordingly, entities are required to apply judgement when performing this assessment and to substantiate their conclusions with appropriate supporting evidence. IFRS 18 provides application guidance that outlines indicative factors to be considered in this evaluation, and the following examples illustrate how such guidance may be applied in assessing an entity’s main business activity:

• For a finance entity, the presentation of a subtotal similar to gross profit is intended to explain operating performance for external communication purposes or to support internal performance assessment, in line with the presentation principles set out under IFRS 18.
• Where an entity discloses a single business activity as part of its segment reporting in accordance with IFRS 8, such disclosure may serve as an indicator in assessing the entity’s main business activity for the purposes of applying the presentation requirements under IFRS 18.
• An entity disclosing multiple business activities as part of its segments reporting in accordance with IFRS 8 will have to assess if its main business activity either falls under the investing or financing activity as this will lead to presentation of income Statement.

What is changing?

IAS 1 did not prescribe a specific format for the presentation of financial statements based on the nature of the reporting entity’s business activities. Consequently, this resulted in diversity in presentation practices, including differences between separate financial statements and consolidated financial statements, even among groups operating within similar lines of business.

IFRS 18 has been updated in response to feedback received from investors, with a focus on enhancing the comparability of information across entities. The requirement to identify an entity’s main business activity based on facts substantiated by appropriate evidence has now established presentation requirements for all entities or group of entities operating in a similar line of business, requiring such entities or group entities to present their financial statements in the specific format prescribed under IFRS 18 and aligning the overall presentation with the disclosures as per IFRS 8 Operating Segment.

Practical Considerations

01. The following are key considerations to be applied while assessing to determine specific main business activity:

• An entity has to evaluate if its main business activity is
  • Investment in group companies, debt or equity instruments, investment properties
  • Providing finance to customers
• An entity will have to perform and conclude on the above evaluation of identifying its specified main business activity, irrespective of any other conclusion determined by such companies while evaluating any other jurisdictional requirements or under any other IFRS standards.
• Such assessment shall be substantiated with evidence based on the facts available at that time.
• All the entities within a group will have to conduct their own assessments. Parent entity of such group companies will have to perform this assessment for its separate financial statements as well as the consolidated financial statements. This will form part of the financial statements closing process and will have to be included as part of the internal financial controls of an organization.

02. Example:

A reporting entity is the ultimate parent of a large group of entities. The entity’s activities are limited to holding investments in subsidiaries, making decisions relating to the management, acquisition and disposal of those subsidiaries, and distributing returns generated from those investments to its shareholders. The entity determines that it does not meet the definition of an investment entity in accordance with Consolidated Financial Statements (“IFRS 10”).

In the circumstances described above, the parent entity is still required to determine its main business activity in accordance with IFRS 18, as such an assessment is consistent with the IASB’s rationale underlying the requirements of the Standard. Given that the parent entity is not engaged in any other substantive activities, this may constitute sufficient evidence to conclude that investing in subsidiaries represents the parent entity’s main business activity. Consequently, the parent entity is required to classify income and expenses arising from its investments in subsidiaries within the operating category of its statement of profit or loss.

03. Below is an example of the determination of the specified main business activity for a conglomerate involved in varied business activities

While the conglomerate may conclude on the main business activity of individual companies forming part of the group as mentioned above, the parent entity will also have to undertake similar assessment for the preparation and presentation of consolidated financial statements. This assessment is performed to determine whether the group’s main business activity is investing, financing, or a combination of both, based on relevant facts and circumstances such as segment reporting, internal performance monitoring, and the use of subtotals comparable to gross profit. Accordingly, the parent entity is required to apply judgement in determining the main business activity for the purposes of consolidated financial statements.

b. Classification of income and expense

IFRS 18 requires entities to present income and expenses across the five prescribed categories, to enhance consistency and comparability in financial reporting. The standard further sets out specific presentation requirements governing the classification of income and expenses within operating, investing, and financing activities, providing a structured framework to support consistent application across entities.

An entity is required to segregate its income and expenses for the purpose of presenting the statement of profit or loss based on its identified specified main business activity. As this evaluation is required to be performed by each entity within a group, it may result in differences in the presentation of income and expense line items between consolidated financial statements and the separate financial statements of individual entities. 

IFRS 18 has streamlined the presentation of the statement of profit or loss based on an entity’s main business activity, reflecting the manner in which users of financial statements typically analyse returns from operating activities separately from those arising from investing activities. The IASB observed diversity in practice in the presentation of certain income and expenses, such as results from investments accounted for using the equity method. Classifying income and expenses related to an entity’s investing activities within a distinct category is therefore intended to enhance consistency and comparability in financial statement presentation, while also enabling users to better understand the performance of an entity’s core operations over time and in comparison with peers.

What is changing?

IAS 1 outlines the overarching requirements for presenting the statement of profit or loss, including the minimum content that must be presented. However, the Standard did not prescribe a specific format for the presentation of line items within a defined structure. Based on an analysis of 100 entities conducted by the IASB, it was observed that 61 entities reported an operating profit; however, those entities defined operating profit in nine different ways. As a result, comparability between such entities was impaired due to the absence of a commonly defined presentation format. IFRS 18 has introduced detailed guidance and a structured approach to categorizing income and expenses into five categories, thereby addressing investor concerns related to comparability and transparency.

Practical Considerations

1. Specific income and expenses items

a. Foreign exchange gain/losses

IFRS 18 focuses on the presentation of items in the statement of profit or loss, categorizing them into three categories: operating, investing, and financing. It has also emphasized the presentation of specific line items based on their categorization within the above-mentioned categories. One example of such a presentation is in relation to foreign exchange gains or losses. IFRS 18 states that foreign exchange differences arising from a transaction should be classified in the same category as the presentation of income or expense relating to the transaction, unless undue effort. 

IAS 1 did not include specific requirements relating to the presentation of particular types of income or expenses, such as foreign exchange gains or losses. Instead, the Standard set out general principles on offsetting, permitting the presentation of gains and losses on a net basis when they arose from groups of similar transactions, while requiring separate disclosure of such transactions when considered material. IFRS 18 has introduced specific requirements for the presentation of income and expenses, including foreign exchange differences, requiring them to be classified within the same category as the income or expenses of the related asset or liability.

b. Also there are several income and expenses whose classification will get impacted basis the nature of income or expenses highlighted below, following is an illustrative list:

2. Illustrative example of classification by entities that invest  as a main business activity

c. Use of sub-totals

To enhance consistency and comparability of information presented across financial statements, IFRS 18 mandates the presentation of specified totals and subtotals within the statement of profit or loss, as outlined below:

Through the implementation of such mandated totals and subtotals in the presentation of income and expenses, IFRS 18 aims to provide a structured summary of an entity’s income and expenses, while simultaneously allowing entities the flexibility to present additional information, where necessary, to reflect their specific circumstances and enhance the usefulness of financial statements. 

What is changing?

In the absence of specific requirements governing the presentation of income and expenses, entities adopted diverse presentation approaches. As a result, investors and other primary users of financial statements encountered difficulties in comparing the performance of entities operating within similar lines of business. As noted by the IASB in its analysis of income and expense classification, different approaches to the presentation of operating profit were identified across entities. With the introduction of IFRS 18, the use of defined sub-totals has been mandated, thereby addressing issues relating to comparability. 

Practical Consideration

Example:

A group may present a subtotal that combines items classified within the operating category, and investments accounted for using the equity method, particularly where the main business activity of the parent and its group entities is consistent. Such a presentation is intended to provide a more holistic view of the entity’s main business activities, thereby enhancing the relevance and interpretability of the information presented to users of the financial statements.

d. Presentation of income statement: Function Vs Nature

IFRS 18 emphasises the presentation and disclosure of material information in a structured summary that faithfully represents an entity’s assets, liabilities, equity, income and expenses. The Standard requires an entity to classify and present expenses in line items that provide the most useful structured summary, using either the nature of expense or the function of expense, or a combination of both characteristics. While IFRS 18 permits the presentation of expenses based on both nature and function, it is important to note that, when applying the principles of aggregation and disaggregation (Refer “Aggregation and disaggregation requirements” below) in the presentation of the statement of financial position or in disclosures in the notes, the Standard requires presentation based on characteristics that are shared or not shared, that is, either by nature or by function. This update is consistent with the overall objectives of IFRS 18, which focus on providing a structured and comparable format for the presentation of the statement of profit or loss.

When an entity opts to present items in operating category based on their function, an entity should also disclose in a single note expense such as depreciation, amortization, employee benefits, impairment losses and reversals that have been categorized under the operating category and outside of the operating category. The entity is required to apply this basis of presentation of the income statement consistently.

What is changing?

IFRS 18 focuses on providing a useful structured summary to investors when an entity presents information in its statement of profit or loss or in the notes. Accordingly, the fundamental principles relating to the presentation of expenses based on their nature or function have been carried forward from IAS 1. However, given the objective of enhancing the usefulness of the statement of profit or loss for primary users of financial statements, IFRS 18 has extended the presentation of expenses by both nature and function within the operating category. While an entity may present expenses in the operating category based on nature, function, or a combination of both, this flexibility is not extended to the investing and financing categories. Nevertheless, the principles of aggregation and disaggregation require that the classification and aggregation of assets, liabilities, equity, income, expenses, or cash flows into line items be based on shared characteristics, such as their nature, function within the entity’s business activities, liquidity, or measurement basis.

Practical Considerations

1. In determining the presentation of the income statement based on the function or nature of expenses, an entity should consider the following factors:

2. IFRS 18 allow companies to use a mixed presentation of items (using a combination of different basis), unlike the policy choice under IAS 1

The IASB is of the view that a mixed presentation sometimes provides the most useful information to investors. This approach addresses concerns raised by stakeholders, particularly for conglomerates. It recognizes that items such as goodwill impairment may be difficult to allocate to functional line items in a non-arbitrary manner. If a mixed presentation is used, application guidance ensures that items are labeled faithfully so users can compare line items.

Accordingly, an entity may conclude to present its income statement based on the nature and function of the expenses if it concludes that this approach provides a structured summary in the most useful and meaningful way.

3. Mixed Nature and Function Presentation in Operating Category

An entity operating within the textile manufacturing and retail industry may have distinct components or drivers of profitability arising from its manufacturing and retail activities. Accordingly, such an entity may present, within the operating category, line items relating to its manufacturing activities based on the nature of income or expenses, and line items relating to its retail activities based on the function of income or expenses. However, the entity is still required to present, within a single note, the disclosures relating to specific line items as required by IFRS 18, whether those line items are classified within or outside the operating category.

Disclosure of Management-defined performance measures (MPMs)

IFRS 18 introduces the concept of an MPM. It defines MPMs as a subtotal of income and expenses that an entity uses in public communications outside of financial statements to communicate to users of financial statements management’s view of an aspect of the entity’s financial performance as a whole. IFRS 18 clearly notes that subtotals specifically required to be presented or disclosed by IFRS Accounting Standards are not MPMs. Furthermore, IFRS 18 lists other subtotals that are not MPMs, such as gross profit or loss (revenue minus cost of sales) and similar subtotals, including operating profit or loss before depreciation, amortization, and impairments within the scope of Impairment of Assets (“IAS 36”), among others. The objective of the disclosure of MPMs is for an entity to provide information to help users of financial statements understand:

• Aspect of the financial performance communicated by MPMs; and
• How MPMs compare with measures defined by the IFRS Accounting Standards

What is changing?

Prior to IFRS 18, IFRS Accounting Standards did not contain any specific requirements that permitted or prohibited the disclosure of voluntary information, which included the non-GAAP or Alternative Performance Measures (APMs) that are now partially defined as MPMs. Companies often reported their own measures of performance outside the financial statements, such as in management commentary, press releases, or investor communications. Although country/ geography specific disclosure requirements were mandated by financial regulators, there was a need for a single uniform disclosure requirement for all IFRS compliant entities across geographies.

Disclosure of MPMs will provide relevant and useful insights as users of the financial statements will gain an understanding of how management views the entity’s financial performance. As such, it enables a single version of truth across the financial statements and other commentary by management. To improve the transparency around these measures, IFRS 18 requires an entity to show information about all its MPMs in a single note to the financial statements.

a. Identification of MPMs

IFRS 18 does not necessitate enhanced disclosures for all the Non-GAAP / Alternative Performance Measures disclosed by the entity in their financial statements. The MPMs are a subset of the Non-GAAP Measures / Alternative Performance Measures (APMs) disclosed by the entities. Therefore, it is essential to first determine what is covered under the scope of MPMs as per IFRS 18. 

What is an MPM? – A measure that meets four specific criteria.

Subtotal of Income and expenses

The standard has specifically narrowed down the definition of the MPMs to only include subtotals of income and expenses. By limiting the definition to subtotals of income and expenses, the standard ensures that many other performance metrics commonly used in public communications are excluded from the specific MPM disclosure requirements. 

Public Communications

Only items that are disclosed in the public communications could be covered under the definition of MPMs. IFRS 18 does not provide an exhaustive or inclusive list of specific documents that constitute public communications. Instead, it provides a functional definition focused on the nature and purpose of the communication. For the purpose of identifying MPMs, public communications are defined as communications outside the financial statements that convey information about the entity’s financial performance to users. Explames are: 

To simplify the process for preparers, auditors, and regulators, the IASB specifically scoped out certain forms of public communications from the definition of an MPMs; such as:.

Management’s view of the financial performance

MPMs focus on communicating an aspect of an entity’s performance and not on communicating management’s performance.  A subtotal used solely for the purpose of measuring management’s performance (for example a measure used only internally for the purpose of management remuneration) would not meet the definition of MPMs.

1. Entity’s Performance:The focus is on communicating management’s view of an aspect of the entity’s performance to users and not on measuring management’s internal performance.
2. Entity as a whole:The focus of the IASB was on disclosure of the performance of the entity as a whole. A subtotal of income and expenses related to a reportable segment generally does not meet the definition of an MPMs unless it provides information about the financial performance of the entity as a whole.
3. Rebuttable presumption:There is a rebuttable presumption that any subtotal of income and expenses used in public communications outside the financial statements reflects management’s view of an aspect of the entity’s overall financial performance. This presumption may be rebutted only where management provides reasonable and supportable evidence that the subtotal does not convey such a view and that it is used for an alternative, clearly articulated purpose in public communications.

Illustrative list of performance measures generally disclosed outside the financial statements by entities under different sectors that may qualify for MPMs.

This is an illustrative list, and the standard does not provide a list of MPMs that are to be included in the financial statements. It’s up to the management to determine what constitutes MPMs for their entity considering the guidance under IFRS 18.

b. Disclosure in the financial statements

IFRS 18 provides that MPMs relate to the same reporting period as the financial statements presented: 

MPMs must be included in a single note to the financial statements. For each measure that meets the definition of an MPM, the entity is required to disclose the following information in a clear and understandable manner that does not mislead users:

Description and Purpose

• A description of the aspect of financial performance that the MPMs communicate, including an explanation of why the measure provides useful information about the entity’s financial performance.
• A statement that the MPMs provide management’s view of financial performance and are not necessarily comparable with similarly labeled measures provided by other entities.

The IASB concluded that transparency is enhanced by an entity clearly stating the purpose and limitations of MPMs. An MPM reflects management’s judgment about what is useful to users of financial statements. Users of financial statements require enough information about that judgment to understand the information the MPM provides and how it faithfully represents an aspect of an entity’s financial performance.

Calculation Methodology

• The entity must disclose how the MPMs are calculated, including an explanation that the accounting policies used to calculate the measure may differ from those used in the statement of profit or loss or required/permitted by IFRS Accounting Standards.
• The entity must provide a reconciliation between the MPMs and the most directly comparable IFRS subtotal disclosed in the financial statements. For each such reconciliation, entities will be required to disclose the amounts related to each item and a description of how those items are calculated. 
• The tax effects and the effects of non-controlling interests (NCI) for each of the reconciliation items included in the note.

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Presentation of MPMs

01. Single Note: All the disclosures in relation to the MPMs must be provided in a single note in the financial Statements. This central presentation addresses investor concerns about the difficulty in finding all relevant information about non-GAAP measures, which are often scattered across various communications.

02. Clear Distinction: If the entity chooses to include other information in this note (for instance, segment reporting information if the segment measure is also an MPM), the information required for MPMs must be clearly distinguished from the other information.

03. Statement of Non-Comparability: The single note must include a statement that the MPMs communicate management’s view of an aspect of the entity’s financial performance as a whole and are not necessarily comparable with similarly labeled measures provided by other entities.

04. Presentation in the Statement of Profit or Loss: An MPM can potentially be presented as an additional subtotal in the statement of profit or loss if doing so is necessary for the statement to provide a useful structured summary of the entity’s income and expenses. This would not preclude the entity from the MPM disclosure requirements under IFRS 18.

05. Comparative Information: Entities are required to present the relevant disclosures for each comparative period included in the financial statements. Where there is any change in the measures disclosed or in their method of calculation in the current year, comparative amounts must be restated, as necessary, to ensure consistency and comparability across periods.

c. Setting up the MPM reporting process

The implementation of IFRS 18 is expected to significantly impact an entity’s existing processes, primarily through first-time implementation related to changes in internal processes and systems. The likely impacts on internal processes include changes across financial reporting, data systems, and internal control environments:

Development of Policies and Procedures

From management’s perspective, a critical aspect for disclosure of MPMs is the policies, processes, and management controls over the disclosure of MPMs and operational metrics. Entities and Management need to consider designing control processes to ensure that procedures are in place regarding:

These management controls may be included as part of the risk control matrix considered for monitoring Internal Financial Control.

Companies shall consider the following while setting up/redesigning internal processes:

Ongoing Cost for Dynamic Businesses: The MPMs disclosed by an entity may need to be revisited and updated in response to changes in business dynamics. For example, in a merger scenario, the combining entities may have historically disclosed different MPMs. Following the business combination, management would be required to reassess these measures to determine which MPMs most appropriately reflect the performance of the combined entity.

Information Gathering and System Adaptation: The most significant impact on existing data collection processes stems from the detailed information required for the reconciliation. As the standard requires the impact of taxes and NCI to be disclosed for each reconciliation item, it would require gathering additional information, particularly for entities operating in different tax jurisdictions and complex group structures.

Internal Communication: MPMs are not merely a financial metric to be disclosed in the financial statements; they have an impact on how the company’s performance is viewed by the external as well as the internal stakeholders (including those charged with governance). Further, the exhaustive disclosure requirements would require interaction with multiple stakeholders beyond the finance team. Therefore, entities would need to ensure that all relevant internal stakeholders are aligned with the MPMs disclosed and develop processes to ensure smooth data collection, as well as follow an approval mechanism.

External Communications: The entities may need to communicate to external parties, such as investors, regarding which APMs are now considered MPMs and the information that will be disclosed in the financial statements about them. Entities that report digitally will incur one-time costs to retag their financial statements for the new MPM disclosures, including the required reconciliation.

d. Assessment Considerations

Disclosure of Non–GAAP Measures which are not MPM

The IASB has clarified that IFRS 18 does not mandate the discontinuation of Non-GAAP measures currently disclosed by entities. The scope of IFRS 18 is limited to a specific subset of such measures and does not introduce explicit requirements to permit or restrict the disclosure of voluntary information. Consequently, entities may continue to present Non-GAAP measures that are disclosed either voluntarily or to meet regulatory requirements, provided that such disclosures are made in accordance with applicable regulatory frameworks and are applied consistently.

Tracking measures disclosed in the public announcements

The IASB has not prescribed an exhaustive definition of what constitutes public communications. Accordingly, entities are expected to actively monitor the nature of their public communications and the performance measures included therein. Entities should establish appropriate systems, controls, and governance processes to identify and monitor MPMs communicated outside the financial statements to comply with IFRS 18 disclosure requirements. This necessitates coordinated efforts across functions such as financial reporting, investor relations, and legal.

In most jurisdictions, entities issue public communications, such as press releases, before or on the same day as the financial statements are authorized for issue. However, in some jurisdictions, investor presentations that might include performance measures are not made available until after the financial statements are authorized for issue. The IASB decided to require an entity to consider the measures it included in public communications related to the previous reporting period to identify MPMs for the current period. 

The requirements apply equally to private entities if a private entity communicates subtotals that meet the definition of MPMs. The intention was to promote transparency and discipline over performance measures communicated externally.

Disclosing EBITDA as an MPM in the financial statements

Typically the EBIDTA measure is equivalent to the operating profit subtotal which forms part of the statement of profit and loss and hence would not qualify as an MPM. However, if there are certain additional adjustments considered in the EBIDTA disclosed in the public information, EBIDTA would qualify as an MPM and the relevant disclosure requirements shall apply.

Overlap between Segment Reporting Disclosure and the MPM disclosure requirement under IFRS 18.

A central requirement for MPMs is that all required disclosures must be included in a single note to the financial statements. A measure of performance used for a reportable segment could also meet the definition of MPM if it satisfies the criteria specified in IFRS 18.

When a reportable segment measure is also an MPM, the entity has flexibility regarding its presentation by either:

Considering the MPMs represent the entity’s performance, separate disclosure for MPMs and segment reporting would provide the users with a better understanding of the financial statements. However, if all the identified MPMs are also a performance measure for the reportable segments, a single note would suffice.

Segment Breakdown vs. Entity as a Whole

A segment measure that is simply a breakdown of a consolidated MPM measure for the entity as a whole is not necessarily required to have all the detailed MPM disclosures provided for each individual segment. The definition of an MPM specifically focuses on the performance of the entity as a whole.

Aggregation and disaggregation requirements

The need for enhanced guidance on aggregation and disaggregation under IFRS 18 arose primarily because the previous requirements in IAS 1 had not been consistently understood or applied. This lack of consistency led to two key problems expressed by users of financial statements:

1. Omission of necessary information:Inconsistent application of aggregation requirements resulted in entities omitting information that users needed to make informed decisions.
2. Obscuring material information:Conversely, inadequate application also led to the obscuring of material information, often by providing too much detail, thus reducing the usefulness of the statements.

The general principles for aggregation and disaggregation in IFRS 18 were introduced as part of a broader framework, with the primary objective being to enhance the communication in financial statements. Therefore, it is key to understand the role and purpose of each segment of the financial statements before deciding on the aggregation and disaggregation of the information.

IFRS 18 does not prescribe any quantitative thresholds for disclosure, aggregation, or disaggregation. Instead, it requires management to exercise professional judgement in grouping or ungrouping items to ensure that material information is presented clearly and is not obscured.

The decision of where to group and present information relies on the distinct and complementary roles of the primary financial statements and the notes:

Assessment Considerations

Core Principles of Aggregation and Disaggregation

Unless specific IFRS Accounting Standards provide overriding requirements, an entity must adhere to five core principles when grouping information:

1. Based on Shared Characteristics (Aggregation): Classify and aggregate items based on characteristics that are shared (similar characteristics). Items aggregated and presented as line items in the primary financial statements must share at least one characteristic other than merely meeting the definition of an element (assets, liabilities, etc.).
2. Based on Dissimilar Characteristics (Disaggregation): Disaggregate items based on characteristics that are not shared (dissimilar characteristics). A single dissimilar characteristic may be sufficient to make the resulting disaggregated information material.
3. Achieving a Useful Structured Summary (PFS Role): Aggregate or disaggregate items to present line items in the primary financial statements that fulfill the role of providing useful structured summaries.
4. Providing Material Information (Notes Role): Aggregate or disaggregate items to disclose information in the notes that fulfills the role of providing material information. Entities need to apply judgment in determining what constitutes material information, as the standard does not specifically define the materiality thresholds
5. Preventing Obscurement of Information: Ensure that the processes of aggregation and disaggregation do not obscure material information.

Basis of Aggregation and Disaggregation

Unless specific IFRS Accounting Standards provide overriding requirements, an entity must adhere to five core principles when grouping information:

Labeling and Description Requirements

Under IFRS 18, entities are required to label and describe items presented in the primary financial statements or disclosed in the notes in a way that faithfully represents their characteristics. This guidance ensures that labels are complete, clear, and include all necessary explanations for a user to understand the reported information

Entities must provide descriptions that accurately reflect the underlying nature or function of the items:

Terminology Choice

Entities have a choice to use alternative labels instead of the standard defined labels, as long as they are not misleading. For example, standard uses terms like “profit or loss”, “net income” is an acceptable alternative label, and entities can use “balance sheet” instead of “statement of financial position.”

Consistency

Presentation and classification of items must be retained from one period to the next unless a significant change in operations or a new IFRS Accounting Standard makes another label more appropriate.

Clarity in Mixed Presentations

If an entity presents expenses using a mix of nature and function, labels must clearly identify what is included in each line. For example, if some employee costs are in the cost of sales, a separate nature line might be labeled “employee benefits other than those included in cost of sales.”

Faithful Representation

After applying the principles of aggregation and disaggregation, the resulting items must be labeled and described clearly. To ensure faithful representation, the entity must provide all necessary descriptions and explanations, including the meaning of any specialized terms it uses and information about how the items were grouped.

Such items are often aggregations of individual items arising from transactions or other events. These aggregated items could be made up of individual items for which the information is material, individual items for which the information is immaterial, or a mix of both.

Use of the label “Other”

Currently, entities present under the “Others” category include almost every aspect of the financial statements, such as other financial assets, other assets/liabilities, or other income/expenses. These disclosures would need to be updated to include more detailed information on what constitutes “others,” including providing disaggregation of information, if possible, of other items that have similar characteristics.

IFRS 18 discourages the use of “other”; it should only be used if a more informative label cannot be found. Entities can use the below approaches while presenting or disclosing “others” as a category: 

Transitioning into IFRS 18

Effective Date and Adoption

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with early adoption permitted, subject to appropriate disclosure in the notes. The standard applies retrospectively in accordance with Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”), subject to specified exemptions.

Reconciliations in Annual Financial Statements

In the first year of application, annual financial statements should include reconciliations for each line item in the statement of profit or loss, comparing amounts previously presented under IAS 1 with the restated amounts under IFRS 18 for the immediately preceding comparative period.

Interim Financial Statements

During the first year, entities preparing condensed interim financial statements under Interim Financial Reporting(“IAS 34”) are required to apply the headings and subtotals prescribed by IFRS 18, and to disclose reconciliations for each profit or loss line item for the comparative periods between the previous IAS 1 policies and the new IFRS 18 requirements.

Election for Investments in Associates and Joint Ventures

At the date of initial application, eligible entities (such as venture capital organisation or a mutual fund or insurance funds)  as specified under Investments in Associates and Joint Ventures (“IAS 28”) may change their election to measure investments in associates or joint ventures from the equity method to fair value through profit or loss. Any such change must be applied retrospectively.

Changes in cash flow statements and Balance Sheet

IFRS 18 introduces limited changes to the presentation of the balance sheet, such as the requirement to present goodwill separately on the face of the financial statements. In addition, IFRS 18 aligns the presentation of the statement of cash flows with the newly defined subtotals in the statement of profit or loss. A key change relates to the starting point for the indirect method, which is now the operating profit subtotal rather than profit before tax. Further, IFRS 18 mandates the presentation of interest and dividends received within investing activities, and interest and dividends paid within financing activities.

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Although, IFRS 18 becomes effective for annual reporting periods beginning on or after 1 January 2027, entities may need to begin developing capabilities and procedures prior to this effective date. As a part of the adoption process, management will have to carefully evaluate the following critical steps in ensuring compliance with IFRS 18 requirements:

Management will be required to apply judgement when performing the above evaluations to ensure alignment with the objectives of IFRS 18. The amendments introduced under IFRS 18 are intended to enhance transparency and relevance in the presentation of financial statements. The table below summarises the implementation of these amendments, highlighting the key updates introduced by IFRS 18.

In addition to the above-mentioned specific requirements mentioned as per IFRS 18, entities will also have to consider the following factors, which are critical in ensuring the smooth transition towards IFRS 18:

• Entities should undertake a comprehensive re-evaluation of their entire chart of accounts to identify and group accounts with similar characteristics, taking into consideration materiality. This process involves assessing the nature and attributes of each transaction type and systematically grouping them according to predefined mapping criteria to ensure consistency, clarity, and accurate financial reporting.
• For entities preparing consolidated financial statements, it is essential that chart-of-account mappings are consistently aligned across all entities included in the consolidation. While certain classes of transactions may be classified differently at the standalone entity level, these classifications should be reviewed and, where necessary, remapped or reclassified to ensure consistency and comparability in the consolidated financial statements.
• Entities would need to undertake a one-time effort to retag their financial statements for digital filing to accommodate the new requirements. It will be helpful for entities to factor all such changes or upgrades into their budgeting exercise for 2026 to ensure a smooth transition and implementation of IFRS 18.
• Transitioning to IFRS 18 requires an organization-wide project involving not just finance & accounts, but IT for system enhancements, investor relations for stakeholder updates, treasury for liquidity/loan covenants impacts, FP&A for planning adjustments, legal for contract reviews, and others like operations. Entities shall coordinate and collarate among departments to ensures smooth implementation, reduces risks, and aligns reporting with strategic goals.
• Entity need to assess IFRS 18’s impact on loan covenants, as new subtotals like operating profit may alter metrics such as debt-to-EBITDA or interest cover ratios, risking breaches despite no economic change. Model restated comparatives, quantify covenant shifts from reclassifications (e.g., interest or expenses), and negotiate lender amendments early for 2027 compliance.

It is critical for entities to undertake an evaluation of their current reporting processes, practices, and skills, as this evaluation is expected to have a long-term impact on both the entity’s current and future operations, as well as its financial reporting dynamics.

Many companies are likely to underestimate the MPM control and audit effort.  The inconsistent EBITDA, adjusted profit, and segment KPIs will now become a regulator and audit issue and not merely an investor relation exercise. This will compel companies to build congruence between statutory reporting, board packs, and investor decks thereby disclosing ‘one version of truth’.

The new requirements are intended to enhance existing disclosure and reporting considerations. Accordingly, entities should assess transactions at a granular level to identify shared characteristics for appropriate classification and aggregation. This process may require significant time and effort, particularly for entities with a high volume of transactions. Given the dynamic nature of business operations, multiple iterations and management discussions may be necessary before finalization; therefore, initiating this process ahead of the effective date would help ensure readiness to comply with the requirements when they become effective.

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