IFRS 18: The Clock Is Ticking — What Changes in Practice
IFRS 18: The Clock Is Ticking — What Changes in Practice
BDO Global Technical Perspective
IFRS 18 Presentation and Disclosure in Financial Statements becomes effective for annual reporting periods beginning on or after 1 January 2027, replacing IAS 1 Presentation of Financial Statements.Although IFRS 18 does not change the recognition and measurement requirements of IFRS Accounting Standards, its practical implications may be significant. As BDO Global demonstrates in its publication IFRS 18 – The Clock Is Ticking: Practical Effects on Financial Reporting, the new requirements may affect reported operating profit, performance measures, cash-flow classifications, disclosures, reporting systems and processes, contractual arrangements and external communications.
A more structured statement of profit or loss
One of the most visible changes introduced by IFRS 18 is a more defined structure for the statement of profit or loss.
Income and expenses are classified into five categories:
- operating;
- investing;
- financing;
- income taxes; and
- discontinued operations.
This is important because entities may currently use different definitions of operating profit. Under IFRS 18, amounts may move into or out of operating profit even though the underlying economics of the transaction have not changed.
BDO Global illustrates this through a series of practical scenarios. For example, in the circumstances considered in the publication, expected credit losses on trade receivables and goodwill impairment are included within operating profit. Certain items that may previously have been presented within finance costs may also be classified within operating.
Income and expenses from associates and joint ventures accounted for using the equity method are classified in the investing category.
Foreign-exchange differences generally follow the classification of the underlying item. This may require entities to distinguish exchange differences relating to operating, investing and financing items and could have implications for systems and reporting processes.
The impact therefore extends beyond presentation. Changes in reported operating profit may affect internal performance measures, benchmarking, remuneration arrangements, contractual covenants and the way financial performance is communicated to stakeholders.
Specified main business activities require careful judgement
IFRS 18 contains specific requirements for entities whose specified main business activities include investing in assets or providing financing to customers.
This is particularly relevant to financial institutions and other entities for which investing or financing forms part of their core operations.
Determining whether such an activity is a specified main business activity requires judgement based on the entity’s facts and circumstances. That conclusion can affect where related income and expenses are presented and may materially influence reported operating profit.
Management should therefore assess these activities carefully and ensure that significant classification judgements are appropriately supported and consistently applied.
Greater discipline in aggregation and disaggregation
IFRS 18 strengthens the principles governing how information is aggregated in the primary financial statements and disaggregated in the notes.
Entities are required to consider whether items have sufficiently similar characteristics to be grouped together and whether items with different characteristics should instead be presented or disclosed separately.
This may particularly affect broad captions such as “other operating expenses”, where dissimilar or individually important items may previously have been combined.
For some organisations, the challenge will not be determining the appropriate accounting treatment but obtaining the required level of information.
Financial reporting systems and processes may therefore need to provide more granular data than is currently available. BDO Global highlights that implementation may require changes to systems and processes to support the new presentation and disclosure requirements.
Cash-flow classifications may change
IFRS 18 also introduces consequential amendments to IAS 7 Statement of Cash Flows.
For entities without specified main business activities, interest and dividends received are generally classified as investing cash flows, while interest and dividends paid are classified as financing cash flows.
Different requirements may apply where investing in assets or providing financing to customers represents a specified main business activity.
The underlying cash flows do not change, but their presentation between operating, investing and financing activities may.
Management should therefore assess whether the new classifications affect cash-flow KPIs, financing arrangements, internal reporting or communications with investors and lenders.
Management-defined performance measures come under greater scrutiny
Another significant development is the introduction of requirements for management-defined performance measures, or MPMs.
Where a qualifying subtotal of income and expenses is used in public communications to communicate management’s view of an aspect of financial performance, IFRS 18 may require related disclosures within the financial statements.
These disclosures include information explaining the measure, why management believes it provides useful information and a reconciliation to the most directly comparable subtotal specified by IFRS Accounting Standards.
This has an important assurance implication.
BDO Global specifically notes that MPM disclosures will be subject to audit.
Measures that may previously have been managed primarily through investor presentations, management commentary or other public communications may therefore require a higher level of discipline over their preparation and supporting information when they fall within the IFRS 18 requirements.
For management and audit committees, this means considering how each relevant measure is defined, whether it is calculated consistently, whether the underlying information is reliable and whether appropriate controls support its preparation and disclosure.
Expense disclosures may require more granular information
Entities presenting operating expenses wholly or partly by function may also need additional information on the nature of those expenses.
This can create a practical reporting challenge.
Existing systems may have been designed primarily to produce information by function or by nature, rather than both. IFRS 18 may therefore require changes in underlying reporting processes and data capture to produce the necessary information efficiently and consistently.
The implications extend beyond year-end
IFRS 18 should not be treated solely as a year-end financial-statement exercise.
Entities preparing interim financial statements will need to reflect the applicable IFRS 18 requirements from the relevant interim reporting period in the first year of adoption.
Early preparation is therefore important.
Waiting until the year-end reporting process to resolve classification, system, disclosure and control issues could create avoidable implementation pressure.
The audit and assurance perspective
For auditors and audit committees, the significance of IFRS 18 extends beyond revised financial-statement presentation.
New classifications and disclosures will need to be supported by appropriate evidence, consistent methodologies and effective controls. Significant judgements—including those relating to specified main business activities, classification, aggregation and disaggregation, and management-defined performance measures—should be appropriately documented and capable of supporting the entity’s financial-reporting conclusions.
This is particularly relevant to MPMs. By bringing qualifying performance measures within the financial statements, IFRS 18 places greater discipline around information that may previously have been communicated primarily outside the audited financial statements.
From an audit-readiness perspective, management should therefore consider not only the technical accounting assessment, but also:
- the reliability and granularity of underlying data;
- documentation supporting significant judgements;
- consistency of calculations and classifications;
- the operation of relevant internal controls; and
- governance over financial and performance reporting.
BDO Global’s practical scenarios make one point particularly clear: implementation should not be confined to the financial-reporting team.
Depending on the organisation, the implications may extend to treasury, tax, investor relations, legal, remuneration, information systems and operational teams.
Management should therefore assess the impact early, identify areas requiring judgement or system change, determine whether existing processes and controls remain appropriate, and understand any consequences for contracts, performance measures and external communications.
The effective date is 1 January 2027 for annual reporting periods beginning on or after that date.
But effective implementation starts earlier.
The quality of the first IFRS 18 financial statements will depend on the decisions, systems, evidence and controls put in place before they are prepared.
Read the full story and further assurance insights in the October 2026 edition of BDO Insights – Jordan | Iraq | Syria.