IFRS 18 Explained

The Complete Guide to the New Financial Statement Presentation Standard (Effective 2027)

6/15/20265 min read

The International Accounting Standards Board (IASB) has introduced IFRS 18 – Presentation and Disclosure in Financial Statements, replacing IAS 1 – Presentation of Financial Statements.

This represents the biggest change to financial statement presentation in more than twenty years. While many businesses initially assume IFRS 18 only changes the income statement, the standard has much broader implications. It affects financial reporting, management reporting, investor communication, audit processes, internal controls, banking relationships, and financial analysis.

With IFRS 18 becoming mandatory for annual reporting periods beginning on or after 1 January 2027, organizations should begin preparing now rather than waiting until implementation becomes compulsory.

What is IFRS 18?

IFRS 18 is a new International Financial Reporting Standard issued by the International Accounting Standards Board (IASB).

It replaces IAS 1 and introduces a more structured approach to presenting financial statements.

The objective is to improve:

Comparability between companies
Transparency for investors
Consistency in financial reporting
Quality of financial disclosures
Confidence in management performance measures

The new standard provides clearer guidance on how financial information should be organized, presented and explained.

Why Was IAS 1 Replaced?

Although IAS 1 served businesses for many years, it allowed considerable flexibility in presenting financial statements.

This flexibility often resulted in inconsistent reporting practices between companies operating in the same industry.

Some of the biggest issues included:

1. Lack of Structure

IAS 1 did not prescribe a standardized structure for the Statement of Profit or Loss.

Companies could classify revenues and expenses differently, making financial statements difficult to compare.

For investors and lenders, this reduced transparency.

2. No Defined Operating Profit

One of the biggest criticisms of IAS 1 was that Operating Profit was never formally defined.

Almost every company reported an operating profit figure.

However:

Each business calculated it differently.
Certain expenses were included by some companies and excluded by others.
Comparisons across industries became unreliable.

IFRS 18 solves this issue by introducing mandatory operating categories and subtotals.

3. Alternative Performance Measures (APMs)

Many businesses presented non-GAAP metrics such as:

Adjusted EBITDA
Normalized Profit
Core Earnings
Underlying Operating Profit

These measures often appeared only in annual reports or investor presentations.

They were usually unaudited.

Users of financial statements found it difficult to understand how these numbers were calculated.

4. Excessive Aggregation

Companies frequently grouped material expenses under broad headings such as:

Other Expenses
Miscellaneous Costs
General Administrative Expenses

This limited transparency and made financial analysis more difficult.

IFRS 18 requires more meaningful disaggregation of material items.

The Three Pillars of IFRS 18

1:Structured Income Statement

One of the most significant changes introduced by IFRS 18 is a standardized income statement structure.

Companies must classify income and expenses into five categories:

Operating

The operating category includes the company's core business activities.

Examples include:

Revenue
Cost of sales
Employee expenses
Selling expenses
Administrative costs

Investing

This category includes returns generated from investments that are separate from the company's main operations.

Examples include:

Investment income
Dividend income
Gains on investment assets

Financing

This section reports items arising from financing activities.

Examples include:

Interest expense
Financing costs
Certain lease financing components

Income Taxes

Income tax expense is now presented separately.

This provides clearer visibility into pre-tax performance.

Discontinued Operations

Results from discontinued business segments continue to be reported separately.

New Mandatory Subtotals

IFRS 18 introduces three mandatory subtotals:

Operating Profit

A standardized measure of operating performance.

This improves consistency between companies.

Profit Before Financing and Income Taxes

This subtotal separates operational performance from financing activities.

Investors gain a clearer understanding of business performance before financing decisions.

Profit Before Tax

This subtotal continues to be mandatory but is now presented within the structured format.

2: Management-Defined Performance Measures (MPMs)

Many companies rely on internal performance measures when communicating with investors.

Examples include:

Adjusted EBITDA
Underlying Profit
Normalized Earnings
Core Operating Profit

Under IFRS 18, these measures can still be used.

However, companies must now disclose them inside the audited financial statements rather than only in presentations or annual report commentary.

Each MPM must include:

A clear explanation
Why management uses it
How it is calculated
A reconciliation to IFRS totals
Tax effects
Non-controlling interest (NCI) impacts for every adjustment

This significantly increases transparency and reduces the risk of misleading performance reporting.

3: Aggregation and Disaggregation

Another major reform introduced by IFRS 18 relates to how companies group financial information.

The standard requires businesses to present information based on shared characteristics.

Material information should no longer be hidden within broad categories.

Instead of presenting:

Other Expenses

Companies may need to separately disclose:

Legal expenses
Professional fees
IT costs
Marketing expenses
Consultancy costs
Regulatory penalties

The objective is to ensure users clearly understand the nature of significant transactions.

Additional Changes Introduced by IFRS 18

Beyond the three pillars, IFRS 18 also affects several other areas of financial reporting.

Improved Cash Flow Reporting

Companies will need greater consistency between:

Income statement presentation
Statement of cash flows
Notes to the financial statements

This enhances financial analysis and reduces inconsistencies.

Better Financial Statement Notes

The standard strengthens disclosure requirements.

Notes must provide clearer explanations of:

Material transactions
Significant judgments
Performance measures
Aggregated balances

Greater Audit Focus

Because Management Performance Measures become part of the audited financial statements, auditors will review:

Calculation methodology
Supporting evidence
Reconciliations
Consistency between reports

This increases accountability and reporting quality.

Impact on Debt Covenants

Many financing agreements rely on metrics such as:

EBITDA
Operating Profit
Interest Coverage
Debt Ratios

Since IFRS 18 changes presentation requirements, businesses should review existing loan agreements and discuss potential impacts with lenders before implementation.

Who Will Be Affected?

Almost every entity reporting under IFRS will experience some level of impact.

This includes:

Private companies
Listed companies
Family businesses
Holding companies
Investment entities
Manufacturing companies
Service businesses
Financial institutions

The level of impact will depend on the complexity of operations and current reporting practices.

Practical Steps to Prepare for IFRS 18

Organizations should begin planning well before the mandatory implementation date.

Recommended steps include:

1. Review Existing Financial Statements

Identify where current presentation differs from IFRS 18 requirements.

2. Identify Management Performance Measures

Prepare reconciliations for all non-GAAP metrics currently used.

3. Update Reporting Systems

Ensure accounting software and reporting tools support the new presentation format.

4. Train Finance Teams

Finance professionals should understand the new classifications and disclosure requirements.

5. Engage Auditors Early

Discuss implementation plans and reporting expectations before year-end reporting begins.

6. Review Banking Agreements

Assess whether revised presentation may affect financial covenants or reporting obligations.

Common Implementation Challenges

Many organizations may encounter challenges such as:

Reclassifying existing accounts
Updating ERP and reporting systems
Preparing reconciliations for MPMs
Educating management teams
Training finance staff
Communicating changes to investors
Managing audit requirements
Maintaining consistency across group companies

Early planning can significantly reduce implementation risks.

Why Early Preparation Matters

Although IFRS 18 becomes effective from 1 January 2027, implementation may require substantial planning.

Businesses that prepare early will benefit from:

Smoother transition
Reduced reporting risk
Better investor confidence
Improved financial transparency
Fewer year-end reporting issues
Stronger governance and compliance

Waiting until the implementation year may create unnecessary operational pressure.

Final Thoughts

IFRS 18 is more than a presentation update, it is a significant shift toward greater transparency, consistency, and comparability in financial reporting. Organizations that begin preparing now will be better positioned to meet compliance requirements, strengthen stakeholder confidence, and avoid last-minute implementation challenges.

If your business reports under IFRS, now is the time to assess the impact of IFRS 18 and develop a clear implementation roadmap.

How AlKhuzam & Co. Can Help

At AlKhuzam & Co., we prepare statutory financial statements in line with IFRS and Kuwait local laws, ensuring full compliance, accurate presentation, and strong acceptance from banks, auditors, and regulatory authorities. Contact us today to learn how we can support your success.

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info@alkhuzam.com | +965 22414000 | +965 66162610

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