The most visible and impactful change introduced by IFRS 18 is the restructuring of the income statement.
Under IAS 1, companies had greater flexibility in how they presented their profit and loss statement. While there were general requirements, there was no strictly defined structure for categorising income and expenses. This meant that similar items could appear in different parts of the statement depending on the company.
IFRS 18 changes that by introducing a clearly defined framework.
The income statement is now built around five categories, but what are they?
The income statement is now built around five categories: operating, investing, financing, income taxes, and discontinued operations. While the last two sit at the bottom of the statement, the real shift lies in the first three categories.
The operating category captures the core activities of the business, representing the activities that fundamentally drive revenue generation and profitability. The investing category includes returns from assets that are not part of those core operations. The financing category reflects the costs of funding the business, including interest and other financing-related expenses.
This structured approach removes much of the ambiguity that existed under IAS 1. It also forces companies to think more carefully about how different types of income and expenses are classified.
IFRS 18 introduces two mandatory subtotals: operating profit or loss, and profit or loss before financing and income taxes.
These subtotals are particularly significant. Historically, “operating profit” has been one of the most widely used and inconsistently defined metrics in financial reporting. IFRS 18 standardises this measure, creating a consistent analysis baseline.
However, this is not just a technical adjustment. It has real implications for how businesses present their performance. Many organisations currently highlight alternative metrics that may not align with the new definitions. Under IFRS 18, those metrics can still be used, but they must be transparently reconciled.
IFRS 18 introduces more detailed guidance on classification
In addition to structural changes, IFRS 18 introduces more detailed guidance on classification. This is where much of the implementation complexity and judgement is likely to arise.
For example, companies must now distinguish between “integral” and “non-integral” associates and joint ventures. This distinction determines whether their results are included within operating or investing categories. Making this judgment will require a deep understanding of how those investments relate to the core business.
Similarly, treasury-related income such as interest earned on cash balances, may need to be carefully assessed. Is it part of normal operations, or is it a financing activity? The answer may differ depending on the nature of the business.
Financial instruments, particularly hybrid instruments and derivatives, add another layer of complexity, especially for financial institutions.
Retrospective application
Finally, IFRS 18 requires full retrospective application. This means companies must restate prior-period income statements using the new structure. For many organisations, this will be one of the most challenging aspects of implementation, as it depends heavily on the availability and quality of historical data.
Taken together, these changes represent a significant shift. They bring greater clarity and consistency, but they also demand more rigorous analysis and stronger data foundations.
For more information
We have a number of different resources available regarding IFRS 18, free to access.
