IFRS 18: looking beyond the headlines

The discussion around IFRS 18 has centred on its most visible changes. These include the introduction of operating, investing and financing categories in the statement of profit or loss, two defined subtotals, enhanced disclosures for management-defined performance measures (MPM), and strengthened principles for aggregating and disaggregating information.

However, the practical implications extend beyond the structure of the primary financial statements.

Income and expenses associated with the same asset may be presented in different categories. A transaction may also be classified differently in the statement of profit or loss and the statement of cash flows. Companies may also require more granular expense, tax and foreign-exchange information than their existing reporting systems currently provide.

For companies that do not invest in assets or provide financing to customers as a specified main business activity, the following areas may require particular attention.

1. Returns on assets versus the costs of holding them

A company may hold investment assets even when investing is not one of its main business activities. Certain income and expenses generated by these assets, including rental and investment income, fair-value changes and gains or losses on disposal, may be presented in the investing category.

However, some costs associated with holding or managing the assets are presented in the operating category, as is certain income recovered against those costs. As a result, income and expenses tied to the same asset may fall into different categories, and companies will need to assess each item by its nature, rather than assigning all amounts linked to an investment asset to investing. This can also affect reported operating profit.

IFRS 18 confines the investing category to specified returns, measurement effects, and incremental acquisition or disposal costs. Recurring holding costs like insurance, property taxes, or investment-management fees stay operating.

The practical risk is that companies group all asset-related income and expenses together, assuming a shared balance-sheet origin should produce a shared classification. This approach is too broad. A robust accounting policy should distinguish between:

• returns generated by the asset;
• measurement and derecognition effects;
• incremental acquisition and disposal costs; and
• recurring stewardship or holding costs.

This also has a performance-management implication: operating profit may absorb the cost of maintaining assets whose returns appear below operating profit, in investing. Management should anticipate this asymmetry when budgeting, explaining margins, and designing internal reporting bridges.

2. Disposal gains and the boundary between profit and cash-flow reporting

When a company sells a non-current asset used in its business, the cash flow is presented as investing, but the disposal gain or loss sits in the operating category – alongside the asset's depreciation, amortisation and impairment. Companies should therefore assess income-statement and cash-flow classifications separately, rather than assume one follows the other.

This is analytically defensible: The cash-flow statement classifies cash by the activity that generated it, while the profit-or-loss statement reports the change in net assets. A disposal gain isn't the cash receipt – it's the difference between proceeds and carrying amount

Implementation implication: Reconciliation controls should explicitly link disposal proceeds, carrying amounts and disposal gains/losses, so the investing cash flow can be reconciled to an operating adjustment under the indirect method without implying that either classification is erroneous.

Equity-accounted associates and joint ventures are an important exception. IFRS 18 places both the periodic share of results and disposal gains/losses in the investing category, reflecting the investment's nature as an individually identifiable return.

3. Significant financing components in customer contracts

Customers may pay for goods or services significantly before or after delivery. Where the timing difference provides a significant financing benefit to either party, IFRS 15 requires the company to adjust the transaction price to reflect that financing component, so part of the amount recognised may be presented as interest income or expense rather than revenue, at an amount reflecting the cash selling price when control transfers. IFRS 18 then determines the category for that interest. 

For companies that do not provide financing to customers as a specified main business activity, interest expense on significant advance payments (a contract liability) is presented in the financing category, while interest income on significantly deferred payments (a contract receivable) is generally presented in the operating category – not investing. Interest's presentation therefore depends on its source and nature, not the label "interest" itself.

This asymmetry reflects the standard's classification logic: financing expense on a liability arising from advance consideration is a financing effect, whereas interest income on a customer receivable is connected to a customer relationship and isn't automatically treated as a return on an investing asset.

Companies should identify significant financing components at contract level, preserve the link between the contract asset or liability and the related interest, and ensure revenue systems can produce classification-ready data. Contract reviews should also distinguish genuine financing from payment terms that exist for other reasons.

4. Operating expense presentation and the new disaggregation discipline

Companies generally present operating expenses either by function (e.g. cost of sales, administrative expenses) or by nature (the underlying type of expenditure). When using a function-based presentation, IFRS 18 requires the notes to disclose, for each function line item, the amounts relating to specified expense natures – not just an aggregate total. The specified natures are:

• Depreciation
• Amortisation
• Employee benefits
• Impairment losses and reversals
• Inventory write-downs and reversals

For each of these, companies must disclose the total, how it splits across operating function line items, and any related amounts sitting outside the operating category, effectively creating a matrix between natural expense data and functional presentation.

Many existing systems often capture an expense's total amount but not its split across functions. General ledgers are typically built around either cost centres and functions or natural account codes, but rarely both at the level external reporting now requires. Companies may therefore need to review their charts of accounts, cost-allocation methodologies, consolidation systems, reporting templates, data ownership and controls, and build clear data lineage from source transactions through natural accounts and cost allocations to financial-statement line items. Manual year-end analysis may work initially but becomes less reliable and harder to control over time.

The strategic benefit is improved transparency over cost composition, but this makes IFRS 18 implementation more than a formatting exercise. It may require real changes to underlying data and reporting processes.

5. Management-defined performance measures

Companies frequently use alternative profit measures to communicate financial performance. Where such a measure meets IFRS 18's definition of a management-defined performance measure (MPM) – broadly, a non-IFRS subtotal used in public communications to convey management's view of the company's performance – it must be disclosed in a single dedicated note. 

Not every alternative measure automatically qualifies; each must be assessed against the definition. The objective isn't to prohibit alternative views of performance, but to make them transparent, comparable, and reconcilable to IFRS measures.

For qualifying MPMs, the required disclosures include why management believes the measure is useful, how it is calculated, a reconciliation to the most directly comparable IFRS subtotal, and the income-tax effect of each reconciling item, along with any effect on non-controlling interests. 

MPMs often originate in external communications rather than in the financial statements themselves. A key governance question isn't whether a non-GAAP measure appears in an annual report, but whether it's used publicly to convey management's view of performance. Finance, tax, investor relations, legal, audit and corporate communications teams should therefore share a common inventory of public measures, agree on calculation and tax-effecting methodologies, and maintain a consistent approval process.

Strategic insight: MPMs transform alternative performance reporting from a communications exercise into an auditable reporting process. Measures that were previously prepared outside the core close may require formal definitions, evidence of consistent calculation and controlled reconciliation.

6. Foreign exchange differences and transaction-level judgement

Under IFRS 18, foreign-exchange gains and losses are generally presented in the same category as the income and expenses arising from the items that generated them. Exchange differences on a foreign-currency borrowing would therefore ordinarily follow financing income or expense, while exchange differences on trade receivables and payables would ordinarily be operating.

Complexity arises when a single transaction gives rise to amounts in more than one category. A deferred foreign-currency purchase, for example, may generate an operating expense for the underlying goods or services, a financing expense for the time-value-of-money component, and an exchange difference on the related payable. Management must assess whether the exchange difference relates to the financing component and allocate it accordingly, though where that assessment would involve undue cost or effort, the standard permits an operating classification instead.

Implementation implication: Companies may no longer be able to rely on a single account capturing all foreign-exchange gains and losses and may instead need to trace differences to the transactions and balances that generated them. This could require more granular data, revised account mappings, and additional controls over classification. 

Policy design matters here. Classification should follow documented principles applied consistently across systems and reporting periods. The operating fallback should not become a substitute for evaluating material, recurring exposures for which a reliable allocation can be developed.

7. Aggregation, disaggregation and disciplined labelling

IFRS 18 strengthens the principles governing how companies group, separate and describe information in the primary financial statements and notes. Items should be grouped when they share characteristics and separated when dissimilar characteristics matter to users, with labels that faithfully describe their contents. 

The word "other" is not prohibited but should be a last resort descriptor rather than a default account category. Companies should confirm that an ‘other’ balance genuinely contains multiple classes too small to warrant separate presentation, that a more precise label isn't available (a balance of only staff loans should read "staff loans," not "other receivables"), and that material or dissimilar items are disclosed separately, with note disclosure used where the face of the statement remains aggregated. 

Good disaggregation is not maximal detail. Excessive detail can obscure the reporting story as much as excessive aggregation, so the goal is a useful, structured summary in the primary statements, supported by explanatory detail in the notes.

Companies may therefore need to revisit transaction and account mappings, charts of accounts, expense-allocation methods, foreign-exchange data, tax calculations, MPM governance measures, reporting systems and controls, financial-statement terminology, and external financial communications.

Conclusion

IFRS 18 changes the language and structure through which financial performance is explained. Its categories and subtotals will make some measures more comparable, but the standard also exposes the quality of an entity's underlying data, policies and judgements. The most difficult issues arise at boundaries: between asset returns and holding costs, profit and cash flow, operating activity and financing, management communication and IFRS-defined performance, natural and functional expense data, or useful aggregation and obscuring detail.

A high-quality implementation will therefore do more than comply with a new presentation template. It will connect recognition and measurement under other standards to a coherent presentation model, supported by transparent policies and reproducible data. When implemented well, IFRS 18 can improve the credibility of performance reporting by making the composition of profit clearer, management-defined measures more accountable and financial statements more useful for comparison and decision-making.

Companies that begin this assessment early will be better placed to identify where current systems, data and judgements need to change before the standard takes effect.