IFRS 18: Categories, Subtotals and Management-defined Performance Measures

Two companies can report profit for the same year and describe it as “operating profit” while including different things in it: one puts interest income in, the other leaves it out. Before 2027, International Accounting Standard (IAS) 1 did not say what operating profit meant or require it, so users could not compare.

International Financial Reporting Standard (IFRS) 18 Presentation and Disclosure in Financial Statements, issued in April 2024, fixes this by sorting every item of income and expense in the statement of profit or loss into five categories, requiring three subtotals, setting rules for aggregation, and requiring disclosure of the profit measures management uses outside the statements. It replaces IAS 1 for periods beginning on or after 1 January 2027.

This topic covers the five categories, the mandatory subtotals, aggregation, management-defined performance measures and the transition rules. The next topic starts the preparation of company financial statements from a trial balance.

In the diets reviewed for this page none of the questions tests IFRS 18 directly, because the Institute’s papers still follow IAS 1 for now. But the standard is on the syllabus and will matter for any period that begins in 2027 or later. Read profit or loss, other comprehensive income, changes in equity and notes first.

What changes and what does not

IFRS 18 changes how an entity presents its statement of profit or loss, how it aggregates and disaggregates information, and how it discloses management-defined performance measures. It does not change recognition and measurement.

A complete set of financial statements still has a statement of financial position, a statement or statements of financial performance (profit or loss and other comprehensive income, in one statement or two), a statement of changes in equity, a statement of cash flows and notes.

Many IAS 1 requirements carry over substantially unchanged, including offsetting, frequency, comparatives, consistency, the current and non-current classification (including the amendments on classification of liabilities effective in 2024) and the structure of the notes. The requirements on fair presentation, going concern and accounting policy information are moved to IAS 8, which is renamed Basis of Preparation of Financial Statements.

Primary financial statements give structured, more aggregated summaries, and the notes give the detail. The new aggregation principle requires items to be aggregated when they share characteristics and disaggregated when they have dissimilar characteristics and the result is material.

An entity may present extra line items or subtotals if they are made up of amounts recognised and measured under the Standards, fit the required structure, are consistent from period to period and are not more prominent than the required totals.

The five categories

Every item of income and expense in the statement of profit or loss is classified in one of five categories, generally by the type of asset or liability to which it relates.

• Operating. The residual category: all income and expenses not classified in the others, whether or not they are volatile or non-recurring. It includes the results of the entity’s main business activities and other activities. Examples are revenue, cost of sales, selling expenses, research and development and general and administrative costs.
• Investing. Income and expenses from investments in associates, joint ventures and unconsolidated subsidiaries, and from cash and cash equivalents and other assets that generate a return individually and largely independently of the entity’s other resources. For an entity without a specified main business activity, typical items are interest income, dividend income, rental income from investment property, fair value gains and losses on financial assets and equity-method income.
• Financing. Income and expenses from liabilities arising from transactions that involve only raising finance (for example loans and debentures), and the interest or unwinding effects of other liabilities, such as interest on lease liabilities and net interest on a defined benefit liability. Examples are interest expense on borrowings and on lease liabilities.
• Income taxes. Tax expense or income under IAS 12 and related exchange differences.
• Discontinued operations. The income and expenses of discontinued operations under IFRS 5.

Exchange differences in profit or loss under IAS 21 are classified in the same category as the item that gave rise to them, unless that involves undue cost or effort. Entities whose main business is investing in assets or providing financing to customers (such as banks and investment funds) follow exceptions that put some investing or financing items in the operating category.

Mandatory subtotals and expenses

The statement of profit or loss presents three mandatory totals or subtotals:

• operating profit, the total of income and expenses in the operating category
• profit or loss before financing and income taxes, which adds the investing category
• profit or loss

Subtotals such as profit before income taxes and profit from continuing operations are additional subtotals and may be presented if they meet the criteria above.

Operating expenses are presented by nature, by function or on a mixed basis, whichever gives the most useful structured summary. An entity that presents any operating expenses by function discloses in a note, for each line item, the amounts of depreciation, amortisation, employee benefits, impairment losses and write-downs of inventories included.

Other comprehensive income is still divided between items that will not and items that may be reclassified to profit or loss. The notes also disclose unusual income and expenses, those with limited predictive value.

For example, an entity has revenue of ₦600,000 and cost of sales of ₦360,000, other operating income of ₦12,000, and selling, research and administration costs of ₦40,000, ₦25,000 and ₦47,000. Operating profit is ₦240,000 + ₦12,000 − ₦40,000 − ₦25,000 − ₦47,000 = ₦140,000. It has a share of profit of a joint venture of ₦18,000 and interest income of ₦6,000 (investing), so profit before financing and income taxes is ₦164,000. Interest on loans and leases of ₦22,000 (financing) gives profit before income taxes of ₦142,000.

Tax at 30% is ₦42,600, profit from continuing operations is ₦99,400, and after a loss from discontinued operations of ₦9,400, profit is ₦90,000.

Management-defined performance measures

A management-defined performance measure (MPM) is a subtotal of income and expenses that an entity uses in public communications outside the financial statements to communicate management’s view of an aspect of the financial performance of the entity as a whole, and that is not a total or subtotal listed in IFRS 18 or required by another Standard. A common example is adjusted profit that excludes share-based payments or impairment.

All MPMs are disclosed in a single note to the financial statements, with, for each one, a description of why it gives management’s view and how it is calculated, and a reconciliation to the most directly comparable subtotal specified by IFRS Accounting Standards, showing the income tax effect and the effect on non-controlling interests of each reconciling item. MPMs are not presented on the face of the statements.

For example, adjusted operating profit adds back share-based payment of ₦8,000 and restructuring costs of ₦5,000 to operating profit of ₦140,000, giving ₦153,000. The reconciliation shows each item and a tax effect of 30% × ₦13,000 = ₦3,900.

Other changes and transition

• Statement of cash flows. The indirect method starts from operating profit or loss, not profit or loss, and the options for classifying interest and dividends cash flows are removed.
• Statement of financial position. Goodwill is presented as a separate line item, apart from other intangible assets.
• Earnings per share. Additional per-share amounts are allowed only where the numerator is a total or subtotal specified by IFRS 18 or an MPM, with extra disclosure for MPMs.
• Third statement of financial position. Still required when a policy is applied retrospectively or items are restated or reclassified and the effect is material, at the start of the preceding period, with notes only for the change.

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, so an entity with a 31 December year end applies it first in the year ended 31 December 2027, with the 2026 comparatives restated. Earlier application is permitted where the entity’s reporting framework allows it.

It is applied retrospectively, and the comparatives are restated. But the entity gives special transition disclosures instead of the line-by-line quantitative information in IAS 8: a reconciliation, for the comparative period immediately before the first application, between the restated IFRS 18 amounts and the amounts previously presented under IAS 1.

The ideas in more depth

Why a residual operating category

Rather than define operating activities, the standard defines what is not operating: investing, financing, tax and discontinued items. Whatever remains is operating. This makes the subtotal comparable even when entities describe their businesses differently.

Why MPMs are disclosed and not banned

Management uses adjusted measures in results announcements whether or not the standards permit them. Bringing them into one audited note, with a reconciliation, lets users see what has been adjusted and judge it, instead of finding it only in a press release.

Sources and references

• IFRS 18 Presentation and Disclosure in Financial Statements: categories, subtotals, aggregation, management-defined performance measures and transition.
• IAS 8 Basis of Preparation of Financial Statements (as renamed by IFRS 18), IAS 7 Statement of Cash Flows and IAS 33 Earnings per Share, as amended.

These points are stated as at 5 November 2026.

Worked examples

1. (a) Investing. (b) Financing. (c) Investing.
2. (d) Operating. (e) The category of the item that gave rise to it: operating, because the payable relates to purchases of goods or services.
3. (f) Income taxes.

1. Operating profit. ₦140,000.
2. Profit before financing and income taxes.
   ₦140,000 + ₦18,000 + ₦6,000 = ₦164,000.
3. Profit.
   ₦164,000 − ₦22,000 = ₦142,000; tax ₦42,600; ₦99,400; less ₦9,400 = ₦90,000.

1. Adjusted operating profit.
   ₦140,000 + ₦8,000 + ₦5,000 = ₦153,000.
2. Reconciliation note.
   From operating profit, showing each adjustment, the tax effect of 30% × ₦13,000 = ₦3,900 and any effect on non-controlling interests.

How to answer in the exam

• Name the categories. Five, with the operating category as the residual.
• Build the statement down the page. Operating profit, then the investing items, then the financing items, tax and discontinued operations, labelling each subtotal.
• State the date. Periods beginning on or after 1 January 2027, retrospective, and the year ended 31 December 2027 for a calendar-year entity.
• For measures say single note, reconciliation and tax effects.

Common mistakes in the exam

• Putting interest income in the operating category.
• Presenting an adjusted profit on the face of the statement.
• Saying the first mandatory year for a 31 December year end is 2028. It is the year ended 31 December 2027.
• Calling profit before income taxes a mandatory subtotal.
• Forgetting that goodwill is a separate line in the statement of financial position.
• Thinking IFRS 18 changes recognition or measurement.

Quick revision

• Effective for periods beginning on or after 1 January 2027; retrospective; replaces IAS 1.
• Categories: operating (residual), investing, financing, income taxes, discontinued operations.
• Mandatory subtotals: operating profit; profit before financing and income taxes; profit.
• MPMs: single note, description, reconciliation, tax and non-controlling interest effects.
• Indirect cash flow starts from operating profit; goodwill separate line.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

Spotted a mistake? Tell us and we will check it.