There’s more to IFRS 18 - Presentation and Disclosure in Financial Statements than accounting changes and compliance requirements. The new standard could enable companies to more effectively align their performance measures and analysis with financial statements, strengthening the credibility of the information that management communicates to investors and other stakeholders. Implementing IFRS 18 will be a cross-functional effort involving finance, tax, IT, operations, investor relations, and the C-suite—which is why companies need to start now to ensure they’re ready.

IFRS 18 is intended to address concerns over the lack of comparability (period-to-period and across companies), improve transparency and credibility of certain non-GAAP measures¹ by requiring such measure to be included in the notes accompanying the financial statements, and enhance grouping requirements.

A key benefit of IFRS 18 is that it provides management with greater flexibility to apply judgment in the presentation of its operating expenses and related subtotals in the income statement. This flexibility can help enhance alignment between the financial statements and how performance is communicated to investors, through MD&A, press releases, and investor presentations, enabling a clear, compelling, and credible narrative.

IFRS 18 in brief

• Replaces IAS 1 - Presentation of Financial Statements, while carrying forward many IAS 1 requirements
• Impacts all entities that report under IFRS Accounting Standards, public or private
• Entities required to apply IFRS 18 for annual reporting periods beginning on or after January 1, 2027; early adoption is permitted
• Requires retrospective application; entities will have to prepare

IFRS 18: A deeper dive into the changes

IFRS 18 introduces significant changes to the way entities present the income statement Implementing these changes will require judgment, restatement of comparative figures, and policy decisions that must be made early. It will also require cross-functional collaboration and coordination. It’s complex—which is why adopting IFRS 18 isn’t something companies should do at the last minute.

The income statement: More standardized, more structured

IFRS 18 re-envisions the traditional income statement as a “statement of performance.” This subtle yet transformative shift highlights the income statement’s enhanced role in aligning financial reporting with management’s assessment of performance.

Key IFRS 18 changes for most entities include the introduction of two new standard subtotals, “operating profit or loss,” and “profit before financing and income tax.” As well, IFRS 18 requires classification of income and expenses under five categories: operating, investing, financing, income taxes and discontinued operations. Management should not regard these changes as a mere relabeling exercise. Nor should management dismiss their impact or assume they do not matter as there could be impacts to key performance metrics, such as the calculation of operating profit, EBITDA, etc.

In fact, IFRS 18 could impact key performance indicators, debt covenants, compensation plans, tax filings, and more. Systems and the chart of accounts may need to be updated to support the new way information is grouped and reported (e.g., foreign exchange to be split into separate accounts to allow for grouping with the related underlying income or expenses that gave rise to them).

For consolidated groups, changes to the chart of accounts across entities may be necessary to ensure appropriate application and compliance with the new standard. Because IFRS 18 requires classification, aggregation, and disclosure of management performance measures (MPMs) to be compliant at the financial statement level, discrepancies may arise between standalone financial statements and consolidated group financial statements, which may require the need to maintain different chart of accounts between the entities, further increasing the complexity of implementation.

Organizations will need to work with the analyst community to communicate how IFRS 18 has changed their financial reporting to ensure their story is clearly understood (e.g., how the income statement has changed, impact on non-GAAP measures, reclassifications, or other metrics used by analysts).

Increased scrutiny and improved transparency of Management Performance Measures

Canadian public companies have a long-standing practice of using non-GAAP measures in their MD&A and other continuous disclosure documents to communicate financial performance to investors. These measures must align with Canadian securities regulations that govern the use and presentation of non-GAAP financial information.

With the adoption of IFRS 18, a subset of these measures, known as MPMs, will now have to be disclosed in the notes to the financial statements. This introduces a new level of scrutiny, as MPMs will fall within the scope of the financial statement audit. As a result, management will need to apply greater rigour in defining, reviewing, and governing these measures. Stronger disclosure controls will be necessary, and any changes to MPMs will be treated as changes in accounting policy, which may require restating comparative figures.

For companies that include adjustments for “non-recurring” items in their MPMs, it will be essential not only to align with existing securities regulatory expectations but also to clearly define such items and establish processes to identify them consistently.

Aggregation and disaggregation changes bring more detail, clarity

IFRS historically provided limited guidance on the aggregation and disaggregation of information in the financial statements or accompanying notes. IFRS 18 addresses this gap by requiring entities to revisit how they categorize, and present financial information—and to establish clear policies for identifying and disclosing new or unusual transactions. Broadly speaking, IFRS 18 requires aggregation of items with shared characteristics, and disaggregation of items with different characteristics.

Ultimately, this means entities may have to provide more detail in their financial statements. Under IFRS 18, entities can no longer use “other” labels such as “other income” or “other expenses” without further explanation (unless the information is clearly immaterial), specifically when such explanation would help financial statement users better understand the business performance. Here again, IFRS 18 provides management with additional levers to better articulate how it views the business and to convey its perception of the business’s performance.

The impact of these changes will ripple throughout the organization. More judgment—consistent, documented, and easily explained to auditors—will be needed. The chart of accounts and reporting tools will need to be adjusted or updated to support the new level of detail IFRS 18 requires. Entities will need to revisit how accounts are structured and how data flows through their systems, especially those with subsidiaries that use a different chart of accounts. Policies and processes will need to be updated to ensure recorded transactions align with the new rules. And close coordination among finance, financial planning and analysis (FP&A), and investor relations teams will be critical, because what is reported in the financial statements must align with budget practices and the story told to shareholders.

IFRS 18 impacts the entire business—not just accounting

Implementing IFRS 18 is much more than a technical accounting rule change. It’s a cross-functional transformation, and the impact—and responsibility—will fall across the business:

• Finance and accounting teams will need to apply the new rules, identify required updates, and assess the impact of the changes on covenants, compensation, internal policies, internal controls, and governance.
• FP&A and budgeting teams will need to align internal performance metrics and forecasts with new reporting structures and identify how the changes affect budget assumptions and performance-based pay.
• IT teams will need to ensure that the systems that support financial reporting are updated to enable and effect IFRS 18’s required changes.
• Investor relations and communications teams will need to work with analysts to understand changes to the income statement and the calculation of MPMs and non-GAAP measures to ensure appropriate analysis of the company’s financial performance.
• C-suite/executive team members will have the ultimate responsibility over compliance with IFRS 18, including classification judgments and the definition of MPMs. They will also be responsible for ensuring the entity has implemented appropriate disclosure controls to maintain alignment between financial statement disclosures and external communications, such as the MD&A and investor presentations.
• Boards of directors and audit committee members are responsible for overseeing financial reporting and must ensure that the changes introduced by IFRS 18 are properly understood and effectively implemented within the organization.
  

Starting the IFRS 18 implementing journey early is the smart, strategic move

While IFRS 18 isn’t mandatory until 2027, it’s strategically savvy to start the transition journey to the new standard as soon as possible. Starting implementation early, gives management and investor relations teams the opportunity to assess and address potential collateral impacts on key performance measures, loan covenants, incentive compensation, and other contractual arrangements.

The longer organizations wait, the greater the risk of errors, operational disruptions, audit findings, and P&L restatements. In contrast, starting the transition project to adopt IFRS 18 early gives organizations the time to get the transition right, ensuring alignment across the business and improving the clarity and transparency of their financial reporting. It also allows time to take full advantage of the opportunities IFRS 18 offers to craft a refreshed performance narrative that reinforces the business’s credibility, transparency, and investment appeal.

Deloitte can help you make the switch to IFRS 18

Deloitte is uniquely positioned to help organizations successfully transition to IFRS 18. With a multidisciplinary team comprising Audit, Advisory, Risk and Technology professionals, we have the scale, knowledge, experience, and track record to deliver a seamless IFRS 18 implementation. We can support you at every stage of your IFRS 18 journey, from impact assessments and policy development to system readiness, controls, and communications. With our deep understanding of IFRS 18’s technical requirements and business implications, we can help you rethink your income statement, ensure your MPMs align with your KPIs, and tell a clear, credible performance story that inspires stakeholder confidence.

To learn more about how IFRS 18 will impact your business and industry and how Deloitte can help you get started on your transition to the new standard, contact your local Deloitte partner or reach out to one of us directly.