Full explanation
Overview
Two companies. Same industry. Same real performance. You open their accounts to compare them… and their "operating profit" looks completely different. One reports two hundred. The other, two hundred and thirty. So — which one is right?
Here's the strange part. For fifty years, "operating profit" — the number everyone quotes — was never actually defined by accounting rules. The IASB looked at a hundred companies.
One number, nine answers
Sixty-one reported an operating profit… using at least nine different definitions. Nine.
That's the puzzle IFRS 18 was built to solve. Stick with me — and by the end, you'll read any income statement with new eyes.
One number, no definition
So why did this happen? The old rulebook, IAS 1, told you which statements to prepare — but gave enormous freedom in how you structured the income statement. No required operating profit. No fixed order. Every company drew its own lines.
And a second problem grew alongside it. Companies leaned on their own invented measures — "adjusted profit", "underlying earnings", "adjusted EBITDA" — in investor decks and press releases. Useful, sometimes. But unaudited, undefined, and impossible to compare.
Two companies, identical performance, could look completely different on paper. Investors were flying half-blind. IFRS 18 is the fix — the biggest shake-up to how the statements look in a generation.
IFRS 18 replaces IAS 1
First, what exactly is IFRS 18? It replaces IAS 1, and it takes effect for periods from the first of January, twenty twenty-seven — applied retrospectively, so the prior year is restated too.
And here's the key: IFRS 18 doesn't change how you measure profit. Your bottom line is unchanged. It changes how that profit is presented and disclosed — the structure, the subtotals, the story the numbers tell.
Summary on the face, detail in the notes
One idea sits underneath the whole standard. Every primary statement — the income statement, the balance sheet — must give a "useful structured summary". A clear, comparable overview.
The fine detail lives in the notes. Summary on the face; depth in the notes. Get that split right, and everything else in IFRS 18 follows.
Part one. The income statement, rebuilt — and finally given a defined shape.
Every line now has a home
Here's the heart of it. Every income and expense now falls into one of five categories. Think of them as floors in a building, top to bottom.
Operating — the day-to-day business. Investing — returns from assets like associates and investments. Financing — the cost of how you're funded.
Then income taxes, and finally discontinued operations. Five categories — and between them sit two brand-new, required subtotals. Let's build a real statement and watch them appear.
The first new subtotal: Operating profit
Take a manufacturer. Revenue, one thousand. Cost of sales, six hundred. Selling and admin, one-fifty. Research, fifty. All of that is the operating category — the core business.
Add it up, and there's the first new required subtotal: operating profit — two hundred. For the first time, defined the same way for everyone. This is the number those sixty-one companies drew nine different ways.
What's "operating profit"?
Quick pause on that phrase, because it's the star of the show. "Operating profit" simply means the income and expenses from your main, day-to-day business — nothing else.
Sounds obvious, doesn't it? Yet for fifty years it was never actually defined — so everyone drew the line somewhere different. IFRS 18 finally pins it down.
The second new subtotal: Profit before financing & tax
Next floor down — investing. Our company earns thirty from a stake in an associate, and ten of interest on its investments. Forty in total, kept separate from the core business.
Operating profit plus investing gives the second new subtotal: profit before financing and income taxes — two hundred and forty. It's what most people used to call EBIT — now defined, and required on the face for most entities. One exception: a financing business that elects to classify certain financing-related items as operating can't present this subtotal at all — the IASB decided it would be misleading.
Same profit — now you see the path
Now financing — the cost of how we're funded. Interest on borrowings, forty. Subtract it, and we reach profit before tax — two hundred.
Take off income tax of fifty, and there's profit for the year — one hundred and fifty. Same bottom line as before. But look what we can now see on the way down.
From a loose list to a defined shape
Here's the before and after, side by side. On the left, the old IAS 1 way: a loose list. Investment income and finance costs lumped near the bottom — and "operating profit"? Wherever management chose to draw it, if they showed it at all.
On the right, IFRS 18: the same numbers, now stacked in defined categories, with operating profit of two hundred and profit before financing and tax of two-forty standing out clearly.
Same profit. Same company. But now you can line it up against any competitor and compare the operating engine directly. That's the comparability that was missing.
Part two. Taming the "adjusted" numbers — companies' own measures, brought into the light.
The "adjusted" number, named
Remember those invented measures — "adjusted operating profit", "underlying earnings"? IFRS 18 gives them a name: management-defined performance measures, or MPMs.
An MPM is a subtotal management uses in public — outside the accounts — to show its own view of performance. Say our company had a one-off restructuring charge of thirty inside operating profit.
Management strips it out and tells investors the "adjusted operating profit" is two hundred and thirty. Under the old world, that number lived in a slide deck — unaudited, unexplained. Under IFRS 18, it can't hide.
What's an "MPM"?
Don't let the phrase scare you. A "management-defined performance measure" is just a company's own adjusted number — "adjusted profit", "underlying earnings" — the one it loves to quote to investors.
IFRS 18's whole move is this: take that number out of the glossy slide deck… and put it inside the audited accounts, reconciled to a real IFRS figure. Nowhere left to hide.
Every "adjusted" number, reconciled
Now the company must bring every MPM into a single note in the audited accounts. And crucially, reconcile it — line by line — back to the closest IFRS subtotal.
Operating profit, two hundred. Add back the restructuring charge, thirty. Adjusted operating profit, two hundred and thirty — with the tax effect of that adjustment shown too. The "adjusted" number is finally transparent, and audited.
When is EBITDA an MPM?
One subtle trap worth knowing. Operating profit before depreciation, amortisation, AND any impairments within IAS thirty-six — that exact combination — is specifically excluded from the MPM definition. Change what's excluded, even slightly, and it can count as an MPM after all.
But the moment you adjust it — "adjusted EBITDA", with your own add-backs — it becomes an MPM, and needs the full note and reconciliation. Plain EBITDA, free. Adjusted EBITDA, disclosed. A distinction the exams and the auditors will test.
Part three. The rules beneath the surface — grouping, labelling, and where the numbers flow.
Group with care, label honestly
IFRS 18 sets real principles for grouping numbers. Combine items that share characteristics; separate those that don't. And label them faithfully — no dumping unrelated costs into a vague bucket called "other".
You still choose how to present operating expenses — by nature, like depreciation and staff costs, or by function, like cost of sales and admin. Today it's a real mix: forty-two percent by function, nineteen by nature, the rest a blend.
But there's a new catch: present by function, and you must also disclose FIVE key nature amounts in a single note — depreciation, amortisation, employee benefits, impairment of non-financial assets, and inventory write-downs. You no longer get to hide them.
Cash flow gets a defined starting point
The ripple reaches the cash flow statement too. The indirect method now starts from one defined point — operating profit — instead of whatever number a company chose. And interest and dividends now follow each company's own main business activity, matching how they're classified in profit or loss — no more free choice, though banks and insurers land in a different place to everyone else.
The categories flex with your business
Now here's a genuinely clever twist — those five categories aren't one-size-fits-all. They flex with what your business actually does. Watch the same three lines land differently across three industries.
Our manufacturer: interest income and investment returns sit in investing, and borrowing costs in financing. Its operating profit is pure trading — make and sell.
A bank is different: lending money IS the business. So its interest income — and its interest expense — both sit inside operating. A bank's operating profit includes net interest income.
And an investment-property firm, or an insurer investing its premiums? The returns on the assets they invest in are their core business — so those land in operating too. The category follows your main business activity. Same standard, three different shapes.
Most of IAS 1 carries forward
And breathe — most of IAS 1 is still here. The balance sheet, the statement of comprehensive income, the statement of changes in equity, comparatives — all retained, with light tweaks.
IFRS 18 isn't a rebuild of everything. It's a sharpening of the income statement, tighter grouping rules, and honesty about management's own measures. That's the standard, in one breath.
Part four. So who feels this — and what does it change for the people reading the numbers?
Everyone reporting IFRS — start now
Who's most affected? Honestly — every company reporting under IFRS. But most of all those with investment income, associates, or heavy financing, and anyone who publishes "adjusted" figures, which is almost everyone listed.
Getting ready means: re-map every income and expense to the five categories, decide nature versus function, list every performance measure you use publicly and build its reconciliation, and update your systems and your cash flow. Start early — the comparative year has to be restated.
Reading the accounts to make a call
And for you, reading the accounts to make a call? Two big wins. First — a defined operating profit means you can finally compare the operating engine of two companies like for like.
Second — that "adjusted" number the company loves to quote is now inside the audited accounts, reconciled, with its tax effect shown. You can see exactly what management stripped out, and judge for yourself.
The income statement stops being a story each company tells its own way… and becomes something you can genuinely compare. That's the whole point of IFRS 18.
Structure, subtotals, honesty
So let's bring it home. Five categories, top to bottom — operating, investing, financing, taxes, discontinued.
Two new required subtotals in the middle — operating profit, and profit before financing and income taxes.
And every "adjusted" measure dragged into a single audited note, reconciled. Structure, subtotals, and honesty — that's IFRS 18.
Same profit, a common language
And the impact in one picture. Before — sixty-one companies, nine different "operating profits", none truly comparable. After — one defined operating profit, the same for everyone.
The bottom line never moved. What changed is that you can now trust the shape of the statement — and compare it. Same profit, finally a common language.
So let's pull it together. IFRS 18 keeps your bottom line exactly the same — but gives the income statement a defined shape: five categories, and two required subtotals, operating profit and profit before financing and tax.
Focus on three things
It drags every "adjusted" measure into the audited notes, reconciled and tax-adjusted. In practice, focus on three things: mapping items to the right category, nature versus function, and building your MPM reconciliations early.
Master those, and no income statement can dress itself up beyond what you can see and compare. That's IFRS 18, effective twenty twenty-seven. Next time — IFRS 9, and the world of financial instruments. See you there.