IFRS 18: the biggest change to the income statement in a generation

For two decades, IAS 1 let entities present the statement of profit or loss more or less as they saw fit. Two companies in the same sector, with near-identical economics, could publish income statements that resisted line-by-line comparison. Investors compensated by building their own models; management teams filled the gap with adjusted measures that sat outside the audited statements and followed no common rulebook.

IFRS 18 is the IASB’s answer to that. Issued in April 2024, it is the most significant change to the face of the financial statements since IFRS itself was adopted at scale. It does not alter a single recognition or measurement requirement. It alters something arguably more visible: the structure through which every user reads your performance.

01A defined structure for the income statement

The headline change is that income and expenses must now be classified into five categories, and two subtotals become mandatory rather than optional.

From those categories, two subtotals follow: operating profit, and profit before financing and income taxes. For the first time, "operating profit" has a defined meaning in IFRS. Today the term appears in thousands of annual reports meaning thousands of subtly different things.

Note the direction of travel in that table. Operating is defined as a residual, not a positive definition. That is deliberate: it prevents entities from pushing inconvenient costs out of the operating result by arguing they are not really operating in nature. If it is not investing, financing, tax or discontinued, it is operating.

Entities with specified main business activities

The standard recognises that this default classification does not work for everyone. An entity whose main business is investing in assets, or providing financing to customers, would produce a nonsensical operating profit if interest and investment returns were pushed below it. Banks, insurers, investment entities and similar businesses therefore apply different classification requirements to reflect that these items are their operations.

This is the area where judgement bites hardest, and where a conglomerate with a financing arm alongside a trading business will need to reach a defensible position early rather than in the audit.

02Management-defined performance measures come inside the tent

"Adjusted EBITDA". "Underlying operating profit". "Normalised earnings". These measures have long occupied an awkward space: prominent in the investor presentation and the chairman’s statement, absent from the audited statements, and governed by nothing more than convention.

IFRS 18 brings them into scope. Where an entity uses a subtotal of income and expenses in public communications outside the financial statements to convey management’s view of performance, that subtotal is a management-defined performance measure, and it must be disclosed in a single note containing:

• a statement that the measure reflects management’s view and is not necessarily comparable to measures used by other entities;
• an explanation of why the measure is useful and how it is calculated;
• a reconciliation to the most directly comparable IFRS subtotal; and
• the income tax effect and the non-controlling interest effect of each reconciling item.

That last requirement deserves attention. Disclosing the tax effect of each individual adjustment is not a presentational tweak — it is a calculation many entities do not currently perform, and it requires tax data at a level of granularity that finance teams rarely maintain outside the annual provision.

03Aggregation and disaggregation get principles

The third change is the quietest and, in our experience, the one that generates the most work.

IFRS 18 sets out principles for how information should be grouped: aggregate items that share characteristics, disaggregate those that do not, and label them in a way that faithfully describes what they contain. Crucially, the standard puts pressure on the catch-all "other" line. Where a material amount is labelled "other", the entity must explain what it comprises.

Anyone who has scrolled to the bottom of an expense note and found a substantial, unexplained "other operating expenses" balance will recognise the problem being solved. Anyone responsible for producing that note will recognise the work involved in solving it.

What else moves

The cash flow statement

Consequential amendments to IAS 7 make operating profit the single starting point for the indirect method, replacing today’s variety of starting points. The standard also removes most of the classification options for interest and dividends paid and received. Two entities with identical cash flows should now produce comparable cash flow statements — which has not reliably been true.

Earnings per share

The IAS 33 calculation is unchanged, but entities may present additional EPS-style measures where the numerator is an MPM — provided the disclosure requirements above are met.

IFRS 19 for eligible subsidiaries

IFRS 18 arrived alongside IFRS 19 Subsidiaries without Public Accountability: Disclosures, which lets eligible subsidiaries apply reduced disclosures. Groups with many reporting entities should assess the two together — the combination can meaningfully reduce group reporting effort.

What this means in Kenya

Kenya applies IFRS Accounting Standards as issued by the IASB. Entities reporting under full IFRS — companies listed on the Nairobi Securities Exchange, banks and insurers under their respective regulators, and other entities with public accountability — will apply IFRS 18 for periods beginning on or after 1 January 2027.

Three local factors sharpen the timeline:

• Regulatory reporting runs on the same numbers. Where regulators and lenders draw on published subtotals, a change in how those subtotals are defined has consequences beyond the annual report. Covenant definitions referencing "operating profit" deserve an early read.
• Group structures are common. Kenyan groups frequently combine a trading business with a financing or investment arm. Those are precisely the structures where the specified-main-business-activity guidance requires real analysis.
• Finance teams are lean. Most are not carrying spare capacity for a restatement exercise on top of a normal close. That argues for starting the data work now, while it can be absorbed, rather than in 2027 when it cannot.

The part most entities underestimate: the data

IFRS 18 is written as an accounting standard. It will be implemented as a systems project.

The classification judgements are finite and, for most entities, resolvable in a workshop. What is not resolvable in a workshop is a chart of accounts that was built to answer different questions. In practice we see the same three constraints:

• The general ledger cannot split what the standard wants split. Interest income sits in one account regardless of whether it arises from cash, from customer financing, or from an investment — three different IFRS 18 categories from one balance.
• "Other" is doing heavy lifting. Material balances are pooled in accounts that were never intended to be published in disaggregated form, and there is no transaction-level attribute to unpick them.
• MPM adjustments live in spreadsheets. The adjusting items behind adjusted EBITDA are typically assembled manually each period, with no audit trail and no tax attribution — which is exactly what the new note requires.

None of these are accounting problems. They are chart-of-accounts design, ERP configuration and data-model problems — and they take longer to fix than the technical accounting does.

A readiness checklist

Where to start

The entities that will handle this well are not the ones with the deepest technical accounting bench. They are the ones that treated IFRS 18 as a data project early, fixed the chart of accounts once, and let the disclosures fall out of a system rather than a spreadsheet.

That work sits at the intersection of two disciplines that are usually separated: financial reporting judgement, and the systems engineering to make the ledger produce what the judgement requires. It is the intersection Briafix was built for — a CPA-led practice that also configures the ERP.

Frequently asked questions