1.The New Five-Category Taxonomy: No More Hiding Places
IFRS 18 requires every income and expense item to be placed into one of five clear categories. This makes sure that operating performance is separated from financing and investment activities.
Operating
This is the default category. It includes income and expenses from the company’s main business and anything not assigned elsewhere.
Investing
This includes returns from assets that earn money on their own, like interest, dividends, or profits from joint ventures.
Financing
This covers costs and income related to raising money, such as interest on loans.
Income Taxes
This includes all tax-related income or expenses.
Discontinued Operations
This includes results from parts of the business that have been sold or shut down.
The “Main Business Activity” (MBA) Exception
This system is not exactly the same for every company. For example, banks or real estate companies may treat interest or rental income as Operating, because those activities are central to their business. This decision must be based on real evidence, not just management preference, and it is assessed at the company level.
Analysis
By making Operating the default category, IFRS 18 removes the ability to move unusual or volatile items (like lawsuits or asset write-downs) out of operating results.
“The existing flexibility in financial statement presentation had created a patchwork of reporting practices that hindered effective cross-border and cross-sector analysis.”
2. Mandatory Anchors: Standardizing Performance
IFRS 18 introduces three required subtotals that must appear in every income statement. These act as standard reference points for analysis.
Operating profit or loss: Shows core business performance
Profit or loss before financing and income tax: Shows earnings before financing and tax effects
Profit or loss: Final total result for the period
Analysis
This change will affect how financial ratios are calculated. Metrics like Return on Capital Employed (ROCE) and Interest Coverage will now use consistent numbers across companies.
This reduces the ability for companies to adjust or “polish” their own versions of metrics like EBIT.
3. Professionalizing the Non-GAAP Narrative: The MPM Mandate
Management-defined Performance Measures (MPMs), often called non-GAAP metrics, are now moving into audited financial statements.
Companies must include a specific note that explains these measures, including:
A clear name and explanation of why the measure is useful
A reconciliation to the closest IFRS number
The tax and non-controlling interest (NCI) effects for each adjustment
A statement confirming it reflects management’s view
Analysis.
This creates much more accountability. Since MPMs are now audited, boards and audit committees must take greater responsibility for them.
It will be much harder to selectively remove “bad” costs while keeping favorable items.
“MPM disclosure enables a bridging of the gap between IFRS numbers and investor communications, serving to reduce skepticism around non-GAAP measures.”
4. The War on “Other”: Precision in Aggregation and Disaggregation
IFRS 18 limits the use of vague labels like “Other.” Companies must now group or separate items based on six factors:
Nature (what the item is)
Function (what it does in the business)
Persistence (recurring or one-time)
Measurement basis (cost or fair value)
Size (how large it is)
Timing (when it impacts the business)
Analysis
Large amounts previously hidden under “Other Operating Expenses” must now be broken down. If a number is big enough that users might question it, companies must explain what it includes.
5. The “By Function” Disclosure Tax
Companies can still present expenses by function (like Cost of Sales), but there is now an added requirement. They must also disclose the total amounts of these five expense types in one note:
Depreciation
Amortization
Employee benefits
Impairment losses
Inventory write-downs
Analysis
This creates pressure on finance teams. Systems must now track expenses both by function and by nature at the same time.
Manual fixes at the end of reporting periods will not hold up under audit.
6. Consequential Ripple Effects: Cash Flows and Systems
IFRS 18 also affects cash flow reporting and internal systems.
Cash Flow Starting Point
The indirect method must now start with Operating Profit
Removal of Policy Choice
Interest and dividends are now more strictly classified
Paid → Financing
Received → Investing
System Impact
Systems must automatically distinguish between similar items
(e.g., FX gains from operations vs financing)
7. Action Plan: A Roadmap for Controllers and FP&A
The rule starts on January 1, 2027, but companies must restate 2026 numbers. This means preparation must begin now.
Impact Assessment
Identify Main Business Activity and which metrics count as MPMs
Gap Analysis
Check if systems can track required details and calculations
System / Chart of Accounts Redesign
Update accounts to match the five categories
Stakeholder Communication
Prepare the Board and Audit Committee for their new responsibilities
8. Conclusion: A Strategic Opportunity
IFRS 18 is not just about compliance. It is a chance to improve how companies explain their performance.
By clearly linking official numbers with management’s internal view, companies can build stronger trust with investors through better transparency.
As you prepare, consider this question:
Is your current Chart of Accounts ready for the 2026 restatement, or will your team rely on time-consuming manual fixes?