IFRS 18 and the new format of the income statement
IFRS 18 does not change a single measurement rule. Net profit for the period will be exactly what it would have been under IAS 1. What changes is the structure of the income statement, and for most entities that structure is now prescribed rather than chosen.
It was issued on 9 April 2024, replaces IAS 1, and is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.
The four things it actually does
| Change | Effect |
|---|---|
| Five categories for income and expenses | Operating, investing, financing, income taxes, discontinued operations — the first three newly defined |
| Two mandatory subtotals | Operating profit, and profit before financing and income taxes |
| Management-defined performance measures | MPMs must be disclosed and reconciled in a single note |
| Aggregation and disaggregation principles | Apply to the primary statements and the notes |
Requirements in IAS 1 that were not reconsidered have been carried across: some remain in IFRS 18, some moved to IAS 8 Basis of Preparation of Financial Statements, and some to IFRS 7. So IAS 8 is not the standard it used to be, and cross-references in your accounting manual will need retargeting.
The five categories
| Category | What sits there |
|---|---|
| Operating | The residual — everything not in another category, regardless of whether it is volatile or unusual |
| Investing | Returns from assets that generate a return individually and largely independently, including results of equity-accounted associates and joint ventures |
| Financing | Income and expenses from liabilities involving the raising of finance, including interest expense on all liabilities |
| Income taxes | Presented separately from the three above |
| Discontinued operations | Presented separately from the three above |
Two consequences deserve emphasis because they reverse common practice.
Operating is a residual, not a definition of "core". An unusual, one-off or volatile item that does not belong in investing or financing sits in operating. Entities accustomed to presenting an "operating profit before exceptional items" as their headline cannot achieve that within the required subtotal — it becomes an MPM instead.
Equity-accounted results move to investing. Share of profit of associates and joint ventures is no longer part of operating profit. For a group whose associates are strategically integral, operating profit will fall relative to the number reported today, with no change in net profit.
Across five industries
Where the same item lands in different sectors.
| Industry | How the point applies |
|---|---|
| Telecom | Spectrum and licence amortisation, network depreciation and site costs sit in operating. Interest on the large lease liability portfolio for towers and sites is financing. A stake in a tower company held as an associate moves to investing — and for operators who have carved out towers, that is a visible reduction in operating profit. |
| Construction & real estate | Contract revenue and costs are operating. Interest on project borrowings is financing where not capitalised. Fair value gains on investment property are operating for a property investor but investing for a contractor holding a surplus site. |
| Software & SaaS | Research and development, and amortisation of capitalised development, are operating. Interest earned on a large cash balance from a funding round is investing, not operating, for a software company. |
| Banking & financial services | Interest income and expense on customer lending and deposits are operating, because that is the main business activity. This is the standard’s own headline illustration and it inverts the manufacturer’s treatment. |
| Retail & e-commerce | Store and fulfilment costs are operating; interest on lease liabilities for stores is financing. Rental income from subletting surplus retail space is investing. |
We handle the computation, the minimum-tax comparison, statutory accounts and the annual filings together.
Avail our corporate tax services"Main business activity" changes the answer
Classification is not uniform across entities. Where an entity's main business activity involves investing in assets or providing financing to customers, items that would otherwise be investing or financing are classified as operating.
| Entity | Item | Category |
|---|---|---|
| Bank | Interest income from lending | Operating |
| Manufacturer | Interest income on surplus cash | Investing |
| Property investment company | Rental income | Operating |
| Retailer | Rental income from subletting spare space | Investing |
This is the judgement with the widest reach in the standard, because it must be made once, documented, and applied consistently — and it determines whether the operating profit subtotal is comparable with a peer's.
Across five industries
The judgement that must be made once and documented.
| Industry | How the point applies |
|---|---|
| Telecom | Main activity is providing communication services, not investing or financing — so interest income is investing. The genuine judgement is device instalment financing: where financing customers becomes a main business activity in substance, the related interest could be operating. Document the conclusion; it is arguable either way. |
| Construction & real estate | A contractor: rental income is investing. A property investment company: rental income is operating. Groups doing both must decide and disclose which activities are main, and apply it consistently. |
| Software & SaaS | Rarely contentious — investing and financing keep their default meanings. A vendor offering customer financing at scale is the exception. |
| Banking & financial services | Both investing in assets and providing financing to customers are main activities, so most of what other entities classify as investing or financing is operating here. The subtotals mean something quite different from a corporate’s. |
| Retail & e-commerce | A retailer running a captive consumer credit book has a financing main activity for that segment, while the merchandise business does not — the hardest version of this judgement. |
Worked: the same results, restructured
A manufacturing group. Nothing is remeasured; only the structure changes.
| Line | Under IAS 1, Rs m | Under IFRS 18, Rs m |
|---|---|---|
| Revenue | 8,400 | 8,400 — operating |
| Cost of sales | (5,900) | (5,900) — operating |
| Distribution and administrative | (1,350) | (1,350) — operating |
| Impairment of a plant | (180) | (180) — operating (residual) |
| Share of profit of associates | 210 | Moves to investing |
| Operating profit as reported today | Rs 1,180 | — |
| Operating profit under IFRS 18 | — | Rs 970 |
| Share of profit of associates | — | 210 — investing |
| Interest income on deposits | 60 | 60 — investing |
| Profit before financing and income taxes | — | Rs 1,240 |
| Interest expense on borrowings and leases | (240) | (240) — financing |
| Profit before tax | 1,000 | 1,000 |
| Income tax | (290) | (290) |
| Profit for the period | Rs 710 | Rs 710 |
Read the two operating profit figures together: Rs 1,180 million today against Rs 970 million under IFRS 18 — a fall of Rs 210 million, entirely because the associates' result moved to investing. Profit for the period is Rs 710 million on both bases, and profit before financing and income taxes is Rs 1,240 million. Any covenant, bonus scheme or analyst model keyed to "operating profit" needs re-baselining before the first IFRS 18 statement is published, not after.
Operating expenses: nature, function, or both
Expenses in the operating category may be presented by nature, by function, or in a mixed presentation — whichever provides the most useful structured summary. The choice carries a cost: an entity presenting by function must additionally disclose specified information by nature.
| Presentation | Example lines | Additional disclosure |
|---|---|---|
| By nature | Raw materials, employee benefits, depreciation and amortisation | None required on this account |
| By function | Cost of sales, distribution, administrative | Specified nature information must be disclosed |
| Mixed | Some functional lines with material nature lines presented separately | As above, for the functional lines |
Most entities currently present by function, so for them this is a new disclosure obligation requiring the general ledger to support a nature-based analysis that may not exist today. That is a systems and chart-of-accounts question, and it is the part of IFRS 18 implementation that takes the longest.
Across five industries
Nature, function, or mixed — and the disclosure that follows.
| Industry | How the point applies |
|---|---|
| Telecom | Almost universally presents by function — cost of services, selling and marketing, administrative. So the additional nature disclosure is required, and it must cover the two largest lines in the sector: depreciation and amortisation, and employee benefits. Whether the ledger can split network operating costs by nature is the practical constraint. |
| Construction & real estate | Contract costs are typically presented by function. Nature disclosure requires subcontractor costs, materials and employee benefits to be separable across hundreds of contracts. |
| Software & SaaS | Functional presentation splitting cost of revenue, research and development, and sales and marketing is the sector convention, so nature disclosure of employee benefits — the dominant cost — becomes mandatory. |
| Banking & financial services | Often closer to a nature presentation already, which reduces the additional burden relative to other sectors. |
| Retail & e-commerce | Cost of sales plus distribution and administrative is near universal, so nature disclosure of employee benefits, occupancy and logistics is new work for most. |
Management-defined performance measures
An MPM is a subtotal of income and expenses that is not listed in IFRS 18 or specifically required by IFRS Accounting Standards, which the 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.
"Adjusted EBITDA", "underlying operating profit", "operating profit before exceptional items" — if it appears in the results presentation or the chairman's statement, it is very likely an MPM.
Disclosure sits in a single note and must include:
- A description of the aspect of financial performance the MPM communicates, and why it provides useful information;
- How the measure is calculated;
- A reconciliation to the most directly comparable subtotal specified by IFRS; and
- The income tax effect and the effect on non-controlling interests for each reconciling item.
The tax and NCI columns are the requirement most groups underestimate. A single "adjusted operating profit" with six reconciling items needs a tax effect and an NCI effect for each, which is a new computation rather than a re-presentation of an existing one.
The strategic point: MPMs move from marketing material into audited financial statements. Any measure that cannot survive a disciplined reconciliation is better retired before adoption than defended afterwards.
Across five industries
Which headline measures become MPMs — and which do not.
| Industry | How the point applies |
|---|---|
| Telecom | EBITDA and EBITDA margin are the sector’s governing measures and are MPMs — each needs a reconciliation to operating profit with the tax and non-controlling interest effect of every reconciling item. A useful precision point: ARPU and subscriber numbers are not MPMs, because they are not subtotals of income and expenses. |
| Construction & real estate | "Adjusted operating profit" excluding fair value movements, and "like-for-like rental growth", are common. The first is an MPM; the second is not a subtotal of income and expenses. |
| Software & SaaS | "Non-GAAP operating income" excluding share-based payment is the sector staple and is squarely an MPM. Annual recurring revenue and net revenue retention are not, being neither subtotals nor drawn from income and expenses. |
| Banking & financial services | "Underlying profit" excluding restructuring and conduct charges is an MPM. Cost-to-income ratio and net interest margin are ratios, not subtotals, so they fall outside. |
| Retail & e-commerce | "Adjusted EBITDA pre-IFRS 16" is an MPM and among the harder to reconcile. Like-for-like sales growth is not a subtotal of income and expenses. |
Aggregation and disaggregation
IFRS 18 sets out enhanced principles: aggregate and disaggregate on the basis of shared characteristics, do not obscure material information with immaterial detail, and label items faithfully. Where a line item is labelled "other", the standard pushes for an explanation of what it contains — a large unexplained "other operating expenses" is precisely the practice these principles are aimed at.
These principles apply to the notes as well as the primary statements, which is why IFRS 18 is a disclosure project and not only an income statement project.
Across five industries
Where "other" will no longer do.
| Industry | How the point applies |
|---|---|
| Telecom | A single large "other operating expenses" line covering interconnect, roaming, site rentals and regulatory fees will not survive the labelling principle. Interconnect and roaming in particular have distinct characteristics and are expected to be disaggregated. |
| Construction & real estate | Aggregating contract revenue across materially different contract types obscures information. Disaggregation by contract type and by revenue recognition pattern is the likely direction. |
| Software & SaaS | Subscription, licence, and professional services revenue have different margins and patterns and should not be aggregated into one line. |
| Banking & financial services | Fee and commission income covering advisory, custody and transaction fees needs disaggregation where the characteristics differ. |
| Retail & e-commerce | Own-inventory and marketplace revenue are recognised gross and net respectively, so aggregating them into one revenue line is precisely the practice the principle is aimed at. |
The statement of cash flows
| Item | Change |
|---|---|
| Starting point for the indirect method | Operating profit, replacing the previous diversity of starting points |
| Interest and dividends received and paid | Classification options removed for most entities, reducing diversity |
Both changes reduce presentation choice, and both mean the prior-year cash flow statement will not tie to the restated comparative without rework. The IASB has separately signalled a broader project on the statement of cash flows following its Third Agenda Consultation, so this is a first step rather than a settled position.
Across five industries
Rebuilding the reconciliation.
| Industry | How the point applies |
|---|---|
| Telecom | Starting the indirect reconciliation from operating profit means the large depreciation, amortisation and lease adjustments now begin from a different line. Interest paid on lease liabilities loses its classification option, which matters given the size of telecom lease portfolios. |
| Construction & real estate | Movements in contract assets, contract liabilities and retentions are the main reconciling items and must be rebuilt from operating profit rather than profit before tax. |
| Software & SaaS | The deferred revenue movement is the dominant reconciling item and its position shifts with the new starting point. |
| Banking & financial services | Because interest is operating for a bank, the interaction between the income statement categories and the cash flow classifications needs deliberate mapping rather than reuse of the existing template. |
| Retail & e-commerce | Working capital movements dominate; the change is presentational but the comparative will not tie without rework. |
Transition — and why the deadline is earlier than it looks
Three transition requirements together move the practical start date well before 1 January 2027:
- Comparative information must be restated in the year of initial application;
- The new requirements apply in interim financial statements in that first year; and
- Early application is permitted, so a group may choose to move sooner.
| Year end | First IFRS 18 period | Comparative period | Data capture must begin |
|---|---|---|---|
| 31 December | Year to 31 Dec 2027 | Year to 31 Dec 2026 | 1 January 2026 — already elapsed |
| 30 June | Year to 30 Jun 2028 | Year to 30 Jun 2027 | 1 July 2026 — now |
| 30 September | Year to 30 Sep 2028 | Year to 30 Sep 2027 | 1 October 2026 |
This is the single most actionable fact about IFRS 18. A December year-end entity's comparative year has already passed, so the 2026 result must be reconstructed on the new basis from records that were not designed to produce it. A June year-end entity — the common pattern for many Pakistani groups — is inside its comparative year right now, and can still capture the data prospectively rather than reconstructing it.
Across five industries
Where each sector should expect the biggest change.
| Industry | How the point applies |
|---|---|
| Telecom | Largest expected impact: operating profit falls where tower or infrastructure associates and joint ventures are material, plus new nature disclosure over network costs. Re-baseline any EBITDA-linked covenant or incentive before publication. |
| Construction & real estate | Largest impact: classifying fair value movements and disposal gains, and deciding whether property investment is a main business activity. |
| Software & SaaS | Largest impact: the non-GAAP measures that have driven equity stories for years now carry an audited reconciliation with tax and NCI effects. |
| Banking & financial services | Largest impact: applying main-business-activity classification consistently across a group containing banking, insurance and asset management, where the answer differs by segment. |
| Retail & e-commerce | Largest impact: nature disclosure of occupancy, logistics and employee costs, and disaggregating gross from net revenue streams. |
A working implementation sequence
- Decide the main business activity and document it. Everything downstream depends on it.
- Map every income statement line to one of the five categories, and flag items whose classification is genuinely arguable.
- Quantify the operating profit delta — particularly the removal of equity-accounted results.
- Test covenants, bonus schemes and guidance against the restated subtotal, and speak to lenders early where a definition is mechanical.
- Inventory every MPM used in public communications, and build the reconciliation including tax and NCI effects.
- Assess whether the ledger supports nature disclosure if you present by function — usually the longest task.
- Rebuild the cash flow statement from operating profit.
- Run the comparative period in parallel on both bases for as long as you can.
Five misconceptions
- "It changes profit." It does not. Net profit is unchanged; subtotals above it change.
- "Operating profit means core or recurring profit." It is a residual and includes unusual items.
- "We can keep reporting operating profit before exceptionals as our headline." Not as the required subtotal; it becomes an MPM with a mandatory reconciliation.
- "Only the income statement is affected." The aggregation principles reach the whole note package, and the cash flow statement changes too.
- "We have until 2027." The comparative period is the binding date, and for December year ends it has already gone.
Related: IFRS 15 revenue recognition, profit and loss format, preparing financial statements and cash flow statements.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
Questions people also ask
What does IFRS 18 actually change?
It principally reshapes the income statement. IFRS 18 requires income and expenses to be classified into three defined categories — operating, investing and financing — and mandates specific subtotals, notably a defined operating profit and a profit-before-financing measure. It also brings management-defined performance measures into the audited statements with a required reconciliation. It replaces IAS 1, though much of IAS 1 is carried forward into IFRS 18 and other standards.
When does IFRS 18 come into effect?
IFRS 18 applies to annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. Its adoption in Pakistan follows the frameworks as applied under SECP, so companies should confirm the local adoption position, but the international effective date gives a clear planning horizon. Because it changes presentation rather than measurement, the main work is mapping and systems, not restating the numbers themselves.
Are "management-defined performance measures" the same as non-GAAP figures?
They are closely related. IFRS 18 targets the subtotals management uses in public communications that are not defined by IFRS — measures like "adjusted operating profit". Rather than banning them, IFRS 18 requires such measures, where they relate to the income statement, to be disclosed in a single note with a reconciliation to the most comparable IFRS subtotal, bringing transparency and audit scrutiny to figures that previously sat outside the statements.
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