In April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 “Presentation and Disclosure in Financial Statements”, a comprehensive new standard that replaces the long-standing IAS 1 “Presentation of Financial Statements”. This release concludes the IASB’s Primary Financial Statements (PFS) project, which was launched in response to investor concerns about inconsistent performance reporting under IAS 1.
Under IAS 1, companies had significant room in how they presented the statement of profit or loss – for example, whether or how to show an “operating profit” subtotal, or which expenses to aggregate. Many companies also highlighted non-standard metrics (like EBITDA or “adjusted profit”) outside the financial statements, making comparisons difficult.
IFRS 18 was designed to improve comparability and clarity. The standard introduces more structured requirements for how income, expenses, and subtotals are presented in financial statements, with a particular focus on the statement of profit or loss. The IASB’s aim is to enhance transparency in how companies report performance, so that investors and stakeholders can more easily compare results across companies and industries. IFRS 18 achieves this by standardizing key subtotals (which were previously optional or inconsistently defined) and by providing clearer guidance on grouping and disaggregating information.
While IFRS 18 makes important changes to the statement of profit or loss and related disclosures, it does not overhaul all of IAS 1 as many fundamental aspects of financial statement presentation e.g., what constitutes a complete set of financial statements, etc. remains the same or are carried forward with minimal changes. The focus is squarely on the statements of financial performance (primarily the statement of profit or loss) and related notes.
IFRS 18 brings a number of important changes in presentation and disclosure requirements compared to IAS 1:
1. Structured categories in the statement of profit or loss:
Under IAS 1, companies did not have to classify income and expenses into defined categories. IFRS 18 now requires grouping all statement of profit or loss items into five categories:
2. New mandatory subtotals:
IFRS 18 introduces two required subtotals on the statement of profit or loss that were not mandated under IAS 1. All companies must now present an “operating profit or loss” subtotal (the result of items classified as operating) and a “profit before financing and income tax” subtotal (essentially operating profit plus investing income/expenses, parallel to an IFRS defined EBIT.
3. Management-defined performance measures:
In a major shift, IFRS 18 requires companies to disclose certain non-IFRS performance metrics (termed management-defined performance measures, or MPMs) within the financial statements. These are subtotals of income/expense that management uses publicly (e.g. in press releases or investor calls) to portray aspects of performance (for example, EBITDA or “adjusted profit”). Under IAS 1, such measures were not regulated and they were presented outside the audited statements. Now IFRS 18 brings them into the notes with explanations and reconciliations, enhancing transparency about how management’s metrics related to IFRS results.
4. Enhanced aggregation and labelling rules:
IFRS 18 tightens the principles for aggregating or disaggregating line items and how they are labelled. It explicitly requires that items with different characteristics be disaggregated if material, and discourages the use of generic “other” line items without descriptive labels. IAS 1’s guidance on this was much less specific. Additionally, IFRS 18 continues to allow presenting expenses by either nature or function, but adds new disclosure requirements (when using a functional presentation) to ensure transparency of key “by-nature” expenses like depreciation and salaries.
5. Statement of cash flows alignments:
While IFRS 18 primarily targets the statement of profit or loss, it also triggers narrow changes to the statement of cash flows. IAS 7 (under IAS 1) permitted flexibility in classifying interest and dividends in operating, investing, or financing cash flows. IFRS 18 eliminates many of these options thus standardizing that interest and dividend receipts are treated as investing inflows, and interest and dividend payments as financing outflows (with limited exceptions for certain industries). Moreover, when using the indirect method, companies will start the statement of cash flows with the new “operating profit” subtotal instead of total profit, to align the operating cash flow reconciliation with the redefined statement of profit or loss.
In summary, IFRS 18 retains much of the familiar structure of financial statements from IAS 1, but introduces a more prescribed statement of profit or loss’ format (with categories and subtotals), new disclosure of management’s performance measures, clearer guidance on grouping information, and some related changes to cash flow presentation. These changes are designed to make financial statements more comparable across companies and more useful to users.
A simple illustration of these requirements is presented below for an entity without specified main business activities (i.e. the entity does not invest in assets or provide financing to customers as a main business activity):
*Zakat expenses are presented in income taxes category.
IFRS 18 does not change how revenues, expenses, or profits are measured, but it will change how they are presented and disclosed. Because of this, the transition is not about re-calculating profit, but about adapting charts of accounts, financial statement formats, and disclosures. Companies need to allow time to implement these changes. The standard becomes mandatory in 2027, but it should be remembered that comparative information for 2026 will need to be restated in the new format. Effectively, the new presentation will impact data collection and systems from the start of 2026 for calendar-year companies.
From managing this change seamlessly, the advice is clear i.e., start preparing early. Finance teams should review the new requirements now and evaluate how their current financial statements will change. This includes:
Training and awareness are also important i.e., stakeholders from the CFO and audit committee to investor relations personnel should be briefed on what IFRS 18 will mean for the company’s reporting. As one industry bulletin notes, even though IFRS 18 doesn’t alter any cash flows or earnings, it “may still have effects on systems and processes” and will require educating stakeholders.
In summary, IFRS 18 announces a new era of clarity and consistency in financial reporting. Companies that begin planning for these changes now will be well-positioned to tell their performance story effectively when 2027 arrives. The new standard offers an opportunity to improve how financial information is communicated and embracing it early will ensure a smooth transition and instill confidence in investors that your company is ready for the new reporting landscape. By acting now, companies can turn IFRS 18 compliance into a strategic advantage, enhancing transparency and comparability well ahead of the mandatory effective date.
BDO’s financial accounting advisory experts across the Middle East region apply the practical experience and knowledge gained from working with clients locally and worldwide.
Please reach out to the relevant partner in your local BDO firm for further information.
Authors:
Abdur Rab Sharjeel, Head of Advisory, BDO Saudi Arabia
Usman Ahmed Siddiqui, Manager FAAS, BDO Saudi Arabia
Under IAS 1, companies had significant room in how they presented the statement of profit or loss – for example, whether or how to show an “operating profit” subtotal, or which expenses to aggregate. Many companies also highlighted non-standard metrics (like EBITDA or “adjusted profit”) outside the financial statements, making comparisons difficult.
IFRS 18 was designed to improve comparability and clarity. The standard introduces more structured requirements for how income, expenses, and subtotals are presented in financial statements, with a particular focus on the statement of profit or loss. The IASB’s aim is to enhance transparency in how companies report performance, so that investors and stakeholders can more easily compare results across companies and industries. IFRS 18 achieves this by standardizing key subtotals (which were previously optional or inconsistently defined) and by providing clearer guidance on grouping and disaggregating information.
While IFRS 18 makes important changes to the statement of profit or loss and related disclosures, it does not overhaul all of IAS 1 as many fundamental aspects of financial statement presentation e.g., what constitutes a complete set of financial statements, etc. remains the same or are carried forward with minimal changes. The focus is squarely on the statements of financial performance (primarily the statement of profit or loss) and related notes.
Key differences between IAS 1 and IFRS 18
IFRS 18 brings a number of important changes in presentation and disclosure requirements compared to IAS 1:
1. Structured categories in the statement of profit or loss:
Under IAS 1, companies did not have to classify income and expenses into defined categories. IFRS 18 now requires grouping all statement of profit or loss items into five categories:
- Operating;
- Investing;
- Financing;
- Income tax; and
- Discontinued operations.
2. New mandatory subtotals:
IFRS 18 introduces two required subtotals on the statement of profit or loss that were not mandated under IAS 1. All companies must now present an “operating profit or loss” subtotal (the result of items classified as operating) and a “profit before financing and income tax” subtotal (essentially operating profit plus investing income/expenses, parallel to an IFRS defined EBIT.
3. Management-defined performance measures:
In a major shift, IFRS 18 requires companies to disclose certain non-IFRS performance metrics (termed management-defined performance measures, or MPMs) within the financial statements. These are subtotals of income/expense that management uses publicly (e.g. in press releases or investor calls) to portray aspects of performance (for example, EBITDA or “adjusted profit”). Under IAS 1, such measures were not regulated and they were presented outside the audited statements. Now IFRS 18 brings them into the notes with explanations and reconciliations, enhancing transparency about how management’s metrics related to IFRS results.
4. Enhanced aggregation and labelling rules:
IFRS 18 tightens the principles for aggregating or disaggregating line items and how they are labelled. It explicitly requires that items with different characteristics be disaggregated if material, and discourages the use of generic “other” line items without descriptive labels. IAS 1’s guidance on this was much less specific. Additionally, IFRS 18 continues to allow presenting expenses by either nature or function, but adds new disclosure requirements (when using a functional presentation) to ensure transparency of key “by-nature” expenses like depreciation and salaries.
5. Statement of cash flows alignments:
While IFRS 18 primarily targets the statement of profit or loss, it also triggers narrow changes to the statement of cash flows. IAS 7 (under IAS 1) permitted flexibility in classifying interest and dividends in operating, investing, or financing cash flows. IFRS 18 eliminates many of these options thus standardizing that interest and dividend receipts are treated as investing inflows, and interest and dividend payments as financing outflows (with limited exceptions for certain industries). Moreover, when using the indirect method, companies will start the statement of cash flows with the new “operating profit” subtotal instead of total profit, to align the operating cash flow reconciliation with the redefined statement of profit or loss.
In summary, IFRS 18 retains much of the familiar structure of financial statements from IAS 1, but introduces a more prescribed statement of profit or loss’ format (with categories and subtotals), new disclosure of management’s performance measures, clearer guidance on grouping information, and some related changes to cash flow presentation. These changes are designed to make financial statements more comparable across companies and more useful to users.
A simple illustration of these requirements is presented below for an entity without specified main business activities (i.e. the entity does not invest in assets or provide financing to customers as a main business activity):
| Line item / sub-total | Amount in currency units (CU) | Classification of income and expenses | Explanation |
| Revenue | 1,000 | Operating | |
| Cost of sales | (400) | ‘Cost of sales’ line item must include inventories expensed (IAS 2). |
|
| Gross profit | 600 | IAS 1 does not mandate the presentation of a ‘gross profit’ sub-total, however, IFRS 18 does not preclude this approach. |
|
| Salaries and benefits | (100) | Operating | |
| Operating profit | 500 | New mandatory sub-total: the sub-total of all income and expense classified as operating. |
|
| Share of profit from associates | 25 | Investing | Income or expense related to the application of the equity method are never classified as operating, which may be a change in practice for some entities. |
| Profit before financing, income taxes and zakat | 525 | New mandatory sub-total: the sub-total of operating profit or loss and all income and expenses classified as investing. |
|
| Interest expense on bank loans | (50) | Financing | Expense classified as financing. |
| Profit before income taxes, zakat and discontinued operations | 475 | Sub-total already required by IAS 1 / IFRS 5. |
|
| Income taxes and zakat expense | (100) | Income taxes and zakat expense | Sub-total already required by IAS 1. |
| Profit from continuing operations | 375 | Sub-total already required by IAS 1. | |
| Profit from discontinued operations | 10 | Discontinued operations | Sub-total already required by IAS 1 / IFRS 5. |
| Profit | 385 | Total already required by IAS 1. |
*Zakat expenses are presented in income taxes category.
Preparing for IFRS 18 implementation
IFRS 18 does not change how revenues, expenses, or profits are measured, but it will change how they are presented and disclosed. Because of this, the transition is not about re-calculating profit, but about adapting charts of accounts, financial statement formats, and disclosures. Companies need to allow time to implement these changes. The standard becomes mandatory in 2027, but it should be remembered that comparative information for 2026 will need to be restated in the new format. Effectively, the new presentation will impact data collection and systems from the start of 2026 for calendar-year companies.From managing this change seamlessly, the advice is clear i.e., start preparing early. Finance teams should review the new requirements now and evaluate how their current financial statements will change. This includes:
- Identifying what will go into the new operating vs. investing categories;
- Determining which alternative performance metrics might need to be disclosed as MPMs; and
- Assessing whether internal systems can produce the required breakdowns (for example, expense analyses by nature, or capturing subtotals like operating profit if not previously used).
Training and awareness are also important i.e., stakeholders from the CFO and audit committee to investor relations personnel should be briefed on what IFRS 18 will mean for the company’s reporting. As one industry bulletin notes, even though IFRS 18 doesn’t alter any cash flows or earnings, it “may still have effects on systems and processes” and will require educating stakeholders.
In summary, IFRS 18 announces a new era of clarity and consistency in financial reporting. Companies that begin planning for these changes now will be well-positioned to tell their performance story effectively when 2027 arrives. The new standard offers an opportunity to improve how financial information is communicated and embracing it early will ensure a smooth transition and instill confidence in investors that your company is ready for the new reporting landscape. By acting now, companies can turn IFRS 18 compliance into a strategic advantage, enhancing transparency and comparability well ahead of the mandatory effective date.
How BDO can help
BDO’s financial accounting advisory experts across the Middle East region apply the practical experience and knowledge gained from working with clients locally and worldwide.
Please reach out to the relevant partner in your local BDO firm for further information.
Authors:
Abdur Rab Sharjeel, Head of Advisory, BDO Saudi Arabia
Usman Ahmed Siddiqui, Manager FAAS, BDO Saudi Arabia