IFRS 18: Five Categories, Two New Subtotals, and the Line Most Banks Cannot Present

Most summaries of IFRS 18 say it introduces three categories in the statement of profit or loss. It introduces five. And they say it requires two new subtotals, which is right, but omits that a whole class of entity — including most large UK banks — is prohibited from presenting one of them.

IFRS 18 Presentation and Disclosure in Financial Statements applies to annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. Comparatives must be restated. So for a calendar-year reporter the work starts in 2026, not 2027.

What it replaces, and what survives

IFRS 18 replaces IAS 1. But withdrawn in full is the wrong mental model, and it is the most common misconception among students.

The IASB did not reconsider all of IAS 1; it focused on the statement of profit or loss. Some IAS 1 paragraphs were carried into IFRS 18 itself, and others were relocated. Four areas moved into IAS 8: fair presentation and compliance with IFRS Accounting Standards, going concern, the accrual basis of accounting, and the disclosure of accounting policy selection. Which is why IAS 8 is being retitled Basis of Preparation of Financial Statements, as covered in our guide to IAS 8. Further material moved to IFRS 7.

So IAS 1 ceases to exist as a standard while a large amount of its content survives in three different places.

Five categories, not three

Paragraph 47 requires income and expenses to be classified into five categories: operating, investing, financing, income taxes and discontinued operations.

This is not pedantry. The required subtotals are produced by summing categories, so anyone working from a three-category model cannot derive the numbers.

Operating is a residual, by design

Operating is the default: it takes income and expenses that do not meet the criteria for any other category. Critically, it is broader than main business activities, and it deliberately catches volatile and non-recurring items.

So operating profit under IFRS 18 is not underlying or normalised profit. A goodwill impairment, a restructuring charge and a litigation settlement all sit above the operating profit line. That is precisely why management-defined performance measures exist as a parallel disclosure regime.

Investing

Income and expenses from investments in associates, joint ventures and unconsolidated subsidiaries — including all subsidiaries in a parent separate financial statements; from cash and cash equivalents; and from other assets that generate a return individually and largely independently of the entity other resources, such as financial assets and investment property.

Paragraph 54 then defines what about those assets goes in: the income the assets generate, the income and expenses arising from their initial and subsequent measurement, and the incremental expenses directly attributable to their acquisition and disposal. So interest income, dividend income, rental income, fair value movements, impairments, derecognition gains and losses and directly attributable transaction costs all follow the asset into investing.

Financing, and the two-tier rule that will catch UK preparers

This is the mechanic most likely to produce restatements of internal reporting.

Tier one: liabilities arising from transactions that involve only raising finance — bonds, bank loans. All related income and expenses go to financing: interest, fair value changes, derecognition gains and losses, directly attributable transaction costs. Certain supplier finance arrangements can qualify.

Tier two: all other liabilities — trade payables, contract liabilities, lease liabilities, net defined benefit liabilities, provisions. Only the interest element goes to financing, and only where the entity already identifies that interest for the purposes of another standard. Everything else about those liabilities stays in operating.

The consequences are concrete and they split line items that finance teams currently treat as one. The IFRS 16 interest expense on a lease liability is financing; depreciation of the right-of-use asset is operating. The IAS 19 net interest cost is financing; current service cost is operating. The IAS 37 unwinding of discount is financing; the provision charge is operating.

Two carve-outs: paragraph 63 disapplies the financing rules to gains and losses on derivatives and designated hedging instruments, and paragraph 64 requires certain items to be excluded from financing and classified in operating.

Cross-cutting rules

Foreign exchange differences follow the item that caused them, falling to operating where identifying that would involve undue cost or effort. Derecognition of an asset follows the category the asset was in. Derivatives and designated hedging instruments follow the category of the item whose risk they manage. A hyperinflation net monetary position gain or loss goes to operating.

The three required totals and subtotals

Paragraph 69 requires totals and subtotals to be presented for three items, and the exact wording matters because the loose forms in circulation are wrong:

• Operating profit or loss — all income and expenses classified in the operating category.
• Profit or loss before financing and income taxes — operating profit or loss plus the investing category. Note the plural, taxes, and note profit or loss rather than profit.
• Profit or loss — total income less expenses included in the statement.

Two of those are new subtotals. Both must be presented even where they are the same amount, so an entity with no investing category still shows both lines.

Not required: gross profit, profit before income taxes, and profit from continuing operations. All three remain common and gross profit is still expected in exam answers, but none is mandatory. Additional subtotals are permitted under paragraph 24, subject to the labelling rules.

Paragraph 75 is a separate requirement and a different thing: a list of required line items, including revenue, operating expenses, the share of profit or loss of equity-accounted associates and joint ventures, income tax expense or income, a single amount for the total of discontinued operations, plus items required by IFRS 9 and IFRS 17. A single line item may span more than one category — impairment on trade receivables is operating, impairment on bond investments is investing.

The prohibition most commentary misses

Paragraph 73 provides that an entity shall not present profit or loss before financing and income taxes if it applies the accounting policy in paragraph 65(a)(ii). Paragraph 74 adds that such an entity shall not label a subtotal in a way that implies it excludes financing amounts.

In plain terms: an entity that provides financing to customers as a main business activity, and elects to classify its finance-raising income and expenses in operating, is barred from presenting the second subtotal — because most of its financing expense would sit inside it and the line would mislead. It may present an optional subtotal after operating profit, but must not call it anything implying financing is excluded. So profit before financing is not available to it.

Most large UK banks will therefore not present a profit or loss before financing and income taxes line at all.

Specified main business activities — not a banks-and-insurers rule

This is widely garbled, so it is worth stating precisely. IFRS 18 does not carve out banks and insurers as categories of entity. It identifies two activities and asks whether either is a main business activity of the reporting entity. Where one is, items a normal corporate would classify as investing or financing get pulled up into operating.

The two activities are investing in assets — the guidance names investment entities, investment property companies and insurers — and providing financing to customers — naming banks and other lenders, manufacturers or retailers that finance their own products, and finance lessors. The Interpretations Committee confirmed in June 2026 that those lists are not exhaustive.

For an investing-in-assets entity, the paragraph 54 items from qualifying assets go to operating, which sweeps investment income including dividends, rental income and fair value movements into operating. Cash and cash equivalents go to operating with no main-business-activity assessment needed. But equity-accounted associates and joint ventures always stay in investing regardless — a point frequently got wrong in secondary commentary.

For a financing-to-customers entity the issue is the interest result, not dividends. Where finance-raising liabilities relate to financing customers, the related items go to operating; where they do not, there is an accounting policy choice between operating and financing. If the entity cannot distinguish between the two, it applies the choice and classifies everything from such liabilities in operating.

So there is no bank-specific dividend rule. A bank dividend income is classified by asking whether the bank invests in assets as a main business activity, not by virtue of its being a bank.

The assessment is entity-level, evidence-based and prospective. It applies to the reporting entity as a whole, so a group and a subsidiary can reach different conclusions — which produces reclassifications on consolidation.

Management-defined performance measures: the presumption is the problem

An MPM is a subtotal of income and expenses that the entity uses in public communications outside the financial statements, that communicates management view of an aspect of the financial performance of the entity as a whole, and that is not excluded by paragraph 118 or required by another standard.

The audit friction will not be in the reconciliation arithmetic. It will be in paragraph 119, which requires an entity to presume that a subtotal used in public communications reflects management view of overall financial performance, rebuttable only with reasonable and supportable information showing that it does not.

The burden sits with management and the evidential standard is familiar. Every adjusted EBITDA, adjusted operating profit, underlying profit before tax and profit before exceptional items in a UK results statement is presumptively in scope until rebutted, and the rebuttal has to be documented. The auditor question writes itself: you put this number in a results announcement, so on what basis is it not management view of performance?

Paragraph 118 excludes a defined list, including gross profit and similar subtotals; operating profit or loss before depreciation, amortisation and IAS 36 impairments, so a plain EBITDA-style subtotal built that way is not an MPM; operating profit or loss combined with equity-accounted results; profit or loss before income taxes; and profit or loss from continuing operations.

Beyond that list, the definition itself does work: because an MPM must be a subtotal of income and expenses, ratios and margins, per-share measures, single-line metrics, balance sheet measures such as net debt and cash flow measures such as free cash flow fall outside it. They may still be caught by other regimes, so the MPM population and an entity existing alternative performance measures are not the same set.

The disclosure burden teams will under-scope

All MPMs go in a single note, which must state that they provide management view of overall financial performance and that they are not necessarily comparable with similarly labelled measures of other entities. For each MPM: the aspect of performance it communicates and why it is useful; how it is calculated; a reconciliation to the most directly comparable subtotal, which must be a paragraph 118 subtotal or one required by IFRS; and the income tax effect and the effect on non-controlling interests.

The granular part is that last one. The tax effect and the NCI effect are required for each reconciling item, not for the measure as a whole. Permitted tax approaches include the statutory rate, a reasonable pro rata allocation, or another more appropriate method, with disclosure of which applies where. Changes, additions and cessations must be explained with comparatives restated unless impracticable.

Aggregation, and the end of "other"

IFRS 18 introduces principles for aggregation and disaggregation and the concept of a useful structured summary, with constraints on labelling — including on the use of unspecific descriptions such as other. The Interpretations Committee considered in June 2026 that the standard is adequate to determine when a mixed nature and function presentation of operating expenses is required, and that an entity may split expenses of the same nature between nature-based and function-based line items.

Cash flows

Two changes. The starting point for the indirect method becomes operating profit. And the presentation options for interest and dividends paid and received are removed — for most entities. An entity with specified main business activities retains a policy choice.

Dates, transition and endorsement

Effective for annual reporting periods beginning on or after 1 January 2027, earlier application permitted. Comparatives must be restated, and a reconciliation is required on transition.

The UK Endorsement Board adopted IFRS 18 on 10 December 2025, publishing its adoption statement on 12 December. Both dates circulate; the adoption date is 10 December. The EU has also endorsed it, so the position is the same in Ireland.

One transition point is an explicit requirement rather than an accident of timing: IFRS 18 requires the new structure in interim financial statements too. For a calendar-year reporter, the first IFRS 18-structured primary statements the market ever sees will be a half-year report published in 2027, prepared under IAS 34. Anyone planning a 2027 annual-report project has the deadline six months early.

What to do in 2026

The work that cannot wait is mapping, not drafting. Classify every material income and expense line into the five categories, paying particular attention to the tier-two financing split that separates lease interest from right-of-use depreciation and IAS 19 net interest from service cost. Determine whether either specified main business activity applies, at reporting entity level, and document the evidence rather than asserting the conclusion. Inventory every subtotal used in results announcements, investor presentations and the front half of the annual report, and start building the rebuttal file for any you do not intend to disclose as an MPM. And check whether the paragraph 73 prohibition applies, because if it does, a subtotal currently presented will have to come out.

For the shorter overview of the reform and its headline effects, see our guide to IFRS 18 presentation and disclosure.