What's New in IFRS 18?
IFRS 18 key changes from IAS 1:
- Management now defines "operating" activities (vs prescribed categories in IAS 1)
- Non-GAAP metrics (EBITDA, adjusted profit) now permitted in primary statements (with rules)
- Restructuring and unusual items must be clearly disclosed
- Equity statement simplified for some items
Effective date: 1 January 2025 (early adoption permitted).
Reference: IFRS 18 paragraphs 1— 20, IAS 1 comparison (appendices).
Operating vs Financing: New Definition
IAS 1 (old): Operating = normal course of business; financing = borrowing, dividends, equity transactions.
IFRS 18 (new): Companies define "operating" based on their business model. Management has discretion in classification.
Example divergence:
- Interest income: Bank classifies as operating (core activity); insurance company may classify as non-operating (returns on investment)
- Disposal of assets: Real estate company may classify as operating (core business); manufacturing company classifies as non-operating
Audit implication: Challenge management on classification policy. Ensure it's consistent with the business model and disclosed in notes.
Non-GAAP Metrics & Management Items
IFRS 18 allows management to present non-GAAP items (e.g., "Adjusted EBITDA") in the primary income statement, provided:
- Reconciliation to GAAP profit is clear and nearby
- Subtotals are clearly labelled (not confused with GAAP subtotals)
- Unusual/infrequent items are disclosed separately
- No double-counting (items must not appear in both GAAP and adjusted metrics)
Example: A company shows "Operating profit: £50M (GAAP), Adjusted operating profit: £55M (excluding restructuring costs £5M)." The reconciliation must be clear in the notes or on the statement itself.
Balance Sheet Changes
IFRS 18 simplifies equity presentation:
- Reclassifications between equity categories no longer require separate disclosure (unless material)
- Changes in accounting policies no longer require restatement of opening equity (retained earnings adjusted instead)
Impact: Less detailed equity reconciliation tables but more focus on actual gains/losses in income statement.
Worked Example: Reclassification
Scenario: Manufacturing company disposes of a manufacturing facility (non-core asset).
- Sale price: £5M
- Book value: £3M
- Gain: £2M
IAS 1 (old): Gain is non-operating (separately disclosed below operating profit).
IFRS 18 (new): If the company has a strategy to periodically dispose of assets (e.g., asset refresh cycle), the company may argue the gain is "operating." However, disclosure must be clear: "Operating profit includes £2M gain on asset disposal" (note required).
Audit approach: Challenge the classification. Is asset disposal truly core to the business model? If not, require non-operating classification and clear disclosure.
Transition from IAS 1
Key changes for companies transitioning in 2025:
| IAS 1 | IFRS 18 |
|---|---|
| Operating defined by standard | Operating defined by management |
| Unusual items in note only | Unusual items may be shown on face of statement |
| EPS must be disclosed | EPS disclosure rules simplified |
| Equity changes require detailed tables | Simplified equity presentation permitted |
Restatement required? No. IFRS 18 can be applied prospectively (from 1 Jan 2025 onwards) without restating prior periods, though many companies will restate 2024 comparatives for consistency.
Audit Implications
- Management policy: Ensure management has documented its "operating" definition and disclosed it in the accounting policies note.
- Consistency: Verify that classification of operating vs non-operating is applied consistently year-over-year. Reclassifications are red flags.
- Non-GAAP metrics: If a company presents adjusted profit, verify the reconciliation is accurate and unusual items are not double-counted.
- Disclosure: Check that unusual/infrequent items are clearly labelled. Avoid mixing GAAP and adjusted subtotals on the same line.
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Ask an Expert →FAQs
When did IFRS 18 become effective?
1 January 2025. Companies could adopt early from 1 January 2024. If early adopted, prior years' comparatives must also be restated.
Can I continue using IAS 1?
No. IAS 1 is replaced by IFRS 18. All IFRS reporters must transition by 1 January 2025 at the latest.
Is US GAAP changing too?
The FASB has its own presentation project. ASC rules on operating vs non-operating remain unchanged (operating = revenues and direct costs; non-operating = financing, investments, unusual items).
This guide is simplified. IFRS 18 implementation depends on specific company facts and circumstances. Consult the full IFRS 18 text and your own advisors before finalising presentation policies.
Real-Life Case Study: Classifying Items Into the New Categories
Scenario. Under IFRS 18, a manufacturer must sort its income statement items into the operating, investing and financing categories.
- Revenue and cost of sales → operating
- Interest on borrowings → financing
- Income from associates → investing
- Interest income on surplus cash → investing (for a non-financial entity)
Takeaway. The classification is entity-role-dependent: interest that is "financing" for a manufacturer can be "operating" for a bank. Getting the category right is what makes the new mandated "operating profit" subtotal comparable across companies.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.