IFRS 18 Scope and Effective Date
IFRS 18 applies to all entities reporting under IFRS. Mandatory effective date: 1 January 2025. Early adoption permitted.
Key improvement: Three sections in the income statement (Operating, Investing, Financing) provide better visibility into different sources of profit and aid financial analysis.
New Income Statement Structure: OIF Model
| Section | Includes | Example |
|---|---|---|
| Operating | Core business activities (revenue, COGS, SG&A) | Sales, Cost of sales, R&D, Admin |
| Investing | Returns on investments, gains/losses on asset sales | Dividend income, Interest income, Gains on asset sales |
| Financing | Returns to providers of capital (interest on debt, dividends) | Interest expense, Finance costs |
Key shift from IAS 1: IAS 1 allowed "by nature" or "by function." IFRS 18 mandates "by function" with this three-section structure.
Operating Activities
All activities related to the entity's core business. Includes:
- Revenue
- Cost of sales (COGS)
- Distribution, administrative, and other operating expenses
- Impairments on operating assets
- Operating profit/(loss) subtotal
Investing Activities
Returns on investments and gains/losses from asset disposals:
- Interest income (on cash, loans to others)
- Dividend income
- Gains/losses on sale of investments or fixed assets
- Fair value gains/losses on investment property
- Investing profit/(loss) subtotal
Financing Activities
Returns to providers of capital (debt and equity):
- Interest expense (on debt)
- Costs of raising capital (share issuance costs)
- Lease finance costs
- Finance profit/(loss) subtotal
Required Subtotals and Line Items
IFRS 18 mandates presentation of three subtotals:
- Operating Profit: All operating section items
- Profit Before Finance & Tax: Operating + Investing profit
- Profit Before Tax: Operating + Investing + Financing profit
Then: minus taxes →’ Profit for the period
Significant Line Items
If line items are material (>5% of operating profit), they must be separately disclosed with supporting management commentary explaining the nature and amount.
Example: Restructuring costs of £10m (5% of operating profit). Must be separately presented with a note explaining the reason for restructuring, expected timeline, and impact on future performance.
Worked Example: Restructured Income Statement
ABC Manufacturing plc — Income Statement for year ended 31 Dec 2025
Revenue £500m
Cost of sales (£300m)
Gross profit 200m
Distribution costs (£40m)
Admin expenses (£35m)
Impairment — equipment (£5m)
OPERATING PROFIT 120m
INVESTING ACTIVITIES
Interest income £2m
Gain on sale of investment £8m
INVESTING PROFIT 10m
PROFIT BEFORE FINANCING & TAX 130m
FINANCING ACTIVITIES
Interest expense (£15m)
FINANCE COST (15m)
PROFIT BEFORE TAX 115m
Tax expense (£23m)
PROFIT FOR THE PERIOD 92m
Transition Challenges
- System reclassification: Income statement lines must be reclassified into operating/investing/financing buckets
- Segment reporting alignment: Management commentary must explain how segment profit reconciles to OIF structure
- Comparatives: 2024 comparatives must be restated under IFRS 18 (no exemption for opening balances)
- Bank-specific nuances: Interest income (core business for banks) stays operating; non-banks' interest income goes to investing
IFRS 18 vs IAS 1: Key Differences
| Aspect | IAS 1 | IFRS 18 |
|---|---|---|
| Format | By nature OR by function (entity choice) | By function ONLY (Operating/Investing/Financing) |
| Subtotals | Not mandated | Three mandatory subtotals |
| Significant items | Encouraged disclosure | REQUIRED if >5% of operating profit |
| OCI presentation | Can be one or two statements | Still flexible (one or two statements) |
Real-Life Case Study: Restructuring the Income Statement Under IFRS 18
Scenario. A group prepares for IFRS 18, which replaces IAS 1 and introduces defined categories (operating, investing, financing) and required subtotals in the income statement.
What changes. The company must now present an "operating profit" subtotal and classify income and expenses into the new categories, and disclose management-defined performance measures (MPMs, e.g. "adjusted EBITDA") with a reconciliation. Its previous freely-defined "underlying profit" now needs formal disclosure and reconciliation.
Takeaway. IFRS 18 does not change what profit is, it standardises how the story is told, forcing consistent subtotals and dragging non-GAAP "adjusted" measures into the audited notes for the first time.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.