IFRS 18/Ind AS 118: New Financial Reporting Architecture for CFOs & Auditors

IFRS 18 / Ind AS 118 From Financial Statement Presentation to a New Reporting Architecture – What CFOs, Auditors and the CA Fraternity Need to Do Now

Summary: The issuance of IFRS 18, Presentation and Disclosure in Financial Statements, by the International Accounting Standards Board (IASB) in April 2024 marks a significant development in financial reporting. IFRS 18 replaces IAS 1 and is intended to improve the comparability, transparency and usefulness of information presented about financial performance. At first sight, IFRS 18 may appear to be principally a change in the presentation of the Statement of Profit or Loss. In reality, its implications are much broader. The Standard introduces defined categories of income and expenses, mandatory subtotals, enhanced principles for aggregation and disaggregation, and a new disclosure framework for Management-defined Performance Measures (MPMs). It also brings consequential amendments to other Standards, including those dealing with cash flows and interim reporting. For Indian professionals, there is an additional layer to consider. ICAI issued the Exposure Draft of Ind AS 118, Presentation and Disclosure in Financial Statements, on 6 January 2025, based on IFRS 18. The Exposure Draft proposes an effective date of annual reporting periods beginning on or after 1 April 2027. Thus, while IFRS 18 becomes effective globally from 1 January 2027, Indian entities applying Ind AS will need to monitor the final Indian standard and its notification separately. The significance for CFOs is therefore not limited to financial statement drafting. IFRS 18/Ind AS 118 has the potential to affect chart of accounts, ERP systems, management reporting, investor communications, internal controls, audit procedures and Board/Audit Committee reporting.

India–UAE DTAA: A Practical Guide for Business Owners

The commercial relationship between India and the United Arab Emirates has become increasingly integrated. Indian entrepreneurs establish companies in Dubai, UAE businesses invest in India, professionals serve clients across both countries, and business owners frequently retain income-producing assets in India after relocating to the Emirates.

These arrangements can expose the same income to the tax laws of both jurisdictions. The India–UAE Double Taxation Avoidance Agreement, commonly known as the India–UAE DTAA, provides a framework for deciding which country may tax particular income and how relief should be provided when both countries have taxing rights.

The treaty is valuable, but it is also widely misunderstood. A UAE residence visa does not automatically establish treaty residence. A Dubai company does not automatically fall outside Indian taxation. Similarly, a Tax Residency Certificate does not cure a structure that lacks commercial substance.

Business owners must examine the treaty together with the domestic tax laws of both countries, the relevant protocols, procedural requirements and the actual manner in which their businesses operate.

Why was IFRS 18 necessary?

Under IAS 1, entities had considerable flexibility in presenting their Statement of Profit or Loss. Although this flexibility allowed entities to reflect the nature of their businesses, it also resulted in differences in the presentation of similar economic activities.

For example, two companies could report apparently similar operating businesses but use different subtotals and classifications. In particular, operating profit was widely used by companies and analysts but was not a defined IFRS subtotal.

At the same time, management frequently communicated alternative performance measures such as:

• Adjusted EBITDA;
• Adjusted operating profit;
• Underlying profit;
• Core earnings;
• Profit before exceptional items; and
• Recurring operating profit.

These measures can be useful, but their definitions may differ from one company to another.

IFRS 18 addresses these concerns through three major pillars:

First, it establishes defined categories and subtotals in the Statement of Profit or Loss.

Second, it introduces disclosure requirements for qualifying MPMs.

Third, it strengthens the principles governing aggregation and disaggregation.

The objective is not to change how an entity measures its financial performance, but to improve how that performance is communicated. ICAI has similarly noted that proposed Ind AS 118 focuses on presentation and disclosure rather than changing the underlying measurement of financial performance.

Five categories of income and expenses

One of the most fundamental changes is the introduction of five categories in the Statement of Profit or Loss:

1. Operating

2. Investing

3. Financing

4. Income taxes

5. Discontinued operations

The operating, investing and financing categories establish a more structured framework for analysing an entity’s financial performance.

Operating category

The operating category is generally the residual category and captures income and expenses from an entity’s main business activities that are not classified in the investing, financing, income-tax or discontinued-operations categories.

This is important because operating profit becomes a defined IFRS subtotal rather than a company-specific measure.

Investing category

The investing category generally captures income and expenses from investments that generate returns individually and largely independently of an entity’s other resources.

Financing category

The financing category generally captures income and expenses arising from liabilities from transactions involving only the raising of finance and certain other financing-related amounts.

Income taxes and discontinued operations

Income tax expenses/income and results of discontinued operations continue to be separately presented in accordance with the relevant requirements.

The result is a much more structured Statement of Profit or Loss than under the previous IAS 1 framework.

Two new mandatory subtotals

IFRS 18 introduces two particularly important subtotals:

(a)Operating profit or loss

This is the total of all income and expenses classified in the operating category.

(b) Profit or loss before financing and income taxes

This represents operating profit or loss together with all income and expenses classified in the investing category.

These subtotals are significant because they create a common analytical framework for investors.

For auditors, they also create a new risk: classification errors can directly affect a defined subtotal that users may increasingly use for benchmarking and valuation.

The difficult area: specified main business activities

One of the most judgement-intensive aspects of IFRS 18 is the concept of an entity having a specified main business activity.

An entity must assess whether investing in assets or providing financing to customers is a main business activity.

This becomes particularly relevant for entities such as:

• banks and financial institutions;
• finance companies;
• insurers;
• investment entities; and
• certain entities whose principal activity involves investing in assets.

Where investing in assets or providing financing to customers is a specified main business activity, certain income and expenses that might otherwise have been classified in investing or financing can be classified in operating.

This assessment cannot simply be treated as an accounting policy choice. It requires an understanding of the entity’s business model, activities, assets, liabilities and how management actually operates the business.

For auditors, this should become a documented accounting judgement, supported by appropriate evidence.

A key practical question will therefore be:

“What does the entity actually do to generate returns, rather than merely what does its legal object clause say?”

Management-defined Performance Measures – the game changer

For many practitioners, the most consequential change in IFRS 18 will be the requirements concerning Management-defined Performance Measures (MPMs).

An MPM is a subtotal of income and expenses that:

• an entity uses in public communications outside the financial statements;
• communicates management’s view of an aspect of the financial performance of the entity as a whole; and
• is not a subtotal specified or specifically required by IFRS Accounting Standards.

Examples could include: Adjusted EBITDA, Adjusted operating profit, Underlying profit, Adjusted earnings and Operating profit before exceptional items

However, not every performance indicator is an MPM. Financial ratios, liquidity measures, cash-flow measures and non-financial performance measures are not MPMs merely because management uses them. The IFRS 18 text specifically distinguishes such measures from qualifying subtotals of income and expenses.

Why MPMs will change the audit process

This is where IFRS 18 moves beyond traditional financial statement presentation.

Historically, management could communicate an “Adjusted EBITDA” in an investor presentation without that measure necessarily forming part of the audited financial statements.

Under IFRS 18, qualifying MPMs must be disclosed with prescribed information, including reconciliation to the most directly comparable IFRS-defined subtotal or total.

This means the audit team needs to look beyond the general ledger.

Auditors should consider reviewing: investor presentations; earnings releases; management commentary; annual reports; results presentations; and other relevant public communications.

The Standard identifies management commentary, press releases and investor presentations as examples of public communications for MPM purposes. Social media posts and certain oral communications are excluded from this definition.

Consequently, the Investor Relations function and Financial Reporting function can no longer operate in isolation from an IFRS 18 perspective.

A company may have an MPM communicated by its CFO or Investor Relations team which the financial reporting team has not previously considered an accounting disclosure.

That creates a new coordination requirement between Finance, FP&A, Investor Relations, CFO office and Audit Committee.

Expense presentation – nature, function or both

IFRS 18 provides greater flexibility concerning the presentation of operating expenses.

Depending on which approach provides the most useful structured summary, an entity may present operating expenses:

• by nature;
• by function; or
• using a combination of both.

For example, expenses by nature may include: employee benefits; depreciation; raw materials; advertising; and transportation.

A functional presentation may include: cost of sales; distribution; administrative expenses; and selling expenses.

Where expenses are presented by function, additional information by nature is required for specified expense items.

Aggregation and disaggregation – quality of information, not quantity

Another important feature of IFRS 18 is the strengthening of principles around aggregation and disaggregation.

Financial statements can become unhelpful in two opposite ways.

Over-aggregation can hide important information.

Over-disaggregation can create excessive detail and obscure the overall picture.

IFRS 18 seeks an appropriate balance.

The objective is to ensure that items with different characteristics are not inappropriately combined where doing so would obscure material information.

This requires greater judgement by preparers and auditors.

For example, a company may historically have presented several unusual expenses under a broad “Other expenses” heading. Under the new framework, the entity will need to consider whether such aggregation provides a useful structured summary.

The question is therefore no longer simply:

“Is this line item individually material?”

The more relevant question becomes:

“Does combining this item with other items obscure information that users need to understand financial performance?”

Impact on the Statement of Cash Flows

The implementation of IFRS 18 is not confined to the Statement of Profit or Loss.

There are consequential amendments to IAS 7. One important change is that entities using the indirect method will use operating profit or loss as the starting point for reporting operating cash flows.

There are also consequential changes concerning the classification of certain interest and dividend cash flows.

Therefore, companies should not treat IFRS 18 implementation as a standalone P&L exercise.

The implementation project should cover:

Statement of Profit or Loss + Notes + Cash Flow Statement + Comparative Information + Management Reporting.

Retrospective application – why 2026 matters

IFRS 18 is applied retrospectively, subject to specified transition requirements and reliefs.

For a calendar-year IFRS reporter, the first annual financial statements applying IFRS 18 will generally be for the year ending 31 December 2027, with comparative information prepared on the applicable IFRS 18 basis.

The consequence is straightforward:

2026 data must be capable of being reconstructed under IFRS 18.

This makes 2026 the ideal year for a parallel reporting or “dry run” exercise.

A company that waits until January 2027 to start implementation could find itself attempting to reconstruct an entire comparative year’s information while simultaneously preparing current-year accounts.

That is neither efficient nor desirable from an audit perspective.

IFRS 18 versus proposed Ind AS 118 – the Indian perspective

For Indian CAs, this distinction is critical.

Globally, IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.

In India, proposed effective date of Ind AS 118 is financial year beginning on or after 1 April 2027.

Therefore, practitioners should not simply state:

“IFRS 18 applies to Indian companies from 1 January 2027.”

That statement would be misleading for entities preparing financial statements under Ind AS.

This distinction is particularly important for Indian subsidiaries of multinational groups, where the parent may report under IFRS while the Indian entity reports under Ind AS.

Schedule III and Indian reporting – an additional implementation consideration

Indian companies reporting under Ind AS also operate within the framework of the Companies Act, 2013 and Schedule III.

Accordingly, implementation of Ind AS 118 cannot be considered in isolation.

The eventual interaction between:

Ind AS 118 + Schedule III + MCA requirements + SEBI requirements + investor reporting will need to be assessed.

This is an area where Indian implementation may require additional professional judgement and regulatory clarity.

What should CFOs and finance teams do now?

A practical implementation roadmap should contain at least the following steps:

Step	Action
1	Determine whether IFRS 18 or proposed Ind AS 118 is relevant
2	Perform a detailed IAS 1/Ind AS 1 versus IFRS 18/Ind AS 118 gap assessment
3	Map every material P&L line item into the new categories
4	Assess specified main business activities
5	Identify all MPMs used in public communications
6	Review investor presentations and earnings releases
7	Assess nature/function expense data availability
8	Review ERP and chart-of-account requirements
9	Design new disclosure templates
10	Reconstruct comparative information
11	Perform a parallel/dry-run financial statement
12	Present key judgements to the Audit Committee

The exercise should ideally be led jointly by CFO, Financial Reporting, FP&A, Investor Relations, Internal Audit and External Audit.

The CA fraternity should look beyond the financial statements

The greatest opportunity created by IFRS 18 is perhaps not technical accounting itself.

It is the opportunity for Chartered Accountants to become involved much earlier in the reporting process.

A CA advising a client on IFRS 18 should ideally be asking:

• How does management measure performance?
• How does the Board measure performance?
• How does the CFO communicate performance to investors?
• Does the ERP capture the information required by the Standard?
• Does aggregation obscure material information?
• Where functional classification is used, are the allocation methodologies reasonable, consistently applied and supported by appropriate controls?
• Are investor presentations consistent with audited financial statements?
• Can comparative information be generated reliably?

This moves the CA’s role from traditional compliance towards financial reporting architecture and assurance.

Conclusion

IFRS 18 represents a shift from asking “What numbers should appear in the financial statements?” to asking “How should financial performance be structured and communicated so that users can understand it?”

That distinction is fundamental.

For CFOs and finance teams, the implementation challenge will involve data, systems, processes and investor communication. For auditors, the challenge will involve classification, judgement, MPM identification, controls and consistency between financial statements and public communications.

For Chartered Accountants, this is therefore much more than an accounting-standard update.

It is an opportunity to play a central role in redesigning the financial reporting architecture of organisations.

The ICAI Exposure Draft already demonstrates the importance of this development for Indian reporting entities, while the continuing IFRS implementation discussions indicate that practical interpretation will remain an important part of the transition process.

The most appropriate approach for finance and audit professionals is therefore not to wait for the first IFRS 18/Ind AS 118 financial statements.

The implementation should begin with the current reporting cycle.

The entities that undertake a structured gap assessment, perform a comparative-data dry run, identify MPMs early and align Finance, FP&A, Investor Relations and Audit will be considerably better positioned for a smooth transition.

For the CA fraternity, the message is equally clear:

IFRS 18 is not simply a new presentation standard. It is a new reporting architecture—and the time to prepare for it is now.

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Disclaimer: This article is intended for professional and educational purposes. IFRS reporters should refer to the applicable issued IFRS requirements, while Indian entities should consider the final notified Ind AS requirements and applicable provisions of the Companies Act, 2013, Schedule III and other regulatory requirements before implementation.