IFRS 18: the new income statement rules your small business needs to know before 2027

IFRS 18 is coming, and your income statement is about to change shape

IFRS 18 is the biggest change to the income statement in over twenty years, and it takes effect for annual reporting periods beginning on or after 1 January 2027. Issued by the International Accounting Standards Board (IASB) in April 2024, IFRS 18 replaces IAS 1 and rewrites how companies present their statement of profit or loss and how they disclose performance measures. It is close enough now that listed companies are already warning investors about it — on its third-quarter 2026 earnings call today, Alcon told investors that IFRS 18 "becomes effective in January" and will change the presentation of certain items in its financial statements, including some of its key metrics.

Here is the reassuring part first: IFRS 18 does not change how revenue, expenses, assets or liabilities are recognised or measured. Your net profit stays exactly the same. What changes is how profit is structured, labelled and explained — and that matters, because the numbers lenders, investors and boards rely on, like operating profit, are about to mean something specific for the first time.

IFRS 18: what actually changes in your income statement

Under IAS 1, there was no single required definition of operating profit. Companies could design their own subtotals and organise the statement of profit or loss in different ways, which made comparing two businesses harder than it should have been. IFRS 18 fixes that with two changes that every IFRS reporter needs to understand.

First, every item of income and expense must be classified into one of five categories: operating, investing, financing, income taxes, and discontinued operations. Second, two subtotals become mandatory: operating profit or loss, and profit or loss before financing and income taxes. For the first time, "operating profit" has a defined meaning under IFRS, so the same label will mean the same thing from one company to the next.

IFRS 18 applies retrospectively. For a business with a December year end, the 2026 comparative figures in the 2027 financial statements must be presented under the new rules — which means the data needs to be captured during 2026, not reconstructed at the last minute. Early application is permitted, and the standard has been endorsed for use in the European Union (February 2026) and by the UK Endorsement Board.

The five IFRS 18 categories, explained simply

The operating category is the default: it holds the results of your main business activities, plus anything that is not classified elsewhere. The investing category holds returns from investments such as associates and joint ventures, generally when they are not part of your main business activities. The financing category holds interest and other expenses on liabilities that only raise finance — loans, and also interest on items like lease liabilities and pensions. That last point is one reason the standard matters to small businesses: under IFRS 16 Leases, leases sit on the balance sheet, and the interest on those lease liabilities now lands in the financing category. Income taxes and discontinued operations get their own categories.

Classification depends on your main business activities. A bank or finance company that lends to customers will classify some interest and investment income in operating profit rather than investing or financing, because lending is what it does.

IFRS 18 and your "adjusted profit" numbers

Many companies publish "adjusted EBITDA", "underlying profit" or similar measures in results announcements and investor presentations. Under IFRS 18, subtotals of income and expenses that are used in public communications outside the financial statements, and that reflect management's view of performance, are called management-defined performance measures (MPMs) — and they come with new disclosure rules.

For each MPM, a company must disclose in a single note: a description of the measure and why management believes it is useful, a reconciliation to the most directly comparable IFRS subtotal, the income tax and non-controlling interest effect of each reconciling item, and an explanation of any change in how the measure is calculated.

If your board pack or lender reporting leans on an adjusted profit figure, start an inventory of every adjusted measure you use now, because each one will need its reconciliation ready.

IFRS 18 and your cash flow statement

IFRS 18 also amends IAS 7. Under the indirect method, operating profit becomes the single starting point for operating cash flows, which means the income statement and the operating cash flow will share a more similar structure and be easier to compare. For most companies, the existing choices are removed: interest paid is classified as financing, and interest and dividends received are classified as investing. Dividends paid remain in financing.

What a small business should do now

You do not need to panic, but you do need a plan, because the 2026 comparative year is already running. Start by mapping each line of your current income statement to the five new categories and noting where judgement is involved. Check how your loan agreements, bonus schemes and budgets define operating profit — if a covenant refers to it, the new defined meaning may move the number, and your lender should hear about that from you before it shows up in a set of accounts.

List every adjusted profit measure you report anywhere, and make sure your chart of accounts can capture transactions by category from 1 January 2026. Then do a dry run: prepare a restated 2026 income statement and notes before the 2027 year end, and talk it through with your accountant. A small business that prepares early will find its 2027 accounts cleaner, its lender conversations easier, and its board's favourite profit measure finally defined in a way everyone can agree on.

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