In April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 "Presentation and Disclosure in Financial Statements". This standard replaces IAS 1, which had been in effect for over 25 years, and becomes effective for annual reporting periods beginning on or after 1 January 2027.

For Ukrainian IT companies that already report under IFRS or are planning a transformation, IFRS 18 is not merely a formal update. The standard fundamentally changes the structure of the income statement, introduces mandatory subtotals and requires disclosure of management-defined performance measures. This means real changes in how a company presents its financial results to investors, auditors and other users of financial statements.

1. Why was IFRS 18 introduced?

IAS 1 gave companies significant flexibility in how they presented information in the income statement. In practice, this meant that companies with identical activities could present their statements in such different formats that comparison became difficult.

Investors and analysts repeatedly pointed to several problems: the absence of standardised subtotals in the income statement, inconsistent classification of income and expenses across companies, and widespread use of non-GAAP measures without adequate disclosure.

IFRS 18 is designed to address precisely these problems while preserving the core presentation principles from IAS 1.

2. New structure of the income statement

The central change in IFRS 18 is the requirement to present income and expenses in the income statement across five categories:

  1. Operating - the residual category that includes all income and expenses not classified elsewhere. For IT companies, this covers service revenue, cost of sales, personnel costs, marketing, and general and administrative expenses.
  2. Investing - income and expenses from assets that generate returns separately from the entity's main business resources. For example, interest income on deposits, dividends from investments, and gains or losses on the sale of investments.
  3. Financing - expenses and income from liabilities related to financing. This includes interest on loans and borrowings, lease finance costs under IFRS 16, and foreign exchange differences on financial liabilities.
  4. Income tax - income tax expense, both current and deferred.
  5. Discontinued operations - results from discontinued operations in accordance with IFRS 5.

3. Mandatory subtotals

IFRS 18 introduces two new mandatory subtotals that were not required under IAS 1:

Operating profit - this is the profit from the entity's operating activities. For IT companies, this is a key metric that demonstrates core business performance without the impact of financing and investing activities.

Profit before financing and income tax - this is operating profit plus the result from investing activities. This subtotal shows overall business performance before taking capital structure into account.

Together with existing subtotals (profit before tax and profit for the period), the statement gains a clear vertical structure that makes cross-company comparison significantly easier.

4. Management-defined performance measures (MPMs)

One of the most significant innovations in IFRS 18 is the formalisation of management-defined performance measures (MPMs). Previously, companies often used non-standard metrics such as "Adjusted EBITDA" or "Normalised Revenue" in press releases and investor presentations without mandatory disclosure in the financial statements.

Now, if a company publicly uses a metric that:

  • is a subtotal of income and expenses (not specified by IFRS), and
  • is used in public communications to characterise financial performance,

then that metric becomes a management-defined performance measure and falls under disclosure requirements in the notes to the financial statements.

For each MPM, the entity must disclose:

  • a clear definition of the measure and an explanation of why it is useful to users of financial statements;
  • a numerical reconciliation between the MPM and the closest IFRS-defined subtotal;
  • the income tax effect on each adjustment in the reconciliation;
  • comparative information for prior periods.

For Ukrainian IT companies raising investment that frequently use Adjusted EBITDA or adjusted operating profit in financial models for investors, this means additional work on preparing notes. But at the same time, it increases investor confidence in the disclosed information.

5. Aggregation and disaggregation requirements

IFRS 18 significantly strengthens the requirements for aggregating and disaggregating information in financial statements. The standard requires that each line item be sufficiently detailed for decision-making but not excessively granular.

Key principles:

  • Aggregation - combining items with similar characteristics. For example, various types of payroll costs can be combined into a "Personnel expenses" line item.
  • Disaggregation - splitting items when they contain materially different information. For example, if a company has both SaaS revenue and professional services income, it may be appropriate to present them separately.

For IT companies with multiple revenue streams (subscriptions, licences, T&M, support), this may mean more detailed revenue presentation in the notes.

6. Changes to the cash flow statement

IFRS 18 also introduces changes to the presentation of the cash flow statement. Specifically:

  • Entities using the indirect method must start the reconciliation from operating profit (rather than profit for the period, as was often done previously).
  • The classification of interest and dividends received and paid becomes more prescribed: interest paid is classified as financing activity, while interest and dividends received are classified as investing activity.

This simplifies comparison of cash flows across entities and eliminates the variability that existed under IAS 7.

7. Practical impact on Ukrainian IT companies

For IT companies already reporting under IFRS, implementing IFRS 18 will require specific steps:

Redesign the income statement format. The statement must be restructured according to the five categories, with two new mandatory subtotals added. In practice, this means reclassifying items: for example, interest income on deposits moves from operating to investing, while interest on credit facilities moves to financing.

Inventory non-standard metrics. All financial metrics that the company uses in communications with investors, creditors and in internal reporting should be reviewed. Each such metric may fall under the MPM definition and require disclosure in the notes.

Prepare MPM reconciliations. For each management-defined performance measure, a numerical reconciliation to the closest IFRS subtotal must be prepared, requiring clear documentation of each adjustment.

Update accounting policies. Accounting policies on financial statement presentation need to be reviewed and updated in accordance with the new IFRS 18 requirements.

Retrospective application. IFRS 18 is applied retrospectively, meaning comparative information for prior periods must also be restated under the new requirements.

8. What remains unchanged?

It is important to understand that IFRS 18 does not change:

  • the recognition and measurement principles for assets, liabilities, income and expenses - these remain in their respective standards (IFRS 15, IFRS 16, IAS 38 etc.);
  • requirements for the statement of financial position (balance sheet) - these are carried over from IAS 1 without material changes;
  • requirements for the statement of changes in equity;
  • general principles of materiality, going concern and accrual basis.

In essence, IFRS 18 focuses on how to present information, not on what to recognise or how to measure.

9. Implementation timeline

IFRS 18 becomes effective for annual reporting periods beginning on or after 1 January 2027. Early adoption is permitted.

For companies with a financial year that coincides with the calendar year, the first IFRS 18 financial statements will be for 2027. However, given the retrospective application, preparation should begin in 2026 to ensure comparative data for 2026 is available in the new format.

Conclusions

IFRS 18 is the most significant change in financial statement presentation in decades. For Ukrainian IT companies working with international investors and auditors, preparing for the new standard is not just a matter of compliance but also an opportunity to enhance the quality of financial communication.

A structured income statement with clear subtotals, transparent management metrics with full reconciliations, and consistent classification of income and expenses - all of this increases confidence in a company's financial statements and simplifies the dialogue with investors.