Transition to IFRS 18: how to get started
Key steps and considerations in an IFRS 18 implementation project.
From the IFRS Institute – June 5, 2025
Authors: Ingo Zielhoff and Kayla Molaro
In a recent non-representative survey of over 2,600 US respondents for our Q1 webcast on IFRS 18, we found that about 80% of preparers applying IFRS® Accounting Standards have not started an IFRS 18 implementation project. To ensure a successful transition, preparers need to start early, involve key stakeholders, and develop a detailed implementation roadmap considering all potential effects on systems, processes, people and financial communication. To help with that, we highlight key steps and considerations.
IFRS 18: A brief overview
IFRS 18 aims to provide a clearer presentation of the income statement based on a company’s main business activities, as well as more disaggregated information. Effective from January 1, 2027, the standard notably introduces new disclosures and a more structured income statement with:
- three new categories of income and expenses (operating, investing and financing);
- two new defined income statement subtotals (operating profit and profit or loss before financing and income tax);
- one new note to the financial statements on management-defined performance measures (MPMs); and
- retrospective application of the disaggregation in the notes of any functional operating expenses into prescribed natural expense categories, with comparative amounts reflected in the financial statements being recast.
KPMG publications, How companies communicate financial performance is changing and First Impressions: Presentation and disclosure – IFRS 18 provide a comprehensive analysis of IFRS 18. You can also use the KPMG high-level guide.
Practical implications of IFRS 18 implementation
Assessment phase: understanding your starting point
The following are a few best practices for starting the assessment phase of an IFRS 18 implementation project.
- Conduct a thorough assessment of the potential changes to each of the current income and cash flow statements formats.
- Identify non-GAAP performance measures that may qualify as MPMs.
- Review the new required disclosures to eventually determine which ones will apply.
This phase also includes assessing the capability of existing systems to capture and report financial data according to the new classification and disaggregation requirements. While it may be clear that IFRS 18 requires adapting reporting systems and processes, other business and people aspects that may be effected are less obvious yet possibly as transformational. For example, operating profit as defined under IFRS 18 may be different from operating profit as calculated today. This change may affect KPI targets, debt covenants, remuneration agreements and budgeting/performance reporting, if they reference operating profit.
Stakeholder involvement and training
Early identification and involvement of key stakeholders is also critical. Besides the core controllership / external reporting team, this group will likely also include representatives from internal audit, investor relations, IT, HR, treasury and business operations.
A good way to ensure all stakeholders have a uniform understanding of the requirements is to initiate the project with IFRS 18 education sessions. Such sessions can help each stakeholder understand what is expected from their function, which in turn will help identify the implementation’s many effects on the company and create a unified implementation strategy.
Subsidiary involvement
Generally, we expect an IFRS 18 project to be driven centrally, by head office resources. However, IFRS 18 requires that certain accounting judgments be made from the perspective of the reporting entity. The reporting entity can be the consolidated group as a whole, or a subsidiary that prepares its own financial statements. Therefore, the implementation of IFRS 18 needs to consider all reporting levels. For example, if a parent and its subsidiary have different main business activities, they may need to classify income and expenses differently, which can affect the consolidation process.
Example
Subsidiary earns rental income from its assets and determines that it invests in those assets as a main business activity. As a result, Subsidiary classifies the rental income in the operating category of its income statement.
Based on all relevant facts and circumstances, Parent determines that this rental activity is not a main business activity at the group level. Therefore, Subsidiary’s rental income needs to be presented in the investing category of Parent’s consolidated income statement. Consolidation adjustments are required to reclassify Subsidiary’s rental income from the operating to investing category.
Further, the disaggregation of operating expenses in the notes and proper classification of all items of income and expenses may not be achievable through estimation or top entries. Instead, it may require subsidiaries to follow uniform account mapping and bookkeeping practices – e.g. to classify foreign exchange differences or interest income or expenses to the appropriate income statement categories.
Additionally, subsidiaries are critical in the preparation of retrospective comparative data. Subsidiary cooperation and accurate data reporting are fundamental to ensuring that prior period financials are correctly reported under IFRS 18. Successfully integrating new systems and processes across the organization requires subsidiaries practical insights into potential challenges and solutions, facilitating a more seamless alignment with the new reporting requirements.
Project plan / implementation roadmap
The end result of the assessment phase is often the preparation of a project plan / implementation roadmap, working backwards from the desired go-live date.
The roadmap should factor in the need to recast comparative period(s) and allow time for parallel runs in 2026 of the legacy reporting system and the reporting system that incorporates IFRS 18 modifications. Parallel runs can ease the transition by increasing efficiency and ensuring comparative data is ready for the 2027 effective date. Additionally, aligning fiscal year 2027 budget cycles with IFRS 18 will allow for increased comparability between budget and actuals. After a successful go-live a company may further refine processes to sustain reporting under IFRS 18 as ‘business as usual’.
Illustrative Timeline
Design phase: charting the course
The design phase includes writing technical papers to document accounting conclusions (key judgments or accounting policies) used in applying IFRS 18. Common examples of accounting conclusions that need to be documented include the company’s specified main business activities, the classification of income and expense items (especially those related to foreign exchange transactions and interest expenses), and the MPMs to be disclosed. These accounting conclusions will help identify design changes that may be necessary to existing systems, processes and controls, and any advisable additional staff training.
Documentation of specified main business activities
Companies with multiple business activities need to carefully determine and document whether these activities qualify as specified main business activities under IFRS 18, because this affects the classification of income and expenses into the operating, investing, and financing categories. For example, companies with specified main business activities of ‘investing in assets’ (e.g. insurers or investment property companies) or ‘providing financing to customers’ (e.g. banks) classify in the operating category certain income and expenses that would otherwise be classified in the investing or financing category. Sufficient evidence must be gathered to support classification conclusions.
Classification of foreign exchange transactions and interest expenses
The foreign exchange effects of transactions with foreign currency will need to be classified in the same category as the underlying transactions. This may require careful system adjustments and clear documentation. Similarly, companies will need to classify interest expenses accurately among the appropriate categories, depending on the company's main business activities.
Management-defined performance measures (MPMs)
Before 2027, companies have the opportunity to strategically reevaluate public communications to refine investor messaging and ensure complete identification of MPMs. Working with investor relations during the design phase will proactively align changes in public communications and disclosures with the changes to systems, processes and controls occurring concurrently.
Modifications to reporting systems
The implementation of IFRS 18 will likely require modifications to reporting systems, primarily due to the new income statement structure and disclosures. The level of modifications necessary will depend on the current state of the reporting systems. Any company undergoing a system upgrade should consider the effects of IFRS 18 as soon as possible to avoid costly rework.
Examples of common required changes to reporting systems include:
- updating the chart of accounts to accommodate new classifications of income and expenses and further disaggregation.
- revising consolidation processes, which may include additional consolidation adjustments when parent and subsidiary main business activities differ.
- updating other processes and systems, which may include establishing new data collection points for expanded disclosures, updating posting entries in subsystems, and developing account reconciliation processes for new accounts. The cash flow statement preparation process may also require changes, given the statement now starts with operating profit and the classification of interest and dividend cash flows may need to be revisited;
- refining internal management reports, with the level of effort depending on the level of historic report customization.
- developing a strategy for reporting comparative data, because IFRS 18 is effective retrospectively. Because different reporting systems have varying capabilities in supporting a retrospective transition, companies must plan for a system transition that considers the nuances in their reporting system’s capabilities to present the prior period data under both IAS 1 and IFRS 18; and
- designing revised controls and internal and external audit plans.
By addressing these required changes, companies can ensure their systems are prepared for IFRS 18 and take the opportunity to enhance broader system functionalities.
Engaging external auditors
Engaging external auditors early in the process is crucial for a successful IFRS 18 implementation. Auditors can provide valuable reviews, observations, and recommendations on accounting policy decisions. They can begin substantive testing of modifications to financial reporting systems and comparative financial statements during the implementation phase, to ensure readiness and preempt any potential issues. Conversations with external auditors about revised controls before implementation and kicking off controls testing at implementation can also make the transition smoother.
Implementation phase: executing the plan
This phase involves implementing the updated processes and systems, followed by thorough testing to ensure accuracy and completeness. Performing parallel runs, where financial results are prepared under both IAS 1 and IFRS 18, can help identify any discrepancies and refine the reporting approach before the standard is effective.
Embedding the new processes into the company’s routine operations is essential for long-term compliance. This includes updating internal management reports, ensuring all necessary disclosures are made, and recalibrating investor communications.
We encourage companies to apply the same project management rigor to these implementation efforts as they apply to other large transformations.
The takeaway
Now is the time to get ready to report under IFRS 18. Early action is crucial to tackle key challenges such as aligning stakeholders, determining main business activities, evaluating necessary system modifications, and planning for retrospective reporting. These complexities are best addressed through thorough preparation and structured planning, to ensure a smooth transition and enhance the accuracy and transparency of your financial reporting. Don’t wait—lay the groundwork today to navigate the complexities of IFRS 18 successfully. Reach out to your KPMG contact to start a conversation.
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