Management-defined performance measures under IFRS 18
Which of a client's own profit figures are management-defined performance measures under IFRS 18, where to look for them and how to draft the note.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Ask a managing director how the business did this year and you will rarely hear "profit for the year". You will hear "underlying profit", "profit before the restructuring", "operating profit excluding the property sale", or a margin the board has tracked for a decade. These figures run the business. Until now they have mostly lived outside the audited or reviewed statements, in board packs, bank presentations and investor letters.
IFRS 18 brings some of them inside. For a preparer, the work is less about drafting a new note than about finding out which of the client's own measures are caught, which requires asking questions the year-end file has never asked before.
What IFRS 18 means by a management-defined performance measure
The IFRS Foundation states that IFRS 18 requires an entity to disclose management-defined performance measures, which are subtotals of income and expenses not specified by IFRS Accounting Standards that are used in public communications to communicate management's view of an aspect of the company's financial performance.
Take that definition apart and it gives four tests, all of which must be met:
- A subtotal of income and expenses. A sum built from items in profit or loss. A count of customers, a sales volume or a cash balance is not one.
- Not specified by IFRS Accounting Standards. A subtotal the standards themselves define is outside the definition.
- Used in public communications. The measure leaves the building, in a document the client makes available outside the company.
- Communicating management's view of an aspect of performance. It is how management chooses to describe how the business did.
IFRS 18, issued in April 2024, is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted, and replaces IAS 1. The detailed requirements for what the note must contain are in the standard, and should be read there rather than reconstructed from summaries.
Where these measures hide: lender reports, investor updates and board packs
The measures rarely appear in the trial balance, so a preparer working only from the ledger will never see them. Look where management talks about performance:
- Lender reports. Covenant certificates and quarterly bank packs often use an adjusted profit figure defined in the loan agreement.
- Investor updates. Letters to minority shareholders, presentations to private equity investors and fundraising decks.
- Websites and press releases. Even small companies sometimes publish a results summary.
- Board packs. Usually internal, so a measure that stays inside the boardroom may not meet the "public communications" test. But board packs are where measures are born, and a figure that starts there often ends up in an investor letter.
For many owner-managed clients in South Africa, Nigeria and Kenya, the honest answer will be that the company publishes no such measures at all. That is a valid conclusion; record it, with the evidence of what was asked.
How they differ from the subtotals IFRS 18 itself defines
IFRS 18 requires two new defined subtotals in the statement of profit or loss: operating profit, and profit before financing and income taxes. Because those subtotals are specified by the standard, they fail the second test above. They are not management-defined performance measures, however prominently the client quotes them.
The difference matters in practice. Suppose a client reports "operating profit before once-off items" to its bank. The standard's operating profit is defined by IFRS 18. The client's version, which removes items management considers unusual, is its own creation. The first sits on the face of the income statement; the second, if it is used in a public communication, is a candidate for the new disclosure. The more a client's favourite figure departs from a defined subtotal, the more explaining the note will have to do. The defined subtotals themselves are covered in IFRS 18's new subtotals.
Questions to ask the client before drafting the disclosure
Put these to the finance director in the year-end questionnaire, and keep the answers on file:
- Which profit or margin figures does the company publish or send outside the company, and in which documents?
- How is each one calculated, and from which income and expense items?
- Has the calculation changed during the year, or since the comparative year?
- Why does management use this measure rather than a figure from the statements?
- Who approves the figures before they are published?
The last two answers shape the note. A measure management cannot explain is a measure it may decide to stop publishing, which is a legitimate outcome of the exercise. Where measures also appear in the directors' report, keep the wording consistent with the directors' report contents.
Writing the note in the Studio: own wording, AI drafts labelled for review before issue
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write their own policies and notes. A note on management-defined performance measures is not something standard SME wording would cover, so plan to write it.
Where an AI key is set up, the Studio can produce narrative text such as note wording, with every figure still coming from code. Such text is labelled "AI draft - review before issue". There is no separate accept step for each paragraph; the firm's review stages and the partner's signature are the safeguard. An AI draft of this note deserves particular scrutiny, because the facts that matter, how the client calculates its measures and where it uses them, are not in the trial balance. Notes take their figures from the mapped trial balance, and anything it does not hold is left as "[to be completed]", which is a useful flag on this note in particular.
If the client wants a defined subtotal or label shown differently on the face of the statements, a firm can add its own statement lines and groups and change row wording, and later builds keep those choices. Do not use that to place a management measure on the face of the income statement without reading what the standard allows.
The IFRS Foundation's IFRS 18 page explains the new standard that replaces IAS 1, including the requirement to disclose these measures. Read it, then send the client the questions above well before year end.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
