IFRS 18's new subtotals in the income statement
IFRS 18 adds two required subtotals, operating profit and profit before financing and income taxes. How a client's income statement will change.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
"Operating profit" has appeared on income statements for decades, but it has never meant the same thing from one company to the next. One client includes interest earned on surplus cash; another excludes the profit on selling a delivery van; a third shows no operating profit line at all and goes straight from expenses to profit before tax. Readers comparing two companies have had to rebuild the figure themselves.
IFRS 18 ends that freedom for clients reporting under full IFRS Accounting Standards. It requires defined subtotals, and preparers in South Africa, Nigeria and Kenya will need to rework the income statements of those clients to show them. This article explains what is required, why it reaches the cash flow statement, and how to prepare a client's set in Achekam.
IFRS 18 replaces IAS 1 for years beginning on or after 1 January 2027
The IFRS Foundation states that IFRS 18, Presentation and Disclosure in Financial Statements, replaces IAS 1. The IASB issued it in April 2024, and it is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.
The IFRS Foundation also notes that the IASB did not reconsider every aspect of IAS 1 when it developed IFRS 18. It focused on the statement of profit or loss. So while much of the familiar structure of a set of statements survives, the income statement is where clients will see the change.
The two defined subtotals the IFRS Foundation names, in plain terms
IFRS 18 requires an entity to present two new defined subtotals in the statement of profit or loss:
- Operating profit.
- Profit before financing and income taxes.
The word that matters is "defined". The standard decides what sits above and below each subtotal, not the client's habit or the layout inherited from last year's file. The second subtotal's name describes its position: it is the profit figure before the effects of how the company is financed and before tax, which can make it a useful point of comparison between a company funded by its owners and one funded by a bank. What each subtotal contains is set out in the standard's own requirements, which should be read before any line is moved.
A consequence for owner-managed clients is that their own favourite profit figures, if they differ from the defined ones and are used in public communications, may become disclosures of their own. That is covered in management-defined performance measures under IFRS 18.
Why the indirect cash flow now starts from operating profit
The change reaches the cash flow statement. When the IASB issued IFRS 18, it amended IAS 7 to require entities to use the operating profit or loss subtotal required by IFRS 18 as the starting point for the indirect method of reporting operating cash flows. The same amendment introduced new requirements for classifying interest and dividend cash flows.
In practice, the income statement and the cash flow have to be designed together. If an item moves above or below operating profit on the income statement, the indirect method's starting figure moves with it, and the adjustments beneath it change. A preparer who updates the income statement and leaves the cash flow alone will produce a set that does not reconcile in the way the amended IAS 7 expects.
Reviewing a client's current income statement lines against the new subtotals
Before the first IFRS 18 year, take each client's most recent income statement and work through it line by line:
| Current line | Question to answer from the standard |
|---|---|
| Revenue, cost of sales, operating expenses | Do they all fall above operating profit as defined? |
| Other income (rent, insurance recoveries, disposal profits) | Where does each item belong once the subtotals are defined? |
| Interest received | Above or below each subtotal, given what the client does? |
| Finance costs | Where does each element sit relative to profit before financing and income taxes? |
| Share of results of associates, investment income | Where does the standard place them for this client? |
| Income tax | Below both subtotals by the second subtotal's own name |
The table's right-hand column is deliberately a set of questions. The answers depend on the standard's text and on the client's business, and should be worked out and recorded per client. Clients that present expenses by function face a further layer of decisions, discussed in expenses by nature or by function.
Using custom lines and groups in the Studio, and why there is no live standards feed to warn you
Achekam's Studio builds a draft set of annual financial statements from a mapped trial balance, with every figure calculated in code: directors' report, the four primary statements, policies, notes and a detailed income statement. A firm can add its own statement lines and groups and change the wording of any row title, and later builds keep those choices. Each custom line still totals into a standard line, so notes and the cash flow stay consistent.
Those are the tools for an IFRS 18 layout. Before using them on a live client, rebuild a copy of last year's set with the new subtotals and labels, check that every total and the cash flow starting point agree, and only then apply the same structure to the current year. Treat whether the Studio's layout can show each subtotal exactly as the client's circumstances require as something to test on that copy, not something to assume.
Achekam does not pull a live feed of standards and regulatory changes; its Standards & Regulatory Updates page shows what its knowledge base records. Nothing in the software will flag that a client's year now begins after the effective date. The firm needs its own list.
A short checklist for the first IFRS 18 year-end
- Confirm the client reports under full IFRS and identify its first IFRS 18 year.
- Classify every current income statement line against both subtotals, with reasons.
- Rebuild the income statement layout on a copy and check the totals.
- Change the cash flow starting point to operating profit and recheck interest and dividends.
- Ask the client which profit measures it publishes.
- Rewrite the presentation policy and review all carried wording.
The IFRS Foundation's IFRS 18 page explains the new presentation and disclosure standard and when it takes effect, and is the first thing to read before the line-by-line review begins.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
