IFRS 18 management-defined performance measures: test scope, then reconcile each adjustment
An investor presentation reports adjusted operating profit of 1,160. The income statement shows operating profit of 1,000. Once IFRS 18 applies, a public measure like that may need its own note reconciling the two, with the tax and non-controlling interest effects of each adjustment. Finance teams preparing full IFRS financial statements need to test their public profit measures against the definition. Not every alternative performance measure is caught.
When this applies
IFRS 18 was issued in April 2024 and applies to annual periods beginning on or after 1 January 2027, with earlier application permitted. Whether a particular entity applies it depends on its reporting framework and local adoption. It does not change UK GAAP, US GAAP or Ind AS. Our preparation guide covers the first reporting period and the new income statement categories. This article deals only with management-defined performance measures, or MPMs.
This article draws on the IFRS Foundation's non-authoritative project summary, its key terms page and its IFRS Accounting Taxonomy update for IFRS 18, which reproduces the disclosure requirements in paragraphs 123 to 125. We did not have access to the full issued standard. The key terms page points to Appendix A of the standard for the authoritative definition, so check the full text before finalising a scope decision.
Apply every part of the definition
For a subtotal to qualify, it must combine income with expenses, appear in a public communication beyond the financial statements and convey management's assessment of the entity's overall performance. Totals already required by IFRS, and the measures IFRS 18 specifically excludes, fall outside the definition. A measure has to pass every part.
The whole-entity condition comes with a presumption. According to the project summary, a subtotal of income and expenses that is communicated publicly is presumed to represent management's view of the financial performance of the entity as a whole. Rebutting that presumption needs reasonable and supportable information. A preference for keeping an awkward public measure out of the note is not enough.
Public communications include management commentary, press releases and investor presentations. Oral communications, written transcripts of them and social media posts are excluded for this purpose. The word adjusted in a label neither creates an MPM nor rules one out. The calculation and its use decide.
| Measure | On these facts | Reason |
|---|---|---|
| Adjusted operating profit in an investor presentation | Candidate MPM | Public subtotal of income and expenses describing the whole entity |
| Core profit used only in board packs | Not an MPM | Not used in public communications |
| Free cash flow or net debt | Not an MPM | Not a subtotal of income and expenses |
| Revenue on its own, or headcount | Not an MPM | Not a subtotal of income and expenses |
| Adjusted operating margin | The ratio is not an MPM | Its adjusted profit numerator can be, if it meets the definition |
| Profit of one operating segment | May fail | May not describe the performance of the entity as a whole |
A worked reconciliation
This bridge is hypothetical, in generic currency units, and is not a complete note template. The public measure is assumed to meet the definition, and all amounts are correctly recognised. Both expenses are assumed fully deductible at a 25% tax rate chosen for illustration, not taken from any country's tax law. The restructuring sits in the parent. The litigation sits in a subsidiary in which outside shareholders hold 20%.
The bridge keeps the adjustments at their pre-tax amounts of 100 and 60, with the tax effects shown beside them rather than netted in. The tax column is the tax benefit each excluded expense is assumed to have generated. It is not tax on the adjusted measure as a whole. To find how much the add-backs raise profit after tax, deduct that 40 of tax benefit from the 160 of adjustments, giving 120: 75 from the restructuring and 45 from the litigation. The restructuring sits in the parent, so all 75 is attributable to the parent's owners. Of the 45, 20%, or 9, belongs to the non-controlling interest. That leaves 111 of the 120 attributable to owners of the parent.
The add-backs remove nothing from IFRS profit. Both expenses stay in the income statement, and the note has to make clear which figure is which. In practice the tax effect depends on deductibility and jurisdiction, and the NCI effect depends on where each item arises in the group, so neither should be assumed constant.
| Reconciling line | Pre-tax amount | Assumed tax benefit on the excluded expense | NCI share of the after-tax effect |
|---|---|---|---|
| IFRS operating profit | 1,000 | ||
| Restructuring expense added back, parent | 100 | 25 | 0 |
| Litigation expense added back, subsidiary | 60 | 15 | 9 |
| Total adjustments | 160 | 40 | 9 |
| Adjusted operating profit | 1,160 |
What the single note contains
All qualifying MPMs are disclosed in a single note. The Foundation's taxonomy update reproduces the requirements in IFRS 18 paragraphs 123 to 125, and the project summary describes them in the same terms. For each measure, the note explains how it is calculated and why management uses it, and states that it reflects management's view and may not be comparable with similarly labelled measures from other entities. Each measure is reconciled to the most directly comparable subtotal listed in IFRS 18, or a total or subtotal required by IFRS. For each reconciling item, the note gives the income tax effect, the effect on non-controlling interests and the amounts in the related financial statement line items, and it describes how the tax effect was determined.
A table is not mandatory, as long as the information sits within that single note. If a measure changes, or the way its tax effect is calculated changes, the note explains the reasons and the effect and restates comparatives, unless that is impracticable, in which case it says so.
Our suggested working file traces each adjustment to ledger evidence, records the reason it is excluded and holds a separate tax and NCI assessment for it, including how the tax effect was worked out. Compare the adjustment definitions with the previous period's before anything is published, so a change is disclosed rather than slipped in.
Start with what has already been published
Gather the latest press releases, investor presentations and management commentary. List every profit subtotal they contain with its calculation, and mark those that pass each part of the definition. For every adjustment, record its tax treatment and whether it arises in a subsidiary with outside shareholders.