IFRS 18 adoption support for US subsidiaries and IFRS reporters

IFRS 18 sorts income and expenses into five categories: operating, investing, financing, income taxes and discontinued operations. Operating is the default. It holds everything not classified elsewhere, whether or not the item is unusual or volatile. The standard then requires two new subtotals, operating profit and profit before financing and income taxes. It doesn't change how profit is measured, only how the statement is laid out.

Foreign exchange differences follow the category of the item that gave rise to them, with a cost-or-effort exemption that lets a company use the operating category. Banks and insurers classify income and expenses differently, and most banks won't present the second subtotal.

The standard also sets grouping principles and, for companies that present expenses by function, requires disclosure in the notes of depreciation, amortization, employee benefits, impairment losses and inventory write-downs included in each operating line.

A management-defined performance measure, or MPM, is a subtotal of income and expenses that a company uses in public communications outside the financial statements to give management's view of its performance as a whole. Adjusted EBITDA and adjusted operating profit are the usual examples. Free cash flow, net debt and customer counts are not MPMs, because they aren't subtotals of income and expenses.

What counts as public communication: management commentary, press releases and investor presentations. Oral remarks, transcripts and social media posts are excluded for the purpose of identifying MPMs.

A company that has MPMs discloses them in a single note with:

• A reconciliation to the closest subtotal listed in IFRS 18 or required by another IFRS standard, showing the income tax effect and the effect on non-controlling interests for each reconciling item.
• A description of how the measure is calculated and why it communicates management's view.
• An explanation of any change in the measures during the period.
• A statement that the measure reflects management's view and may not be comparable with similarly labeled measures of other companies.

A US subsidiary may have none if it doesn't publish its own investor material. The group's communications decide, so the first task is to ask the parent which measures it intends to disclose and which subsidiary figures feed them.

IFRS 18 comes with limited amendments to IAS 7. Two matter for a US subsidiary.

First, a company using the indirect method now starts the operating section from operating profit, not from profit before tax or net profit. If the pack template begins from a different figure, the mapping needs rework.

Second, the choices for interest and dividends narrow. For most companies, interest and dividends paid are classified in financing activities, and interest and dividends received in investing activities, where IAS 7 allowed options before.

US GAAP works differently. FASB Statement 95, codified in ASC 230, classifies interest paid, interest received and dividends received as operating cash flows, and dividends paid as financing. A US subsidiary on IFRS 18 therefore carries a recurring classification difference between its US cash flow statement and the IFRS pack. It's one more line in the bridge, and it is easier to build once, in 2026, than to reconcile after the comparatives are restated.

IFRS 19, Subsidiaries without Public Accountability: Disclosures, was issued in May 2024 and is effective, like IFRS 18, for annual periods beginning on or after 1 January 2027, with earlier application permitted. It's voluntary. A subsidiary that applies it uses the recognition and measurement requirements of other IFRS standards but the reduced disclosure requirements in IFRS 19.

A subsidiary is eligible if two things are true. It doesn't have public accountability, meaning no publicly traded debt or equity and no holding of assets in a fiduciary capacity for a broad group of outsiders as a primary business. And its ultimate or any intermediate parent produces consolidated financial statements available for public use that comply with IFRS Accounting Standards.

For most US subsidiaries this is a side question. They report to the parent through a pack, not through standalone IFRS financial statements. IFRS 19 matters if the subsidiary does prepare its own IFRS statements, for a lender or an investor, and wants to cut the footnotes. IFRS 18 also provides that an entity applying IFRS 19 doesn't have to present the quantitative information required by IFRS 19 paragraph 178(f) (IFRS 18, paragraph C2).

The transition rule drives the calendar. IFRS 18 is applied retrospectively under IAS 8, interim statements in the first year apply it, and the comparative year is restated. For a calendar-year company, the 2026 income statement needs an IFRS 18 version when the 2027 statements are prepared, and the 2027 interim packs need it as they go.

A workable sequence:

1. Q4 2026 or earlier: run a gap assessment of the current income statement and chart of accounts against the five categories.
2. Map each account to operating, investing or financing, with the rule applied. Interest on leases and pensions is the usual surprise.
3. Ask the parent for its MPM list, the new pack template and the dates for the first IFRS 18 reporting cycle.
4. Recast 2026 quarter by quarter in the new layout, and keep the reconciliation to the old IAS 1 amounts, which the standard asks for.
5. Update the bridge between US GAAP and IFRS for the cash flow and category differences described above.

The work is mostly mapping and reporting, so it's well-suited to a project outside the monthly close. Group policy and the group auditor decide the final presentation, and we write to their instructions.