AASB 18 / IFRS 18 — What Australian Businesses Need to Know

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1. Overview

For annual reporting periods beginning on or after 1 January 2027, a new accounting standard will fundamentally reshape how Australian businesses present their financial performance. AASB 18 Presentation and Disclosure in Financial Statements — the Australian adoption of the international IFRS 18 — replaces the long-standing AASB 101 (IAS 1) and introduces the most significant changes to financial statement presentation in decades (IASB, 2024a; AASB, 2024a).

This is not merely a cosmetic relabelling exercise. AASB 18 requires businesses to reclassify every line of income and expense into defined categories, present new mandatory subtotals, bring “adjusted” performance measures under audit scrutiny, and enhance the way information is aggregated and disaggregated across the financial statements and notes. The standard applies retrospectively, meaning the first AASB 18 annual report will be for the year ending 31 December 2027 (or 30 June 2028 for Australian June-year-end reporters), with comparative figures for the prior year also restated under the new framework. In practical terms, the transition date is already upon us.

This article unpacks the key changes, explores the real-world implications for finance teams and boards, and provides two worked examples — a hypothetical retail entity and a hypothetical manufacturing entity — to illustrate what the new-look profit and loss statement might look like under the new framework.

2. What Is AASB 18 / IFRS 18?

In April 2024, the International Accounting Standards Board (IASB) issued IFRS 18 Presentation and Disclosure in Financial Statements. The Australian Accounting Standards Board (AASB) followed in June 2024 by issuing the Australian equivalent, AASB 18 (AASB, 2024a). The standard responds to longstanding concerns from investors, analysts, and regulators about inconsistency and lack of comparability in how entities present their results (IASB, 2024b) — particularly in the statement of profit or loss.

Under the outgoing AASB 101 (AASB, 2024b), companies had broad discretion over how they structured their income statements. This led to significant diversity in practice: some companies presented operating profit, others did not; some included foreign exchange gains in operating results, others placed them below the line; the treatment of impairments, restructuring costs, and finance-related income varied widely. For investors attempting to compare two companies in the same industry, this inconsistency made analysis unnecessarily difficult.

AASB 18 addresses this by introducing a structured framework for the profit and loss statement, mandating specific subtotals, formalising the treatment of non-GAAP performance measures, and enhancing the principles that govern how information is grouped in the primary statements and notes.

Who Does It Apply To?

In Australia, AASB 18 applies to for-profit entities preparing Tier 1 general purpose financial statements for annual reporting periods beginning on or after 1 January 2027 (AASB, 2024a, para 1). Not-for-profit public sector entities have a deferred application date of 1 January 2028. Early adoption is permitted.

The phrase “beginning on or after” is critical and is a common source of confusion. The test is when the annual period starts, not when it ends or whether it straddles 1 January 2027.

3. The Five Key Changes

3.1 Five Defined Categories for Income and Expenses

Under AASB 18, every item of income and expense must be classified into one of five categories (AASB, 2024a, paras 47–62): Operating, Investing, Financing, Income Taxes, and Discontinued Operations.

The Operating category is the default or residual category — it captures all income and expenses that are not classified in the other four categories. This means revenue, cost of sales, depreciation and amortisation, selling and administrative expenses, impairment losses on operating assets under AASB 136 (with goodwill impairment being a particularly common and significant example), expected credit losses on trade receivables under AASB 9, and gains or losses on disposal of operating assets all fall here.

The Investing category captures income and expenses from assets that generate returns individually and largely independently of the entity’s other resources. This includes income from equity-accounted associates and joint ventures, dividends from investments, interest income on financial assets (where not a main business activity), and gains and losses on disposal of investments.

The Financing category captures income and expenses from liabilities that arise from transactions involving only the raising of finance. This includes interest expense on borrowings, unwinding of discount on provisions, and lease liability interest under IFRS 16. More specifically, the financing category applies to liabilities that arise from transactions that involve only the raising of finance (AASB, 2024a, para B51) — that is, where the entity receives finance in the form of cash (or an extinguishment of a financial liability, or receipt of its own equity instruments) and will, at a later date, return cash or its own equity instruments in exchange. Common examples include bank loans, bonds payable, notes and debentures. Liabilities that arise from transactions that do not involve only the raising of finance — such as trade payables, lease liabilities, and contract liabilities — are classified differently, with their associated income and expenses generally falling into the operating category unless specific exceptions apply.

The Income Taxes category is straightforward: it captures income tax expense (both current and deferred) as determined under AASB 112.

The Discontinued Operations category captures the post-tax results of operations that have been classified as held for sale or have been disposed of during the period, as defined by AASB 5.

Highlighted rows indicate items where the classification differs between the two statements or where an item appears in one statement but not the other.

3.2 New Mandatory Subtotals and the P&L Cascade

AASB 18 requires every entity to present a defined sequence of subtotals on the face of the profit and loss statement, creating a structured cascade from operating results through to profit or loss for the period (AASB, 2024a, paras 63–68). This cascade aligns directly with the five categories described above, with each category’s items presented in a specific position within the statement.

The full cascade is as follows:

1. 1. Operating Profit (or Loss) — the total of all income and expenses classified in the operating category. This is a new mandatory subtotal. All operating category items are presented before this line.
2. 2. Profit (or Loss) Before Financing and Income Taxes — operating profit plus all income and expenses in the investing category. This is a new mandatory subtotal. Investing category items are presented between operating profit and this line.
3. 3. Profit (or Loss) Before Income Taxes — profit before financing and income taxes plus all income and expenses in the financing category. This subtotal existed under AASB 101 and continues under AASB 18, though it is not one of the two new mandatory subtotals.
4. 4. Profit (or Loss) from Continuing Operations — profit before income taxes less income tax expense. Income tax category items are presented between profit before income taxes and this line.
5. 5. Profit (or Loss) for the Period — profit from continuing operations plus (or minus) results from discontinued operations. The discontinued operations category is presented between profit from continuing operations and this final line.

The two new mandatory subtotals introduced by AASB 18 are operating profit and profit before financing and income taxes. This is arguably the single most impactful change for analysts and investors.

3.3 Management-Defined Performance Measures (MPMs)

Many companies currently communicate “adjusted” profit figures — often referred to as Alternative Performance Measures or non-GAAP measures — in investor presentations and press releases. AASB 18 introduces Management-Defined Performance Measures (MPMs): subtotals of income and expenses used in public communications that are not already required by IFRS standards (AASB, 2024a, paras 117–132).

For each MPM, the entity must provide: a clear description of the aspect of financial performance the measure communicates and why management believes it is useful; the calculation methodology; a reconciliation to the most directly comparable IFRS-defined subtotal; the income tax effect and effect on non-controlling interests for each reconciling item; and an explanation of how those tax effects were determined.

An important clarification for unlisted entities: the MPM requirements are triggered by the use of adjusted performance measures in public communications outside the financial statements — not by ASX listing status. If an unlisted Tier 1 entity uses measures such as EBITDA or adjusted operating profit only internally (for example, in management reports, monthly board packs, or internal dashboards), those measures would not meet the definition of an MPM because they are not being communicated publicly. The trigger is external public use: ASX announcements, investor presentations, press releases, media briefings, or other public-facing communications.

3.4 Enhanced Aggregation and Disaggregation Principles

AASB 18 provides significantly more detailed guidance on how entities should group items in the primary financial statements and notes (AASB, 2024a, paras 25–46). The standard introduces defined roles for the primary statements versus the notes: primary statements provide a useful structured summary, while notes provide further disaggregation and additional information. Entities must group items based on shared characteristics and must not obscure material information by either excessive aggregation or unnecessary disaggregation. The use of the label “other” (e.g. “other income”) is specifically discouraged unless no more informative description can be found.

3.5 Changes to the Cash Flow Statement

Consequential amendments to AASB 107 (AASB, 2024c) mean that where the indirect method is used, the reconciliation of operating cash flows must now start with operating profit (as defined by AASB 18) rather than profit before tax. Additionally, the classification options that previously existed for interest and dividends paid and received have been removed. For most non-financial entities, interest paid and dividends paid must be presented as financing activities, while interest and dividends received must be presented as investing activities.

4. Implications for Australian Businesses

4.1 Systems and Chart of Accounts

Existing general ledger structures and reporting taxonomies were not designed with AASB 18’s five-category model in mind. Finance teams will need to review and potentially restructure their chart of accounts to ensure every income and expense item can be tagged to the correct category. In some cases, a single general ledger account may need to be split — for instance, where an impairment account captures both impairments on operating assets (classified as operating) and impairments on investments in associates (classified as investing). ERP configurations, consolidation tools, and reporting platforms will all need to be updated.

4.2 Contractual and Compensation Impacts

Many loan covenants, earn-out arrangements, and executive remuneration plans reference specific profit measures from the financial statements — such as EBIT, EBITDA, or operating profit. The new definitions under AASB 18 may change the numerical value of these measures (IASB, 2024b, para BC15). Businesses should review existing contracts and agreements to assess whether the adoption of AASB 18 triggers unintended consequences, such as covenant breaches or changes in bonus calculations.

4.3 Investor and Stakeholder Communication

The introduction of standardised operating profit and profit before financing and income taxes will change the headline numbers that companies report. Where a company has previously presented its own version of “operating profit” that includes items now classified as investing (such as equity-accounted profits from joint ventures), the new AASB 18 operating profit figure will be different. Proactive communication with investors, lenders, and boards will be essential to manage expectations and explain the transition.

4.4 Audit Considerations

Auditors will need to assess whether income and expenses have been correctly classified across the five categories, whether the new mandatory subtotals are correctly calculated, and whether MPM disclosures meet the detailed requirements of the standard. Early engagement with auditors is strongly recommended to avoid surprises during the first reporting period under AASB 18.

4.5 Transition and Comparatives

AASB 18 must be applied retrospectively (AASB, 2024a, paras 133–146). In the year of first adoption, entities must present a reconciliation between the restated comparative amounts (under AASB 18) and the amounts previously presented (under AASB 101). This reconciliation is also required for comparative periods presented in interim financial statements under AASB 134 (AASB, 2024d). The practical implication is that the “dual reporting” workload during transition will be significant, and the earlier that preparation begins, the smoother the process will be.

5. Illustrative Example — Retail Organisation

The following illustrative example is based on a hypothetical Australian retail entity operating a national chain of home and lifestyle stores. Numbers are illustrative and designed to demonstrate the structural changes under AASB 18.

5.1 Current Presentation Under AASB 101

5.2 New Presentation Under AASB 18

Under AASB 18, the same underlying transactions are reclassified as follows. Note that the net profit remains unchanged — AASB 18 changes presentation, not recognition or measurement.

5.3 What Changed and Why

The key reclassifications for the retail entity include the following. The $2.3M previously lumped together as “other income” has been disaggregated: the $1.0M JV share and the $500K interest income and $800K dividend income have moved to the investing category. This leaves operating profit at $13.0M — a figure that now purely represents the performance of the retail operations themselves. Interest expense of $3.7M moves to the financing category. The net profit of $8.12M remains identical; only the presentation has changed.

For a retail business, this is particularly useful. Investors can now see, on one line, what the stores actually earned from trading — before the effects of how the business is financed or the returns from peripheral investments. That clarity supports better benchmarking against pure-play retail peers.

6. Illustrative Example — Manufacturing Organisation

The following illustrative example is based on a hypothetical Australian manufacturing entity operating two plants producing building materials and construction products. The entity has more complex transactions including foreign exchange exposures, a significant equity-accounted associate, multiple borrowing facilities, and a gain on disposal of surplus land.

6.1 Current Presentation Under AASB 101

6.2 New Presentation Under AASB 18

For the manufacturing entity, the reclassification is more complex. The $3.9M “other income” must be disaggregated: $1.4M gain on surplus land disposal stays in operating (disposal of PPE used in operations); $1.2M share of associate profit and $400K interest income move to investing; $550K FX gain on trade receivables stays in operating (FX classified with the underlying item); and $350K FX gain on USD borrowings moves to financing (FX classified with the underlying liability). Finance costs are reclassified to financing. Restructuring costs remain in operating.

6.3 Key Observations for the Manufacturing Entity

The manufacturing entity example illustrates several important principles. First, the FX classification rule: foreign exchange differences must follow the underlying item (AASB, 2024a, para 60). FX on trade receivables (an operating asset) stays in operating, while FX on USD borrowings (a financing liability) moves to financing. This is a new and granular requirement that many entities will find challenging to implement in their existing systems.

Second, the gain on land disposal remains in operating because the land was PPE used in the entity’s operations. Had it been an investment property held for capital appreciation, the gain would likely sit in the investing category.

Third, restructuring costs stay in operating. Under AASB 18, there is no concept of “non-operating” or “unusual” items being presented below operating profit. If management wants to highlight these costs separately, they would need to use an MPM (e.g. “Adjusted Operating Profit excluding restructuring”) and provide the required reconciliation disclosures. This gives management the flexibility to communicate their view of underlying performance — but within a disciplined, audited framework.

7. Illustrative Example — MPM Disclosure

Suppose the illustrative manufacturing entity communicates an “Adjusted Operating Profit” in its investor presentations that excludes restructuring costs and the one-off land disposal gain. Under AASB 18, this qualifies as an MPM and must be disclosed as follows (illustrative):

8. What Businesses Should Do Now

With the transition date effectively upon us for June year-end reporters, the time for preparation is now. Waypost recommends the following practical steps.

9. Conclusion

AASB 18 does not change how transactions are recognised or measured — net profit remains the same. What it does change is the structure and transparency of the profit and loss statement, introducing a standardised framework that replaces decades of preparer discretion with defined categories, mandatory subtotals, and a disciplined approach to adjusted performance measures.

For most entities, the transition is manageable but not trivial. It requires a methodical review of how income and expenses are currently classified, an honest assessment of which performance measures will qualify as MPMs, and practical updates to systems, contracts, and reporting processes. The earlier this work begins, the more considered the outcome — and the less disruptive the transition will be for finance teams, auditors, and the board.

Waypost works alongside finance teams and boards to translate regulatory change into clear, practical action. If you would like to discuss how AASB 18 applies to your organisation, or need support with your impact assessment and transition planning, please get in touch.