What is the impact of IFRS 18 on Controlling and Performance Management?

Author of this issue: Felix Moisel and Frank Poschadel

Dear Controlling Community,

the introduction of IFRS 18, effective from January 1, 2027, brings significant changes to the presentation of the statement of profit or loss (P&L) in external financial reporting.

One of the primary changes is the implementation of new subtotals, such as operating profit (or loss) and profit or loss before financing and income taxes, which we covered in in our October 2024 edition of this newsletter.

In this newsletter edition, we focus on whether and how this new standard can also impact internal reporting by the Controlling department for performance management purposes, as most companies use P&L-based subtotals to manage not only the company as a whole, but also internal reporting units.

Enjoy reading.

Who is affected?

When it comes to internal management reporting and externally published reporting of financial statements, companies typically fall into two major categories.

The first category?consists of companies that favor close or full alignment and integration between internal and external reporting. These organizations typically use the same KPIs and P&L subtotals for both purposes. They apply external accounting standards for their calculation, and rely on highly integrated IT systems (e.g., SAP S/4HANA) that provide a single source of truth for financial data. This approach is increasingly favored due to lower process costs, reduced reconciliation efforts, and streamlined communication with business partners.

The second category?includes companies that decouple internal reporting from external reporting. They use distinct KPIs and subtotals for performance management, tend to calculate these measures using specific adjustments (e.g., by including/excluding certain accounts, by excluding one-time effects), and often operate with less integrated IT systems. While this approach offers flexibility, it can lead to higher process costs and complexity in reconciling internal and external reporting.

IFRS 18 affects companies in both categories, though the nature of the impact differs slightly.

For?companies in the first category, the new standard will directly influence internal reporting. The mandated subtotals, such as operating profit & loss, will replace existing P&L-based KPIs. Changes in subtotals may also require adjustments to Controlling reports, particularly if shifts occur due to the company’s business model and its impact on the definition of specified main business activities. If the effects of IFRS 18 are significant, these companies will need to invest time and effort in realigning finance master data, updating processes, and communicating changes both internally and externally.

For companies in the second category, the impact will be different. While internal management reporting may not require immediate adjustments, external reporting will still need to comply with the new IFRS 18 requirements. All public companies are required to disclose their financial performance management system as part of their quarterly and annual reports. If the subtotals used for performance management differ significantly from those mandated by IFRS 18, they may be classified as Management-defined Performance Measures (MPMs).

Challenges with management KPIs to measure performance & profitability

With the introduction of IFRS 18, companies that rely on key performance indicators (KPIs) such as EBITDA or Adjusted EBITDA for performance management must assess whether these measures fall within the scope of Management-defined Performance Measures (MPMs) as defined by the new standard. MPMs must be disclosed in the notes to the financial statements and are subsequently subject to audit. This will cause additional effort and complexity in the financial closing and reporting process.

However, not all specific KPIs used for performance management fall within the scope of MPMs as defined by the new standard. If a company reports Adjusted EBITDA as a key performance indicator, and in its calculation, it excludes income or expense items which are considered as part of the IFRS-defined Operating Profit or Loss (e.g., foreign exchange gains/losses related to the operating business), this measure qualifies as an MPM. The same principle applies if income or expense items from another IFRS subtotal are included. If a KPI such as EBIT is fully aligned with one of IFRS 18’s mandatory subtotals and does not include income or expense items classified under different IFRS-defined categories, it does likely not qualify as an MPM. For example, Gross Profit and Operating Profit or Loss before depreciation, amortization, and impairments (before IFRS 18 commonly referred to as EBITDA) are likely not considered MPMs, as they are fully contained within IFRS 18’s mandatory subtotal Operating Profit or Loss.

In addition, the calculation of the subtotals is not just a matter of including or excluding certain types of income or costs. It will also be impacted by the business models of a company and the definition of specified main business activities by IFRS 18.

Challenges with business models and specified main business activities

Under IFRS 18, operating activities are defined as those that arise from an entity’s primary business activities. For a manufacturing company, this would typically include income and expenses related to production, sales, and distribution. However, the classification of minor activities from other business models, such as leasing or financing for customers becomes less straightforward.

If leasing or financing activities are considered integral to the company’s main business (e.g., providing financing options to customers to support product sales), they may be classified as operating activities. If these activities are incidental or secondary to the core business, IFRS 18 may require them to be classified as investing activities (e.g., income from leasing assets) or financing activities (e.g., interest income from customer financing).

From a performance management standpoint, it is often logical to view all parts of the business – including minor leasing or financing activities?– as contributing to operating profit or loss. This approach ensures that the financial performance of the entire business is reflected in internal reports, providing a comprehensive view of profitability.

To address these challenges, companies may need to:

1. Reassess business model definitions: Clearly define which activities are integral to the main business and justify their classification as operating activities under IFRS 18.
2. Use Management-defined Performance Measures (MPMs): If certain activities are excluded from operating profit under IFRS 18 but are critical for internal performance management, companies can present MPMs in external reports, accompanied by reconciliations to the IFRS 18 subtotals.

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Conclusion

The introduction of IFRS 18 marks a significant shift for external financial reporting and can also have implications for internal performance management. Companies that are highly integrated in their reporting processes will need to carefully consider how to adapt their steering logic to align with the new standards. This may involve reassessing business model definitions or leveraging Management-defined Performance Measures (MPMs). For others, the transition to IFRS 18 might provide a chance to finally align their internal performance management KPIs with accounting standards to reduce complexity and streamline communication inside and outside the business.

Event Highlights 2025

February 27th-28th: Controllertag - Jahresforum für Controlling und Financial Leadership/ Vienna, Austria (held in German)

March 12th: Moderne Planung in der Praxis - Schneller – effizienter – flexibler planen/ Zurich, Switzerland (free of charge, held in German)

March 25th: Intelligente Optimierung des Abschlussprozesses – Voraussetzungen und Potentiale von KI im Abschluss/ Zurich, Switzerland (free of charge, held in German)

March 27th: Finance & Controlling Process Excellence Experts/ Stuttgart, Germany (held in German)

April 3rd: Horváth AI & Data Convention/ Düsseldorf, Germany (held in English)

May 21st-22nd: Fachkonferenz Reporting & Konsolidierung/ Hamburg, Germany (held in German)

May 25th-27th: TECH by Handelsblatt/ Heilbronn, Germany (held in English)

What's next on issue #08?

Weakening markets, volatile raw material prices and geopolitical challenges are putting pressure on many companies. Greater transparency through effective performance management is needed, while efficiency must increase, and costs decrease. In our latest CFO Study 2025 on Next-Gen Performance Management, 78% of surveyed CFOs prioritize cost reduction. In the upcoming issue we will outline key actions and strategies to manage this transition, enabling savings of up to 36% in performance management.

Stay tuned.