IFRS 18 Management Performance Measures in Industrial Manufacturing (Discrete & Process)

1 Purpose and Positioning – IFRS 18 MPM’s Industrial Manufacturing

Industrial manufacturing is cyclical, capital-intensive and highly diverse. CFOs report on projects that span multi-year cycles, mix of new-equipment and service revenues, and constant restructuring to adapt capacity. Traditional IFRS subtotals often fail to show the real operating rhythm of these businesses.

IFRS 18 – Presentation and Disclosure in Financial Statements changes that. Paragraphs IFRS 18.117–125 require entities to present any management-defined subtotal of income and expenses (Management Performance Measure, or MPM) used in public communications and to reconcile it to the nearest IFRS subtotal with tax and non-controlling-interest effects (IFRS 18.123 (d), IFRS 18.B141).

Two sector-specific MPMs capture how manufacturers actually run their business:

1. Underlying Industrial EBIT (UI-EBIT) – Operating profit + restructuring costs + purchase-accounting effects on COGS.

2. Aftermarket Contribution (AMC) – Operating profit – new-equipment margin + aftermarket margin (defined).

These bridges translate the CFO’s internal performance language into auditable figures that meet IFRS 18’s transparency and comparability requirements.

Read more on IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance, the cornerstone blog in this serie on IFRS 18.

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2 Core Editorial Principles Applied

• Technical authority. All interpretations follow IFRS 18.117–125 and application guidance IFRS 18.B134–B141, plus IFRS 3 and IAS 37 for specific adjustments.

• Governance focus. Each reconciling item is explained in terms of decision rights and control evidence (Board approval, ICFR policy, audit trail).

• Comparability. The same definitions must be used across periods and entities (IFRS 18.124–125).

• Transparency. Every adjustment shows tax and NCI effects and is described as required by IFRS 18.123 (a–d).

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3 Underlying Industrial EBIT (UI-EBIT)

3.1 Definition and IFRS 18 Context

Formula

UI-EBIT = Operating profit + Restructuring costs + Purchase-accounting effects on COGS

According to IFRS 18.117, this is a management-defined performance measure because it adds back specific income-statement items to Operating profit, a defined IFRS subtotal (IFRS 18.118). It is used publicly in earnings calls and analyst presentations and therefore must be disclosed and reconciled in the notes (IFRS 18.122–123).

3.2 Reconciliation Table

Reconciling item	Amount (CU m)	Tax effect (CU m)	NCI effect (CU m)
Operating profit (IFRS subtotal)	2 480	–	–
Add back: Restructuring costs (personnel, plant closures)	+180	–45	–3
Add back: Purchase-accounting effects on COGS (fair-value uplift of inventory from IFRS 3)	+95	–24	–1
Underlying Industrial EBIT (UI-EBIT)	2 755

Notes: Tax and NCI effects per IFRS 18.123 (d) and IFRS 18.B141. Amounts illustrative.

3.3 Explanation of Adjustments

Restructuring Costs

These include employee-termination benefits, facility closure expenses, and production line relocation charges recognised under IAS 37 and IAS 19. They are episodic responses to structural changes in the business model and distort comparability between periods.

Management adds them back to present an “underlying” view of recurring manufacturing profitability. Under IFRS 18.23 (a) the note must explain why this adjustment is useful and that it does not remove ordinary variability (IFRS 18.BC354–BC358).

Governance requirement: board-approved restructuring plan evidence and ICFR control for identification and classification.

Read more on Restructuring costs in our blog: IFRS 3 Recognition of restructurings or exit activities.

Purchase-Accounting Effects on COGS

Business combinations under IFRS 3 often create temporary COGS distortions when inventory is remeasured to fair value. As the acquired stock is sold, cost of sales rises without a matching margin benefit.

Adding back this effect neutralises acquisition-timing noise and aligns the result with the acquirer’s organic operations. The reconciliation must tie to the IFRS 3 note and show the tax/NCI impact (IFRS 18.123 (d)).

Control evidence: acquisition accounting worksheet and COGS journal audit trail.

Read more in respect of purchase accounting in the acquisition method in our blog.

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3.4 Interpretation and Governance Perspective

The measure Underlying Industrial EBIT (UI-EBIT) separates what truly defines the industrial engine from what temporarily distorts it.

Industrial companies operate in long cycles—design, build, deliver, service—and are constantly adjusting capacity to demand.

Restructuring programmes, acquisition integrations and portfolio refocusing are part of life.

But for investors and boards, it is essential to know how the factory performs when the noise of change is stripped away.

That is what UI-EBIT expresses.

By adding back restructuring and purchase-accounting effects, the measure shows the profitability of steady-state operations: the margin that the enterprise can generate when it is not closing plants or absorbing fair-value uplifts from newly acquired inventories.

It reframes volatility without pretending it doesn’t exist.

Under IFRS 18.123 (a), management must explain why this subtotal provides useful information; the usefulness lies precisely in this lens on recurring industrial productivity.

From a governance viewpoint, UI-EBIT is a test of discipline.

Audit committees should insist that each “add-back” is supported by board-approved documentation—a restructuring plan, an integration budget, an IFRS 3 valuation memo—and that the policy defining eligibility is public and consistent year on year.

A cost cannot be called exceptional simply because it is inconvenient; IFRS 18 BC354-BC358 make clear that management performance measures must not filter out normal variability.

CFOs therefore need a policy threshold: a restructuring charge qualifies only when it relates to a distinct strategic decision, not routine workforce realignment.

For the purchase-accounting adjustment, governance demands a sunset clause.

Once the acquired inventory has been sold, the add-back must disappear.

Investors should be able to see the amount, the expected duration and the linkage to the acquisition note.

Otherwise, what began as a fair adjustment becomes a perpetual smoothing mechanism.

When properly governed, UI-EBIT becomes more than a headline—it becomes the board’s internal compass for judging operating efficiency.

It allows directors to discuss industrial performance in the same language auditors test and analysts interpret.

Each reconciling line tells a governance story: a restructuring plan authorised, an acquisition integrated, a distortion quantified and then retired.

This is IFRS 18 at work: transforming management commentary into a verifiable performance narrative.

Read more on corporate governance in the COSO-model: COSO Internal Control Framework: Lessons from Global Corporate Failures or including ESG-reporting use King IV™ from South Africa instead.

4 Aftermarket Contribution (AMC)

4.1 Definition and IFRS 18 Context

AMC = Operating profit − New Equipment Margin + Aftermarket Margin (defined)

For most manufacturers, aftermarket activity—service, spare parts, upgrades—drives the stable cash flow that balances volatile new-equipment cycles.

Under IFRS 18.117–123, AMC qualifies as a management-defined performance measure because it adds and subtracts specific components of Operating profit to isolate this recurring earnings stream.
It is used publicly in analyst briefings and therefore must be reconciled and explained in one note (IFRS 18.122–123).

4.2 Reconciliation Table

Reconciliation from Operating profit to Aftermarket Contribution (AMC)

Reconciling item	Amount (CU m)	Tax effect (CU m)	NCI effect (CU m)
Operating profit (IFRS subtotal)	1 820	–	–
Subtract: New equipment margin (project-based deliveries)	–640	+155	–2
Add: Aftermarket margin (service, spares, retrofits)	+710	–170	–1
Aftermarket Contribution (AMC)	1 890

Notes: Tax and NCI effects per IFRS 18.123(d) and IFRS 18.B141. Figures illustrative.

4.3 Explanation of Adjustments

New Equipment Margin

Represents profit from the sale of new machines, turbines or systems—typically volatile, project-based and cyclical.
Management removes it to highlight the stability of service and spare-parts revenue.

Accounting source: revenue and cost-of-sales lines recognised under IFRS 15.

Governance point: the CFO must document the split between project and aftermarket margins, ensuring consistency with segment disclosures under IFRS 8.
Frequent reclassification undermines comparability; therefore, a fixed policy approved by the audit committee is essential.

Aftermarket Margin

Covers maintenance contracts, spare-parts sales, upgrades and retrofits—transactions that generate predictable cash flow and high return on capital.
Adding this back shows the recurring earnings power embedded in the installed base.

The reconciliation should tie to internal service-segment reporting and to external segment disclosures (IFRS 8.32).
Tax and NCI allocation follow IFRS 18.123(d); controls must trace each margin component to verified ledger accounts.

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4.4 Interpretation and Governance Perspective

The Aftermarket Contribution (AMC) tells a story that most income statements never reveal: a manufacturer’s real strength is not in the drama of selling new equipment, but in the quiet, repetitive reliability of keeping that equipment running.

The rhythm of industrial business is cyclical—order booms, production peaks, then lulls follow—but the aftermarket hums continuously beneath it, generating cash when factories pause.

In this sense, AMC functions as the economic heartbeat of an industrial group.

By carving out the new-equipment margin and adding back the service margin, it translates a mixed-cycle Operating profit into a measure of recurring resilience.
The adjustment does not “create” profit; it re-categorises the same earnings to show which portion stems from predictable maintenance and upgrades rather than one-off project deliveries.

From a governance perspective, this distinction matters profoundly.

Boards and investors want to know whether management’s performance narrative rests on durable economics or temporary surges.
AMC provides that lens—but only if applied with symmetry and discipline.

Audit committees must challenge management to include all elements of service performance, not only the favourable ones.

Losses on warranty contracts, under-recovered service hours, or penalties on long-term maintenance agreements must remain inside the measure; otherwise AMC becomes a public-relations tool rather than a performance metric.

IFRS 18.123(a) explicitly requires preparers to explain why the measure is useful and how it represents performance faithfully.
This means the disclosure must describe the logic of separating the cycles, not merely list adjustments.

It should read as an explanation of business model, not a justification for exclusions.

Good practice is to link AMC directly to IFRS 8 segment data, showing that the aftermarket segment’s margins reconcile with the figures in the MPM table.
When executed with transparency, AMC bridges operations, finance and assurance.

It turns the service business—often hidden within “other revenues”—into a visible, auditable contributor to enterprise value.

For the CFO, it offers a common language between engineers, accountants and investors: one measure that connects workshop activity to shareholder return.

Used in this way, AMC becomes more than a KPI; it is a governance instrument, a demonstration of how IFRS 18 converts narrative into evidence.

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5 Industry Examples – How Leaders Communicate Performance

Siemens AG
Reports “Industrial Business EBITA” excluding purchase-price-allocation amortisation and restructuring. Under IFRS 18 ¶122–123, these adjustments become part of a single MPM note, with clear tax and NCI columns—essentially a UI-EBIT template.

ABB Ltd
Presents “Operational EBITA,” adding back restructuring and PPA amortisation. IFRS 18 will require ABB to reconcile this measure line by line to Operating profit and to disclose the tax basis per B141.

Caterpillar Inc.
Communicates “Adjusted Operating Profit” stripping out restructuring and currency-translation effects. Under IFRS 18, the currency item would not qualify unless it reflects a genuine exceptional event; recurring FX volatility must stay in Operating profit.

GE Vernova
Uses “Segment Profit” based on EBITA before restructuring. Applying IFRS 18 turns this into an MPM with documented linkages to statutory subtotals and clear audit-committee oversight.

Atlas Copco
Discloses “Adjusted Operating Profit Margin,” removing purchase-price-allocation amortisation. Under IFRS 18, that adjustment must be shown with tax/NCI effects and accompanied by an explanation of why it provides useful information.

Summary insight: these manufacturers already follow 80 % of IFRS 18’s discipline. The new standard simply formalises it—forcing each company to publish reconcilable, tax-aware bridges that investors can audit.

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6 IFRS 18-Compliant Disclosure Note (Template)

Management-defined performance measures

The Group uses two MPMs to supplement its IFRS results: (1) Underlying Industrial EBIT (UI-EBIT) and (2) Aftermarket Contribution (AMC). Both represent subtotals of income and expenses not defined by IFRS but used in public communications (IFRS 18.117–118). Reconciliations to Operating profit are presented above in accordance with IFRS 18.123 (a–d). Tax and NCI effects are shown per IFRS 18.B141. Management believes UI-EBIT is useful to assess recurring industrial performance, and AMC to understand the stability of aftermarket earnings. Definitions and consistency have been reviewed by the Audit Committee; no changes were made in 2025.

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7 Governance and Quality Assurance

• Policy ownership: each MPM defined in an approved accounting manual.

• Audit Committee review: ensure recurring restructuring or FX items are not treated as exceptional.

• ICFR integration: controls for identification, calculation and approval documented and tested.

• External audit scope: auditors validate completeness, accuracy and neutrality.

• Comparability: definitions consistent across subsidiaries and years (IFRS 18.124–125).

Strong governance turns MPMs from investor messaging into part of the company’s system of internal control—evidence of disciplined stewardship.

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Conclusion – Performance with Evidence

Industrial manufacturers live in a world of cycles: orders rise and fall, plants expand and contract, currencies swing. IFRS 18 does not smooth that reality; it makes it transparent. UI-EBIT exposes the profitability of the underlying industrial engine, cleansed of restructuring and acquisition noise. AMC reveals the durability of the installed base—the steady hum of service and parts that sustains value between booms. When reconciled, disclosed and controlled under IFRS 18.117–125, these measures replace impressionistic storytelling with auditable logic.

For CFOs, the reward is credibility; for audit committees, a sharper governance instrument; for investors, a coherent bridge from operations to earnings. IFRS 18 turns “underlying” into demonstrable. Performance is no longer a claim—it is evidence.

Also read other MPM-blogs in this serie: IFRS 18 Management Performance Measures in Consumer Packaged Goods (CPG/FMCG) and IFRS 18 Management Performance Measures in Consumer Retail.

FAQ’s – IFRS 18 MPM’s Industrial Manufacturing

IFRS 18 MPM’s Industrial Manufacturing

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