1 – The Architecture of IFRS Financial Statements: Principles Before Standards
General principles financial statements – Financial statements under IFRS are often approached as a collection of standards: IAS 1 for presentation, IAS 7 for cash flows, IFRS 15 for revenue, IFRS 16 for leases, IFRS 9 for financial instruments. In practice, however, this standards-first mindset frequently obscures the deeper structure that holds the entire framework together. IFRS does not function as a rulebook. It functions as a principle-based architecture, designed to translate economic reality into a coherent financial narrative.
At the foundation of that architecture lies the Conceptual Framework for Financial Reporting. It defines the purpose of financial statements, identifies their primary users, and establishes the qualitative characteristics that make financial information useful. Financial statements exist to provide information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. This objective is deceptively simple, yet far-reaching. It immediately frames financial reporting as a decision-support system rather than a compliance artefact.
From this foundation flow several core assumptions that permeate all IFRS financial statements. Accrual accounting ensures that transactions are recognised when economic events occur, not merely when cash is exchanged. Going concern assumes that the entity will continue operating for the foreseeable future, shaping both measurement and presentation choices. These assumptions are not technical footnotes; they are existential premises. When either is undermined, the entire financial statement structure requires reassessment.
Within this architecture, IFRS distinguishes four interconnected layers: recognition, measurement, presentation and disclosure. Recognition determines whether an item belongs in the financial statements at all. Measurement determines how it is quantified. Presentation determines where and how it appears, and disclosure provides the contextual narrative that allows users to interpret the numbers. Errors in practice often arise not from misapplying a specific standard, but from confusing these layers or treating them in isolation.
IAS 1 Presentation of Financial Statements plays a central role at this level. It does not prescribe numbers; it prescribes structure, coherence and discipline. It governs the overall presentation of the financial statements, their comparability over time and between entities, and the minimum information required to understand them. IAS 1 is therefore not a formatting standard. It is a governance standard, defining how economic reality must be communicated in a way that is faithful, consistent and intelligible.
This architectural perspective explains why technically compliant financial statements can still mislead. History provides ample examples—Enron, Wirecard, Carillion—where detailed rules were followed, yet the overarching principles were violated. The lesson is clear: without a principled understanding of the architecture of financial statements, compliance becomes performative rather than informative.
2 – Fair Presentation and True and Fair View: The Governing Principle
Among all general principles underlying IFRS financial statements, fair presentation occupies a unique position. IAS 1 requires that financial statements present fairly the financial position, financial performance and cash flows of an entity. This is not a slogan; it is a binding requirement that supersedes mechanical compliance.
Fair presentation is achieved through faithful representation of transactions and events, in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Conceptual Framework. Faithful representation, in turn, requires completeness, neutrality and freedom from error. Together, these concepts form the ethical spine of IFRS reporting.
IFRS 16 Leases presentation in cash flows
Most changes from IAS 17/IFRIC 4 to IFRS 16 relate to lessees, the companies renting a car, office or warehouse.
At first, IFRS 16 has affected balance sheet and balance sheet-related ratios such as the debt/equity ratio. Aside from this, IFRS 16 also influenced the income statement, because an entity now has to recognise interest expense on the lease liability (obligation to make lease payments) and depreciation on the ‘right-of-use’ asset (that is, the asset that reflects the right to use the leased asset).
Due to this, for lease contracts previously classified as operating leases the total amount of expenses at the beginning of the lease period will be higher than under IAS 17. Another consequence of the changes in presentation is that EBIT and EBITDA will be higher for companies that have material operating leases.
IFRS 16 also changes the cash flow statement. Lease payments that relate to contracts that have previously been classified as operating leases are no longer presented as operating cash flows in full. Only the part of the lease payments that reflects interest on the lease liability can be presented as an operating cash flow (depending on the entity’s accounting policy regarding interest payments).
Cash payments for the principal portion of the lease liability are classified within financing activities. Payments for short-term leases, leases of low-value assets and variable lease payments not included in the measurement of the lease liability remain presented within operating activities.
Presentation and disclosures
In the statement of cash flows, lease payments are classified consistently with payments on other financial liabilities:
- The part of the lease payment that represents cash payments for the principal portion of the lease liability is presented as a cash flow resulting from financing activities.
- The part of the lease payment that represents interest portion of the lease liability is presented either as an operating cash flow or a cash flow resulting from financing activities (in accordance with the entity’s accounting policy regarding the presentation of interest payments).
- Payments on short-term leases, for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are presented as an operating cash flow.
A simple example to classify the movements in Right-of-use assets is as follows:
A simple example to classify the movements in Lease liabilities is as follows:
On the balance sheet, the right-of-use asset can be presented either separately or in the same line item in which the underlying asset would be presented. The lease liability can be presented either as a separate line item or together with other financial liabilities. If the right-of-use asset and the lease liability are not presented as separate line items, an entity discloses in the notes the carrying amount of those items and the line item in which they are included.
In the statement of profit or loss and other comprehensive income, the depreciation charge of the right-of-use asset is presented in the same line item/items in which similar expenses (such as depreciation of property, plant and equipment) are shown. The interest expense on the lease liability is presented as part of finance costs. However, the amount of interest expense on lease liabilities has to be disclosed in the notes.
IFRS 16 Leases presentation in cash flows IFRS 16 cash flow presentation for leases Cash flow statement presentation under IFRS 16 IFRS 16 lease cash flow classification IFRS 16 lease payments in the statement of cash flows
IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows
Why business continuity is a governance judgment, not an accounting assumption
1. Going concern: from accounting premise to governance judgment
Going concern governance – In corporate reporting, going concern is often introduced as a technical premise: financial statements are prepared on the assumption that the entity will continue operating for the foreseeable future. Under IAS 1, that foreseeable future is at least twelve months after the reporting date. Auditors test management’s assessment under ISA 570, disclosures are drafted, and the subject disappears into the back half of the annual report.
That framing is profoundly misleading.
Going concern is not, at its core, an accounting assumption. It is a governance judgment. It requires directors to form an explicit, reasoned view on whether the organisation remains a viable economic entity — not merely today, but across a period in which uncertainty, stress and disruption are plausible rather than hypothetical.
Accounting asks: Can we reasonably assume continuity for reporting purposes?
Governance must ask: Is continuity still defensible given how this organisation actually works, is financed and is exposed?
Those are not the same questions.
Boards that collapse the second question into the first often discover — too late — that compliance has quietly replaced judgment.
2. Why going concern failures are rarely technical failures
When companies fail, post-mortem analyses tend to focus on technical shortcomings: weak controls, flawed forecasts, aggressive accounting, insufficient disclosure. These elements matter, but they are rarely decisive on their own.
The recurring pattern in major corporate failures is different:
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liquidity pressure was visible long before collapse;
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refinancing dependency increased gradually, not suddenly;
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covenant headroom eroded over multiple reporting periods;
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operational underperformance was rationalised as temporary;
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boards accepted reassurance rather than forcing confrontation.
In other words, the warning signs were not absent — they were absorbed, normalised and postponed.
Carillion did not fail because cash flow models were missing. Wirecard did not fail because no one understood liquidity. Imtech did not fail because covenants were unknown. These organisations failed because boards lost their ability — or willingness — to treat going concern as a decisive governance question rather than an administrative hurdle.
Once that shift occurs, continuity becomes something that is “managed” rather than judged. And when continuity is managed instead of judged, governance quietly erodes.
When liquidity management meets accounting discipline
Bank overdrafts and cash and cash equivalents – Cash is often called the lifeblood of an organisation. It is the number boards look at first, lenders monitor continuously and analysts instinctively trust. Yet precisely because cash feels so intuitive, the accounting around it is often treated as self-evident. Few areas demonstrate this tension more clearly than the treatment of bank overdrafts within cash and cash equivalents.
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At first glance, the question seems almost trivial: is an overdraft cash, financing, or something in between? In practice, the answer cuts much deeper. It touches on treasury behaviour, legal enforceability, liquidity governance and earnings quality. And it is exactly here that IFRS deliberately resists simplicity.
This article explains not just what IAS 7 allows, but why it draws the lines where it does, how those lines interact with IAS 32, and why overstretching the concept of “cash equivalents” often signals deeper governance weaknesses.
Why overdrafts are never just a technical footnote
In many organisations, overdrafts are operationally invisible. Treasury dashboards show one net liquidity position. Cash pools sweep balances automatically. Payment factories run daily without friction. From that perspective, an overdraft feels less like debt and more like a momentary dip in the bloodstream of cash.
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Financial reporting, however, is not designed to mirror internal dashboards. It exists to communicate economic reality to outsiders: investors, creditors, supervisors. And for them, the difference between liquidity management and structural financing is fundamental.
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This is why IAS 7 starts from a strong presumption: bank borrowings are financing activities. Only in tightly defined circumstances does an overdraft escape that classification.
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That exception is narrow by design.
Consolidated or unconsolidated financial statements
1 – Why consolidation is not a presentation choice but a reporting-entity decision
At first glance, consolidation may appear to be a technical accounting exercise: a set of mechanical steps that combine balances, eliminate intragroup transactions and produce a single set of numbers. In practice, however, consolidation is something far more fundamental. It is the accounting expression of a deeper economic and governance decision: which activities, assets and risks belong to the enterprise that external users are asked to assess.
Investors, lenders and other providers of capital do not fund legal entities in isolation. They fund economic systems — collections of activities that generate cash flows, consume capital and expose stakeholders to risk. Consolidated financial statements exist precisely because those economic systems often transcend the boundaries of individual legal entities. A parent company may hold its production facilities in one subsidiary, its intellectual property in another, its financing in a third and its distribution channels in yet another. Viewed separately, none of these entities tells a meaningful story. Viewed together, they form the business.
This is why consolidation is not about aggregation, and certainly not about presentation preference. It is about defining the reporting entity: identifying the perimeter within which performance, financial position and cash flows are to be interpreted as a coherent whole.
Misunderstanding this point has consequences. If the reporting boundary is defined too narrowly, risks and obligations may be hidden outside the consolidated view. If it is defined too broadly, performance may be blurred and accountability diluted. In both cases, users of financial statements are misled — not because the numbers are wrong, but because the entity to which those numbers relate is poorly defined.
From a governance perspective, consolidation is inseparable from accountability. Control implies responsibility; responsibility demands transparency. Where an entity has the power to direct activities and is exposed to the resulting variability of returns, excluding that entity from the consolidated financial statements would weaken the link between decision-making and reporting. Conversely, including entities over which such power does not exist would create a false sense of control and stewardship.
This is why consolidation cannot be reduced to ownership percentages or legal form. It is a reflection of economic reality and governance substance, expressed through accounting. Everything that follows — recognition, measurement, segmentation and performance presentation — depends on getting this boundary right.
Before turning to specific standards, it is therefore essential to understand how IFRS approaches the concept of the reporting entity itself.
Chapter 2 – The reporting entity under IFRS: structure before numbers
IFRS does not begin with numbers. It begins with structure.
At the heart of IFRS financial reporting lies the concept of the reporting entity: an economic unit for which financial information is prepared and presented to users who cannot demand tailored information. This concept precedes — and logically dominates — questions of measurement, classification or disclosure. Without a clearly defined reporting entity, financial statements lose their interpretive anchor.
Under IFRS, a reporting entity is not necessarily a legal entity. It may consist of a parent and one or more subsidiaries that together form a single economic unit. What binds these components together is not legal ownership as such, but control: the ability to direct relevant activities and to benefit from, or be exposed to, the resulting returns.
This sequencing is crucial. IFRS first asks: who belongs to the reporting entity? Only once that question is answered does it move on to how should assets, liabilities, income and expenses be recognised and presented? In other words, scope comes before accounting.
The emphasis on control reflects an explicit rejection of form-over-substance thinking. Legal structures can be designed to fragment activities, isolate risks or achieve regulatory objectives. Economic power, however, is often exercised through contracts, governance arrangements or de facto influence rather than simple share ownership. IFRS acknowledges this reality by treating control as a matter of substance, not form.
The reporting entity concept also explains why IFRS draws sharp distinctions between different types of relationships:
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entities that are controlled and therefore consolidated,
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arrangements where control is shared,
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entities over which significant influence exists but not control,
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and investments that are purely financial in nature.
Each of these relationships represents a different degree of power, exposure and accountability — and therefore a different place in the reporting architecture.
Importantly, the reporting entity boundary is not designed to maximise transparency at all costs. IFRS deliberately avoids overreach. Including entities over which an organisation does not have the ability to direct activities would suggest a level of stewardship that does not exist. Excluding entities that are controlled would undermine the usefulness of the financial statements by disconnecting reported performance from actual decision-making power.
Seen in this light, consolidation is neither optional nor cosmetic. It is the outcome of a structured assessment of control that determines where the reporting entity begins and ends. This assessment forms the foundation for all subsequent reporting layers: segment information, disclosures about unconsolidated interests and, ultimately, the way performance is presented and interpreted.
Only once this foundation is firmly in place does it make sense to examine the detailed rules on control, joint arrangements, significant influence and disclosure. These rules do not create the reporting entity; they operationalise it.
Intermezzo – Legal entity, economic entity and reporting entity: three different lenses
In discussions about consolidation, three concepts are frequently used as if they were interchangeable: the legal entity, the economic entity and the reporting entity. In reality, they describe different layers of the same organisation. Failing to distinguish between them is one of the most persistent sources of confusion in financial reporting and governance.
A legal entity is a construct of law. It comes into existence through incorporation or registration, has legal personality, and can own assets, incur liabilities and enter into contracts in its own name. Legal entities define where legal accountability sits: which entity can distribute dividends, which entity can default on debt, and which entity can be sued by creditors or regulators. From this perspective, each legal entity stands on its own, regardless of how closely it is connected to others in economic terms.
An economic entity, by contrast, is defined by reality rather than statute. It consists of activities, resources and decision-making processes that together generate cash flows and expose stakeholders to risk. An economic entity may span multiple legal entities, jurisdictions and contractual arrangements. From the standpoint of investors and lenders, it is typically this economic entity — the business as it is actually run — that matters most. Strategy, performance and risk are managed at this level, not at the level of individual legal shells.
1. The quiet revolution inside the income statement
IFRS 18 Management Performance Measures – When the International Accounting Standards Board (IASB) published IFRS 18 – Presentation and Disclosure in Financial Statements, it didn’t just tweak layouts. It fundamentally re-wired how companies tell their performance story. For the first time, IFRS explicitly defines subtotals in the profit and loss statement—including Operating profit and Profit before financing and income taxes (PBFT)—and demands transparency whenever management adds its own layers of meaning on top.
These additions are called Management Performance Measures (MPMs): custom metrics management uses to explain performance in press releases, investor presentations or annual reports. Under IFRS 18, these can no longer be free-floating non-GAAP inventions. They must be reconciled, disclosed, and auditable.
In short: what once lived in investor decks now has to live inside the financial statements—with a trail of evidence.
2. What exactly is an MPM?
An MPM is any subtotal of income and expenses that:
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Is not specified by IFRS, and
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Is used in public communications outside the financial statements, and
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Represents management’s view of financial performance.
That definition is deliberately broad. It captures “Adjusted EBITDA”, “Underlying EBIT”, “Core Operating Profit”, or “Net income ex-one-offs”.
1. IFRS 18 MPMs Energy Banking Insurance – Purpose & Positioning
Energy producers, banks and insurance companies operate in long cycles with deep capital intensity and high regulatory oversight. Their business models rely on metrics that have existed for decades outside IFRS statutory subtotals — from Replacement Cost Operating Profit (RCOP) in oil & gas, to Core PBFT in banking, to Underlying Operating Profit and Combined Operating Ratios in insurance.
For years, each sector reported a mix of statutory results and bespoke “adjusted” metrics designed to show the underlying economics of long-cycle industries.
Those adjusted metrics became central to how boards steered their organisations, how investors valued them, and how analysts interpreted performance.
But until IFRS 18, those metrics lived outside the discipline of audited financial statements.
They were explained — sometimes persuasively, sometimes selectively — but they were never required to be reconciled, justified, stabilised or governed.
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Read more on IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance, the cornerstone blog in this serie on IFRS 18.
IFRS 18 ends the era of “free-form” adjusted metrics
Under IFRS 18 – Presentation and Disclosure in Financial Statements, any subtotal of income and expenses not defined by IFRS but used publicly becomes a Management Performance Measure (MPM).
This triggers mandatory requirements under IFRS 18.117–125 and IFRS 18.B134–B141, including:
- A full reconciliation to the nearest IFRS subtotal (Operating profit or PBFT).
- A clear statement of why the metric is useful to users (IFRS 18.123(a)).
- A description of how the metric is calculated (IFRS 18.123(b)).
- Presentation of tax and NCI effects for each adjustment (IFRS 18.123(d), IFRS 18.B141).
- Consistency across periods (IFRS 18.124–125).
- A prohibition against filtering out normal variability (IFRS 18.BC354–BC358).
This is a fundamental shift for long-cycle sectors, because their traditional adjusted metrics are:
- Economically justified (RCOP removes inventory effects; Combined Ratios remove investment volatility; Core PBFT removes trading noise).
- But accounting-fragile (they rely on judgement, timing, and classification).
IFRS 18 forces these sectors to explain — not assume — the rationale behind those measures.
It moves adjusted metrics from investor decks and segment slides into audited performance communication.
Why this cornerstone matters
Energy, banking and insurance now face the same challenge: turning deeply embedded industry metrics into IFRS-governed performance indicators.
This blog explains six MPMs, each widely used in its respective sector:
IFRS 18 MPMs Telecom Software – Purpose and positioning
Telecom and software businesses have long reported performance through non-IFRS measures.
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“Service EBITDA” and “Operating Profit ex SBC” fill the gap between statutory subtotals and how these companies actually steer their networks or platforms. Under IFRS 18 – Presentation and Disclosure in Financial Statements, these measures move from investor slide decks into the audited financial statements.
IFRS 18.117–125 define Management Performance Measures (MPMs) as subtotals of income and expenses not defined by IFRS but used in public communications. IFRS 18 requires every MPM to be reconciled to the nearest IFRS subtotal, to explain why it is useful (IFRS 18.123 (a)), how it is calculated (IFRS 18.123 (b)), and to show tax and non-controlling-interest effects (IFRS 18.123 (d); IFRS 18.B141).
For telecom operators, the story revolves around network scale and recurring service revenue; for software vendors, around margins and share-based compensation (SBC).
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This cornerstone demonstrates how IFRS 18 turns those narratives into verifiable metrics:
- Service EBITDA – a telecom measure that reconciles from Operating profit and exposes the recurring cash engine of connectivity.
- Non-IFRS Operating Profit ex SBC – a software measure that adjusts for non-cash share-based compensation and capitalisation differences to show underlying operating leverage.
Both illustrate how IFRS 18 anchors communication in governance: boards must define them precisely, apply them consistently, and document their controls.
Read more on IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance, the cornerstone blog in this serie on IFRS 18.
2 Core Editorial Principles Applied
- Authority and discipline. Interpretations follow IFRS 18.117–125 and IFRS 18.B134–B141, together with IFRS 2 (Share-based compensation), IAS 38 (Intangibles), IFRS 15 (Service Revenue) and IAS 37 (Provisions).
- Governance embedded. Every reconciling item must be policy-based and auditable; definitions approved by the Audit Committee.
- Comparability over creativity. IFRS 18.124–125 require consistent use of definitions; changes must be retrospectively restated or explained.
- Usefulness explained. Each MPM must justify its existence (IFRS 18.123 (a)) and describe how it enhances understanding of performance.
- Faithful representation. IFRS 18.BC 354–BC 358 prohibit filtering out normal variability; MPMs cannot serve as smoothing devices.
- Integration with controls. Because MPMs now sit inside audited statements, they form part of Internal Control over Financial Reporting (ICFR) and are subject to audit testing.
Here is a link to IFRS 18, IAS 38, IFRS 15 and IAS 37.
3 Telecommunications Industry: Service EBITDA
3.1 Definition and IFRS 18 Context
Service EBITDA = Operating profit + Depreciation + Amortisation + Impairment losses – Equipment margin adjustment + Lease cost reclassification
Telecom CFOs manage networks through EBITDA, not statutory operating profit.
1 Purpose and Positioning – IFRS 18 MPM Automotive and Airline Industries
Both the automotive and airline sectors live and breathe on thin margins and relentless cycles. Automotive CFOs wrestle with platform electrification, supply-chain volatility and R&D accounting; airline CFOs balance volatile fuel costs, yield management and fleet utilisation. Until now, IFRS subtotals such as Operating profit or Profit before tax failed to reflect these operational rhythms.
IFRS 18 – Presentation and Disclosure in Financial Statements bridges that gap. Paragraphs 117–125 require any publicly communicated subtotal of income and expenses — a Management Performance Measure (MPM) — to be reconciled to an IFRS subtotal, with clear explanations of usefulness, tax and non-controlling-interest effects (IFRS 18.123 (d), IFRS 18.B141)
For mobility industries, IFRS 18 means converting the KPIs already used internally into auditable, comparable disclosures. It also forces boards to confront a core question: what part of profit is structural, and what part is turbulence?
This cornerstone explains how:
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Automotive groups move from Operating profit to Adjusted Industrial EBIT (AI-EBIT) and Mobility Services Margin (MSM).
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Airlines translate their volatility into Core Operating Profit excluding Fuel (COP-xFuel) and Yield per Available Seat Kilometre adjusted for Ancillaries (YASK-A).
Each measure follows the IFRS 18 structure: definition, reconciliation, explanation of adjustments, governance and assurance.
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Read more on IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance, the cornerstone blog in this serie on IFRS 18.
2 Automotive Industry: Management Performance Measures
2.1 Adjusted Industrial EBIT (AI-EBIT)
Definition and IFRS 18 Context
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:
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Underlying Industrial EBIT (UI-EBIT) – Operating profit + restructuring costs + purchase-accounting effects on COGS.
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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.
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Read more on IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance, the cornerstone blog in this serie on IFRS 18.
2 Core Editorial Principles Applied
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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.
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Governance focus. Each reconciling item is explained in terms of decision rights and control evidence (Board approval, ICFR policy, audit trail).
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Comparability. The same definitions must be used across periods and entities (IFRS 18.124–125).
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Transparency. Every adjustment shows tax and NCI effects and is described as required by IFRS 18.123 (a–d).