IFRS PS 1 KPIs, MPMs and credibility: how management commentary connects IFRS 18 and strategy

KPIs and MPMs IFRS 18 management commentary – Few aspects of corporate reporting reveal governance quality as clearly as the way performance is measured. Strategy statements can be eloquent, risk disclosures can be extensive, and sustainability narratives can be carefully balanced. But when performance measures are vague, opportunistic or poorly explained, credibility erodes quickly—often long before financial results deteriorate.

Key Performance Indicators (KPIs) and Management Performance Measures (MPMs) are not neutral descriptors of reality. They are expressions of intent. They show what management pays attention to, what it rewards, and which trade-offs it is willing to make. For boards and audit committees, this makes performance measures a governance issue first and a reporting issue second.

IFRS 18 makes this explicit. By formalising the role of Management Performance Measures in the statement of profit or loss, it forces a long-overdue confrontation between internal performance logic and external financial communication. IFRS Practice Statement 1 provides the narrative counterpart by requiring management to explain why these measures matter and how they connect to strategy.

Together, they end a long-standing ambiguity in corporate reporting: the ability to manage the business on one set of metrics while explaining performance externally on another.

Performance measures as behavioural instruments

Performance measures do not merely describe outcomes; they shape behaviour. What gets measured influences what gets prioritised, invested in and defended when results are under pressure.

Consider a management team that publicly emphasises long-term value creation, resilience and sustainability, while internally tracking short-term adjusted earnings as the primary success metric. Even if both narratives are technically defensible, the mismatch is governance-relevant. Incentives, decisions and risk appetite will follow the metrics, not the rhetoric.

This is why weak KPI frameworks often coincide with strategic drift. When too many metrics are disclosed, none truly matter. When metrics change frequently, accountability fades. When adjusted measures are highlighted without explanation, trust erodes.

IFRS Practice Statement 1 addresses this directly. It requires management commentary to focus on the key performance measures that management actually uses to manage the business—not an exhaustive catalogue, but a prioritised set that reflects strategic intent.

IFRS 18 reinforces this by drawing those same measures into the formal reporting perimeter when they are used to communicate financial performance.

Here is the link to the IFRS Practice Statement 1: Management Commentary on IFRS.org.

The historical gap IFRS 18 closes

Before IFRS 18, performance reporting operated in two parallel worlds.

In the first world, IFRS financial statements presented standardised subtotals defined by accounting rules. In the second, management presentations, annual report narratives and investor materials featured adjusted results, alternative earnings concepts and bespoke KPIs.

The connection between the two was often weak. Reconciliations existed, but they were easy to overlook. Narrative explanations were selective. Management commentary often acted as a buffer, smoothing inconsistencies through language rather than clarity.

IFRS 18 fundamentally changes this dynamic. It acknowledges a simple reality: management uses non-IFRS performance measures because standard IFRS subtotals do not always reflect how performance is managed internally. Instead of ignoring this, IFRS 18 brings those measures into the open and subjects them to discipline.

KPIs and MPMs IFRS 18 management commentary IFRS 18 management performance measures KPIs and credibility corporate reporting management commentary IFRS 18 performance measures governance strategy and performance measures IFRS

KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary KPIs and MPMs IFRS 18 management commentary

An MPM under IFRS 18 is not just any alternative metric. It is a measure that:

reflects management’s view of financial performance,
is used to communicate performance externally,
and is not explicitly defined by IFRS.

Once a measure meets that definition, it cannot remain an informal narrative construct. It must be defined, explained, reconciled and presented consistently.

That is a governance shift, not a technical one.

Credibility lives between numbers and narrative

Numbers alone do not create credibility. Narrative alone does not either. Credibility emerges from the coherence between the two.

IFRS Practice Statement 1 requires management commentary to explain performance in a way that is consistent with the financial statements. IFRS 18 raises the stakes by reducing the space for ambiguity in how performance is presented.

When management emphasises an adjusted operating result as its primary performance indicator, users can now expect:

a clear definition,
a reconciliation to IFRS figures,
and an explanation of why this measure is relevant to strategy.

This forces a level of honesty that was previously optional. Management can still exercise judgment—but that judgment must now be visible.

For boards, this coherence test becomes a powerful oversight tool. Inconsistencies between strategy, KPIs, MPMs and IFRS results are no longer matters of style; they are indicators of governance risk.

Read more on the New Zealand External Reporting Board, XRB.nz: IFRS Practice Statement 1 – Management Commentary (MPS1).

KPIs as a test of strategic seriousness

A strategy that cannot be translated into credible performance measures is not a strategy—it is an aspiration.

IFRS Practice Statement 1 is explicit that management commentary should explain how strategy is monitored and assessed. That means identifying which KPIs matter, how they reflect strategic priorities, and how performance against them influences decisions.

IFRS 18 ensures that when those KPIs are financial in nature and used externally, they must withstand scrutiny.

This creates a direct accountability chain:
strategy → KPIs → MPMs → financial reporting → narrative explanation

Once this chain exists, superficial storytelling becomes much harder. The cost of inconsistency rises, and with it, the incentive to be disciplined.

Read more in our blog regarding IFRS 18: IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance.

Why boards should care deeply

For boards and audit committees, IFRS 18 is not primarily an accounting update. It is a governance signal.

It tells boards that performance communication is no longer something that can be delegated entirely to finance or investor relations. It requires board-level judgment about:

KPIs and MPMs IFRS 18 management commentary

which measures truly reflect success,
how those measures influence behaviour and remuneration,
and whether the performance story being told is one the board is prepared to defend.

In that sense, KPIs and MPMs are not about optics. They are about credibility under pressure.

KPIs, MPMs and consistency: where governance is tested over time

If Part I established that performance measures are a credibility issue, Part II addresses the moment where credibility is most often lost: when measures change, drift, or are selectively emphasised. This is where IFRS 18 and IFRS Practice Statement 1 quietly but decisively raise the bar.

Most governance failures around performance reporting do not arise from outright misstatement. They arise from inconsistency. Measures that evolve without explanation. Adjustments that proliferate when performance weakens. KPIs that fade from view when they no longer tell a convenient story.

IFRS 18 is designed to confront exactly this behaviour—not by prohibiting judgment, but by forcing it into the open.

KPIs versus MPMs: a distinction with consequences

KPIs and MPMs are often used interchangeably in practice, but IFRS 18 draws an important line.

KPIs are broader. They may be financial or non-financial, quantitative or qualitative. They reflect how management monitors progress toward strategic objectives. Many KPIs sit outside the financial statements and are discussed primarily in management commentary.

MPMs, by contrast, are a subset of financial performance measures. They are financial subtotals or metrics that:

reflect management’s view of financial performance,
are used to communicate performance externally,
and are not explicitly defined by IFRS.

Once a measure qualifies as an MPM, it is no longer just a narrative choice. It enters the formal reporting perimeter. It must be defined, reconciled, explained and presented consistently.

This distinction matters because it removes a long-standing escape route. In the past, management could treat adjusted results as informal communication tools. Under IFRS 18, that informality disappears. Measures that matter must now withstand discipline.

Consistency is not rigidity

A common misconception is that IFRS 18 demands static performance measures. It does not. Business models evolve, strategies shift, and metrics can lose relevance. IFRS Practice Statement 1 explicitly recognises this reality.

What changes under IFRS 18 is not the ability to change measures, but the cost of doing so without explanation.

When KPIs or MPMs change, management commentary is expected to explain:

why the previous measure no longer reflects performance appropriately,
how the new measure better aligns with strategy,
and what this change means for comparability over time.

This explanation is not a technical footnote. It is a governance moment. It reveals whether management is adapting thoughtfully or reacting defensively.

Boards should treat metric changes as signals, not housekeeping. A change in how success is measured is a statement about priorities, risk tolerance and confidence.

Opportunistic adjustment: the credibility trap

One of the clearest governance risks in performance reporting is opportunistic adjustment. This occurs when:

adjustments increase during periods of underperformance,
“non-recurring” items recur with striking regularity,
or exclusions systematically remove downside while leaving upside intact.

IFRS 18 does not ban adjustments. It makes them visible and comparable.

By requiring reconciliation of MPMs to IFRS-defined totals, IFRS 18 forces management to show exactly how its preferred performance view differs from statutory results. IFRS Practice Statement 1 then requires management commentary to explain why those differences matter.

This combination shifts the discussion. The question is no longer “is this adjustment allowed?”, but “does this adjustment credibly reflect how the business is managed?”

For audit committees, this is a powerful reframing. It moves oversight away from compliance toward substance.

Metric drift and narrative erosion

Another subtle but damaging pattern is metric drift. KPIs do not change abruptly, but emphasis shifts:

a once-prominent KPI is mentioned less frequently,
another quietly takes its place,
and over time, the performance story changes without explicit acknowledgment.

IFRS Practice Statement 1 addresses this by requiring consistency and explanation across reporting periods. Users should be able to trace how performance measures evolve and why.

IFRS 18 reinforces this discipline for financial measures. Because MPMs must be presented consistently, unexplained shifts attract attention from auditors and users alike.

Metric drift is rarely accidental. It often reflects discomfort with results or changing internal priorities. By forcing continuity or explanation, IFRS 18 turns drift into a conscious governance choice.

Financial and non-financial KPIs: reconnecting the narrative

Another governance weakness IFRS 18 indirectly exposes is the artificial separation between financial and non-financial KPIs.

Management commentary frequently presents non-financial KPIs—customer satisfaction, employee engagement, sustainability metrics—as strategic drivers, while financial performance is explained elsewhere using adjusted earnings or cash flow measures.

IFRS Practice Statement 1 challenges this fragmentation. It expects management to explain how performance measures relate to strategy and value creation. That implies causality: non-financial KPIs should help explain future financial outcomes.

IFRS 18 strengthens this expectation. Once financial MPMs are disciplined and reconciled, vague claims about non-financial drivers become harder to sustain. If a non-financial KPI is truly strategic, users will reasonably expect to see its financial implications reflected—or at least explained.

This does not mean every ESG metric must translate neatly into earnings. It does mean that disconnected storytelling loses credibility.

Consistency across audiences

A final but critical governance dimension is consistency across audiences. Boards, investors, analysts and employees often receive different performance narratives through different channels.

IFRS 18 narrows the space for divergence. If a measure is used externally to communicate performance, it must now meet a defined standard. IFRS Practice Statement 1 then requires management commentary to align narrative explanation with that measure.

For boards, this reduces information asymmetry. It becomes harder for management to emphasise one set of metrics internally and another externally without explanation.

Consistency does not mean simplification. It means coherence.

Why this matters for boards

For boards and audit committees, Part II is where IFRS 18 becomes operational.

Oversight questions shift from:

“Is this compliant?” to:
“Is this consistent, explainable and defensible over time?”

Metric consistency, adjustment logic and change explanations become governance indicators. They reveal how management responds to pressure—and whether credibility is treated as an asset or a convenience.

Reconciliation, oversight and credibility under pressure

Now the point is addressed where credibility is ultimately proven: when performance is reconciled, challenged and overseen under pressure.

This is where IFRS 18 and IFRS Practice Statement 1 converge most forcefully. Together, they shift performance reporting from a persuasive exercise to an explanatory discipline, with reconciliation and governance oversight as its backbone.

Reconciliation as a governance mechanism, not a technical formality

Reconciliation is often treated as a compliance requirement—something to be included, but rarely discussed. IFRS 18 fundamentally reframes reconciliation as a credibility mechanism.

By requiring Management Performance Measures to be reconciled to IFRS-defined subtotals, IFRS 18 forces management to expose the bridge between its internal view of performance and externally standardised results. This bridge is where judgment lives.

Every reconciliation answers a set of governance-relevant questions:

What does management believe should be excluded or adjusted?
Why are those items considered non-representative of performance?
Are these exclusions consistent with how the business is actually managed?
Do they persist over time, or are they opportunistic?

IFRS Practice Statement 1 then places responsibility on management commentary to explain the logic behind these choices. Numbers alone are insufficient. Without narrative explanation, reconciliation becomes mechanical. With explanation, it becomes meaningful.

For boards, this is a critical shift. Reconciliation is no longer about arithmetic correctness; it is about defensibility of judgment.

When reconciliation exposes uncomfortable truths

One of the most important consequences of IFRS 18 is that it makes certain patterns harder to obscure.

Repeated “non-recurring” items become visible. Structural costs labelled as exceptional lose plausibility. Adjustments that systematically remove downside but leave upside untouched raise questions.

None of this is prohibited by IFRS 18. What changes is that such patterns must now be owned and explained.

This is where management commentary becomes decisive. If adjustments reflect how management genuinely evaluates performance, the explanation should be coherent and stable over time. If they do not, reconciliation exposes the gap.

Credibility is rarely lost because users disagree with management’s view. It is lost when management appears unwilling to explain it honestly.

The expanded role of the audit committee

The combined effect of IFRS 18 and IFRS Practice Statement 1 materially expands the role of the audit committee.

Oversight of performance reporting now includes:

reviewing the selection and definition of MPMs,
assessing the consistency of KPIs and MPMs over time,
challenging the rationale for adjustments,
ensuring alignment between performance measures, strategy and remuneration,
and evaluating whether narrative explanations genuinely reflect how decisions are made.

This is not a technical burden; it is a governance opportunity.

Audit committees that limit their focus to compliance risk missing the deeper issue: credibility risk. Inconsistent metrics, weak explanations and unexplained changes erode trust long before financial misstatements occur.

IFRS 18 gives audit committees a stronger basis to ask substantive questions—not about what is allowed, but about what is defensible.

Performance measures as early-warning indicators

One of the least appreciated governance benefits of disciplined KPI and MPM reporting is its function as an early-warning system.

Before performance collapses, performance narratives often change:

KPIs are redefined,
emphasis shifts to alternative measures,
adjustments increase,
or explanations become more abstract.

These signals appear in management commentary before they appear in the numbers.

IFRS Practice Statement 1 encourages multi-period consistency and explanation, making such shifts easier to detect. IFRS 18 reinforces this by anchoring financial performance measures more firmly in the financial statements.

Boards that track KPIs and MPMs longitudinally—rather than treating each year in isolation—gain insight into how management’s confidence, assumptions and priorities evolve under pressure.

In that sense, disciplined performance reporting is not just about transparency. It is about anticipation.

From persuasion to explanation

At its core, IFRS 18 represents a philosophical shift in corporate reporting.

Historically, performance reporting often aimed to persuade. Measures were selected to present results in the most favourable light. Narrative was used to soften inconsistencies. Judgment was exercised, but rarely exposed.

IFRS 18 does not eliminate judgment. It requires judgment to be visible.

Management is still permitted—indeed expected—to present its view of performance. But that view must now be:

clearly defined,
reconciled to IFRS figures,
consistently applied,
and explained in management commentary.

This does not weaken management’s voice. It strengthens it by making it defensible under scrutiny.

Strategy, metrics and trust

Ultimately, KPIs and MPMs are the connective tissue between strategy and trust.

Strategy without metrics is rhetoric. Metrics without explanation are noise. Narrative without reconciliation is persuasion.

IFRS 18 and IFRS Practice Statement 1 close the gap between these elements. They require management to align:

what it claims to prioritise,
how it measures success,
and how it explains performance.

For boards, this alignment becomes a core governance responsibility. Credibility is not something that can be delegated to finance, investor relations or communications. It must be owned at the top.

Integrated conclusion – Credibility is demonstrated, not declared

KPIs and Management Performance Measures are where governance becomes visible. They reveal what management truly values, how it responds to pressure and whether it is willing to stand behind its judgments.

IFRS 18 does not restrict management’s ability to explain performance. It restricts its ability to do so without discipline. IFRS Practice Statement 1 complements this by requiring coherent narrative explanation.

Together, they transform performance reporting from a presentation exercise into a governance discipline.

The question for boards is no longer whether adjusted measures or KPIs should be used. The question is whether management is willing to:

explain them clearly,
apply them consistently,
reconcile them transparently,
and defend them over time.

Because in the end, credibility is not claimed in strategy statements or sustainability narratives.

It is earned in the measures management chooses—and in the discipline with which they are explained when results are under pressure.

FAQ’s – KPIs and MPMs IFRS 18 management commentary

FAQ 1 – What is the difference between KPIs and MPMs under IFRS 18?

Consolidated and unconsolidated financial statements

KPIs are broader performance indicators used to monitor strategic objectives and may be financial or non-financial. Management Performance Measures (MPMs) under IFRS 18 are a specific subset of financial performance measures that reflect management’s view of financial performance and are used externally. Once a measure qualifies as an MPM, it must be clearly defined, reconciled to IFRS figures and consistently presented. This distinction turns certain KPIs from narrative tools into regulated reporting elements.

FAQ 2 – Why does IFRS 18 change the credibility of performance reporting?

IFRS 18 removes the informal space in which adjusted performance measures could previously operate. By requiring reconciliation, consistency and explanation of MPMs, IFRS 18 forces management to expose its judgment. Credibility no longer depends on persuasive narrative, but on whether performance measures are coherent, defensible and aligned with strategy over time.

FAQ 3 – Are adjusted or alternative performance measures still allowed under IFRS 18?

Yes. IFRS 18 does not prohibit adjusted measures. Instead, it legitimises them under strict conditions. If management uses an adjusted measure to communicate performance externally, it must be treated as an MPM: clearly defined, reconciled to IFRS totals and explained in management commentary. The standard shifts the focus from permissibility to accountability.

FAQ 4 – How do IFRS 18 and IFRS Practice Statement 1 work together?

IFRS 18 disciplines the numerical presentation of performance, while IFRS Practice Statement 1 disciplines the narrative explanation. Together, they ensure that performance measures used internally, presented externally and explained in management commentary are aligned. This closes the gap between strategy, metrics and reporting and turns performance communication into a governance mechanism.

FAQ 5 – What is the role of the audit committee in overseeing KPIs and MPMs?

Under IFRS 18, audit committees must look beyond technical compliance. Their role includes assessing whether MPMs genuinely reflect how the business is managed, whether adjustments are consistent and defensible, and whether narrative explanations align with strategy and remuneration. Weak metric discipline is a credibility risk, not just a reporting issue.

FAQ 6 – Why are KPIs and MPMs considered early-warning indicators for governance risk?

Before financial performance deteriorates, changes often appear in performance narratives: KPIs shift, adjustments increase, or emphasis changes. IFRS 18 and IFRS Practice Statement 1 make these shifts more visible and harder to explain away. Boards that track KPIs and MPMs over time can detect governance stress earlier than through financial results alone.