IFRS 18 and Management Performance Measures (MPMs): The New Language of Performance

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.

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2. What exactly is an MPM?

An MPM is any subtotal of income and expenses that:

1. Is not specified by IFRS, and

2. Is used in public communications outside the financial statements, and

3. 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”.

Under IFRS 18, companies must:

• Present each MPM in a single dedicated note, not scattered across the report;

• Reconcile it to the most directly comparable IFRS subtotal (usually Operating profit or PBFT);

• Quantify tax and non-controlling interest (NCI) effects for every adjustment; and

• Explain why management believes the measure is useful.

This discipline brings comparability and prevents “metric shopping”—the old practice of re-labelling earnings until the story fits.

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3. Why the IASB stepped in

For years, analysts navigated a jungle of bespoke metrics. “Adjusted EBITA before special items” in one company might equal “Normalized Operating Income” in another. The European Securities and Markets Authority (ESMA) already required reconciliation for Alternative Performance Measures (APMs), but IFRS stopped at the door of the income statement.

The IASB realised that investors were increasingly relying on these adjusted figures—often more than on the IFRS totals themselves. Without consistent disclosure, trust and comparability eroded.

IFRS 18 therefore brings the unofficial “bridge tables” into the official notes, subject to audit, consistency checks, and IFRS terminology.

And here is the original pdf of IFRS 18 Presentation and Disclosure in Financial Statements.

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4. The heart of the new requirement: reconciliation and transparency

Each MPM must include a clear reconciliation from an IFRS subtotal (Operating profit or PBFT) to the custom metric. Every line must show:

The reconciliation is the heart of IFRS 18. It transforms a management-defined number into an auditable bridge from the IFRS subtotals. Without it, an MPM would be just a slogan.Below is the standard illustrative table:

Reconciliation from Operating profit (IFRS subtotal) to Underlying EBIT (CU million)

Reconciling item	Amount	Tax effect	NCI effect
Operating profit (IFRS subtotal)	520	–	–
Add back: restructuring costs	+40	–8	0
Add back: inventory step-up (purchase accounting)	+10	–2	0
Subtract: one-off gain on asset sale	–15	+3	–
Underlying EBIT (MPM)	555

Narrative explanation

Each line in this bridge must be anchored in a clear accounting rationale. IFRS 18 requires the reconciling items to be directly derived from the financial records, not invented outside the ledger.

Operating profit (IFRS subtotal).
This is now a prescribed subtotal under IFRS 18. It groups income and expenses from operating activities before financing and tax. Every MPM that measures trading performance must start here.

Restructuring costs (+40).
Many entities isolate restructuring charges because they distort year-on-year comparability. Adding them back indicates management views them as non-recurring. The –8 tax effect represents deferred-tax relief; zero NCI means the charge was in wholly-owned subsidiaries. Boards must justify whether these costs truly lack recurrence — IFRS 18 expects the note to explain that assessment.

Inventory step-up (+10).
In acquisitions, fair-value adjustments to inventory increase COGS upon sale. By reversing this effect, management shows performance as if inventories were measured at historical cost. The related tax effect (–2) reflects the temporary-difference reversal.

Gain on asset sale (–15).
Here the company removes a profit that inflated operating results but has little predictive value. IFRS 18 demands symmetry: removing income items that flatter performance is as important as adding back expenses that depress it. The +3 tax figure reflects tax on the gain.

Underlying EBIT 555.
The resulting subtotal becomes an auditable management measure. IFRS 18 requires a short paragraph describing why it is useful (“Management believes Underlying EBIT better reflects recurring profitability of core operations.”). The reconciliation ensures every reader can rebuild the number back to IFRS Operating profit — and the auditor can test every link.

Interpretation for users

Analysts should read this table vertically and ask: which adjustments are recurring, and which are judgement calls? A pattern of frequent “non-recurring” costs may suggest that management’s normal operations are more volatile than portrayed. IFRS 18 does not prohibit judgement; it forces disclosure so judgement becomes visible.

Read more on our blog: EBITDA – 1 Best complete read.

5. MPMs and governance: when “transparency” meets “accountability”

From a governance standpoint, MPMs are powerful—and risky. They sit at the intersection of strategy, communication, and control.

• the MPM is defined by policy,
• its calculation is consistent over time,
• reconciliations are complete and neutral, and
• disclosures are reviewed by auditors and the audit committee.

A way to detect your MPM’s indicators could be by looking at IFRS 15 Performance obligations, like in: Performance obligations in a property management contract.

6. The anatomy of a compliant MPM disclosure

1. Label and definition – avoid implying an IFRS term; “EBITDA” is acceptable only if clearly defined.
2. Reason for use – what management monitors and why investors find it useful.
3. Calculation method – identify reconciling items, policies, and data sources.
4. Reconciliation – bridge from IFRS subtotal to the MPM.
5. Tax and NCI effects – per reconciling line.
6. Consistency statement – disclose any change, reason, and its effect.

Example disclosure excerpt:

Management defines ‘Underlying EBIT’ as Operating profit adjusted for items that are significant in size or nature and not expected to recur frequently. Management believes this measure provides a consistent basis for comparison of performance between periods. The reconciliation to Operating profit is shown below. The income tax effect of each adjustment is disclosed, and the measure is consistent with that used in the prior year.

7. How MPMs differ from other measures

How MPMs differ from other performance measures

Measure type	Defined by	Appears where	Audit scope
IFRS subtotal (e.g. Operating profit)	IFRS 18 / IASB	Statement of profit or loss	Fully audited
Management Performance Measure (MPM)	Entity-specific (per IFRS 18 rules)	Notes to the financial statements	Within audit scope (assurance required)
ESMA Alternative Performance Measure (APM)	ESMA Guidelines (EU)	Management report / MD&A	Generally unaudited (but subject to review)
Key Performance Indicator (KPI, non-financial)	Entity-specific (policy or framework)	Sustainability / MD&A sections	Outside IFRS audit scope (often assured separately)

The key distinction: MPMs live inside the financial statements and must be consistent with IFRS subtotals. That makes them subject to assurance—raising the credibility bar.

8. IFRS 18 Cross-industry illustrations (overview)

Cross-Industry Overview of Typical Management Performance Measures (MPMs)

Industry	Typical MPM 1	Typical MPM 2	Reconciliation from
Retail	Retail Operating Margin ex Markdowns	Like-for-Like EBIT	Operating profit / PBFT
Consumer Packaged Goods (CPG)	Brand-Investment Adjusted EBIT	Core Gross Profit after Mix	Operating profit
Manufacturing	Underlying Industrial EBIT	Aftermarket Contribution	Operating profit
Automotive	Adjusted Auto Margin	EBITDA ex Leases	Operating profit / PBFT
Airlines	Unit Operating Margin (per ASK)	Cash Cost per ASK	Operating profit
Telecommunications	Service EBITDA	Adjusted Operating Profit ex Spectrum	PBFT / Operating profit
Software / SaaS	Non-IFRS Operating Profit ex SBC	Net Revenue Retention Gross Margin	Operating profit
Energy	Underlying Replacement-Cost Profit	PBFT ex Decommissioning	Operating profit / PBFT
Banks	Underlying Operating Profit ex Credit Volatility	Core Banking PBFT	Operating profit / PBFT
Insurance	Adjusted Insurance Service Result	PBFT ex Catastrophe Losses	Operating profit / PBFT

How to read the table

Each industry emphasises the economics that drive value creation. IFRS 18 does not dictate which MPMs to use; it only standardises how they are disclosed. Understanding the rationale behind each helps both preparers and users apply the framework consistently.

Retail.
Retailers live and die by margin discipline. “Retail Operating Margin ex Markdowns” isolates underlying trading by removing strategic price-cut programs. The reconciliation usually starts from Operating profit; adjustments include markdown programs, store-closure costs and supply-chain transformation charges. Analysts can see whether price pressure or restructuring is the real profit driver.

Consumer Packaged Goods (CPG).
These groups often spend heavily on brand launches. By adjusting for exceptional marketing or purchase-accounting inventory step-ups, Brand-Investment Adjusted EBIT shows operating momentum stripped of one-time shocks.

Manufacturing.
The key question is: “How much of EBIT comes from ongoing production versus restructuring or acquisition noise?” Hence Underlying Industrial EBIT reconciles Operating profit by removing plant-closure costs or integration expenses. Aftermarket Contribution is sometimes shown to highlight the profitability of service revenues, again bridged from Operating profit.

Automotive and Airlines.
These sectors face cyclical and regulatory costs. Adjusted Auto Margin backs out recall and regulatory-credit effects; Unit Operating Margin per ASK removes fleet-transition anomalies. IFRS 18 forces each to disclose the exact value of those exclusions, curbing selective optimism.

Telco and Software.
Service EBITDA and Non-IFRS Operating Profit ex SBC are common investor metrics. IFRS 18 brings them inside the notes, demanding explicit definitions (“SBC = share-based compensation”). The reconciliation reveals whether recurring operating leverage or capitalisation policy drives the result.

Energy, Banks, Insurance.
Long-cycle sectors historically use bespoke measures—Replacement-Cost Profit, Underlying Operating Profit, or Combined Operating Ratio. Under IFRS 18, each must now anchor to Operating profit or PBFT with line-by-line bridges. That makes “adjusted” energy or financial metrics transparent and comparable.

Interpretive takeaway

The table is not prescriptive; it demonstrates that IFRS 18 accommodates diversity without sacrificing structure. Whatever label a company chooses, readers will see the skeleton behind it: the IFRS subtotal, the precise adjustments, and their effects on tax and minorities. The MPM becomes a lens, not a mask.

9. Disclosure pitfalls and best practice

Disclosure Pitfalls and Best Practice under IFRS 18

Pitfall	Why it matters	How to fix
Label confusion (“EBITDA” without definition)	Misleads users and implies a standardised definition where none exists.	Provide the explicit formula and starting IFRS subtotal (e.g. PBFT + tax + finance + D&A).
Omitting tax and NCI effects	Breaches IFRS 18 disclosure rules and hides the total impact on equity holders.	Present separate columns or footnotes quantifying both income-tax and non-controlling-interest effects.
Selective adjustments	Creates bias by excluding only unfavourable items.	Apply symmetrical inclusion criteria; document policy and obtain Audit Committee approval.
Inconsistent period use	Destroys comparability and confuses trend analysis.	Disclose any change in definition, explain reasons, and show quantified impact on prior year.
Non-reconcilable metrics	Fails the IFRS 18 test; readers cannot bridge to IFRS subtotals.	Recast as an operational KPI outside the financial statements or redesign to reconcile properly.

Expanded commentary

Each row in this matrix represents a real-world compliance trap.

Label confusion.
Investors often assume “EBITDA” is uniform. IFRS 18 tolerates the label only when defined precisely and reconciled from PBFT or Operating profit. Preparers should include the full formula: EBITDA = PBFT + finance costs + tax + D&A. Anything else must carry a clarifying suffix such as “management EBITDA (defined below)”.

Tax and NCI omissions.
The new requirement for dual-column disclosure is easily overlooked. If a reconciling item affects deferred tax or subsidiaries with minority interests, that effect must be quantified. A simple note like “tax effect immaterial” is acceptable only when supported by analysis.

Selective adjustments.
Some issuers historically adjusted only negative events. IFRS 18 demands symmetry: gains and losses of similar nature must be treated consistently. Documenting inclusion criteria—e.g., “items > CU 10 million or > 5 % of Operating profit”—helps avoid bias allegations.

Inconsistency over time.
Changing definitions is allowed but must be explained. The disclosure should quantify the prior-period impact had the new definition applied then. Readers can then restate their trend analyses.

Non-reconcilable metrics.
Some “operational KPIs” (like volume per employee) do not reconcile to IFRS subtotals. These should be presented outside the financial statements, not disguised as MPMs. Doing so protects both the company and auditors from scope confusion.

Governance insight

Audit committees should review this table annually as a checklist. Many restatements stem from unclear MPM definitions rather than accounting errors. Embedding IFRS 18 logic in disclosure controls turns this matrix into a preventive tool, not a post-mortem.

10. MPMs and digital reporting (machine-readable)

The IASB designed IFRS 18 with the IFRS Taxonomy in mind. Each MPM can be tagged with:

• its label (entity-specific element);
• the tax/NCI effects as tagged facts.
• the reconciliation relationship to IFRS subtotals; and

That makes performance measures machine-traceable—a major step toward transparent digital annual reports.

11. Governance checklist for audit committees

• Inventory all MPMs used externally.
• Approve definitions and inclusion/exclusion criteria.
• Verify that reconciliations are consistent with IFRS 18 format.
• Challenge management’s “usefulness” statements.
• Ensure internal controls over data and tax/NCI allocations.
• Monitor changes in measures and disclosure wording.

Good governance is about alignment between story and substance.

12. Looking ahead: the strategic impact

IFRS 18 is not a cosmetic exercise. It will:

• Re-standardise the income statement worldwide;
• Force convergence between GAAP and investor metrics; and
• Elevate narrative discipline across industries.

For analysts, the benefit is clarity; for preparers, the challenge is integration; for boards, the message is accountability.

The best-run companies will treat MPMs as an integrated part of governance—not an afterthought. The story you tell investors will need the same audit trail as the numbers behind it.

Conclusion

IFRS 18 turns “management performance” from narrative art into structured reporting. It doesn’t silence storytelling—it makes it verifiable. The bridge from Operating profit to “Underlying EBIT” is no longer a back-of-deck slide but part of the audited record.

For readers, that means less fog. For boards, it means more responsibility.
For everyone, it means performance will finally speak the same language.

Read more on the ifrs.org site in the IFRS Accounting Standards Navigator on IFRS 18 Presentation and Disclosure in Financial Statements.

FAQ’s – IFRS 18 Management Performance Measures