May 2026: Episode 3 of Decoding IFRS 18 — Management-defined performance measures (MPMs)

Hello and welcome to IFRS Talks, your source for all things IFRS. I'm your host Anuproindira. Today we're continuing our series "Decoding IFRS 18", which is all about the new presentation and disclosure account extended, affected from one January 2027. As we mentioned during our last episode, an area of IFRS 18 which has generated a lot of debate is management defined performance measures or MPMs for short. The IFRS interpretations committee is expected to be discussing this topic soon and it's already been a focus area for regulators. We covered the basics of MPMs in episodes 1 and 2 of our IFRS 18 series, so today we're planning to spend most of our time on the live discussions and the practical judgments which many are wrestling with as they prepare for implementation. To help me do that, I'm really excited to be joined by two members of our global corporate reporting services team. First day here, welcome back to IFRS Talk. Thanks Anu, it's great to be back. And Tangi, welcome to you as well. This is your first time on the podcast and I have to add that Tangi leads our IFRS 18 accounting working group, so it's really great to have you here today to give us all of your insights. Thanks Anu, happy to be here. Now before we get into the details, I was hoping to start a big picture to set the scene a bit. Heather, could you please remind us why did the ISB decide that new requirements around MPMs were needed in the first place? So Anu, it's a really important question, because it really frames our discussion on MPMs today. Several years, investors and regulators have been telling the ISB the same thing. That is, companies communicate a lot of what we call either alternative or non-gap performance measures, for instance, things like underlying profit or cash early earnings, and these numbers often drive things like share prices, analyst models, and executive remuneration. But up until now, they have lived outside of the general purpose financial statements. So they're often included in other information or in the front half of the annual report. And although some regulators said our expectation about how these should be defined and disclosed, there has been no requirements in the IFRS accounting standards that require transparent disclosure about these measures and how they should be defined and disclosed. So one of the ISB's objectives with IFRS 18 is to bring more discipline into this area, so not to ban the measures, but to bring the most important ones into the general purpose financial statements and to require reconciliation to an IFRS subtitle. So I think in short, it's the same measures that's already used today, but it's now just bringing them into the financial statements with a transparent framework around them that is set out in IFRS 18. All right, that makes sense. So basically there are requirements on your disclosure requirements, which are applicable for the back half of the annual report. We heard it just that everyone is on the same page. Do these new disclosure requirements apply from the effective period 1 January 2027? That's correct. I know they apply from the effective date of IFRS 18, which is 1 January 2027, with comparatives that need to be restitated. And as I'm sure you covered in episodes 102, early adoption is permitted and that is also applicable to MPMs. And we've already seen a couple of early adopters, including our own PWC illustrative financial statements, which we covered in detail in your last episode. So practically speaking, I think preparers need to start working on these now, because as I said, comparatives need to be restitated, so it's good that preparers now start thinking about what the numbers would be for those 2026 comparative figures. All right, so basically everything that we discussed today is likely going to be very front of mind for those that are working through the implementation. Tony, coming to you now, could you give us a definition of measurement defined performance measures in a nutshell? Sure I know. So there are three conditions and all three must be met. What's interesting is that each one of those three conditions has already generated extensive technical debate. It has to be a sub-total of income and expense. That sub-total should be used in public communication outside the financial statements. And it has to communicate management view of an aspect of the financial performance of the entity has a whole. Okay, thanks, Tony. So those conditions aren't easy enough, but as you say, they generated some discussion. So maybe we can go a bit deeper and take these conditions one at a time. So firstly, what counts as a sub-total of income and expenses? I think, I mean, I can personally think of lots of performance measures that entities disclose that don't actually fit neatly in that label. Exactly. And this is one of the first filters. The museum must be a sub-total and it must relate to income and expense. So a pure balance sheet measure, such as nap depth, is not an MPM. A pure cash flow measure, such as free cash flow, is not an MPM either, because it's not a sub-total of income and expense. Adline numbers, like revenues gross at constant currency, are also typically outside the scope. Because revenue itself is an income line item and not a sub-total of income and expense. Not all sub-total of income and expense can be MPM. Measures that are specifically required by IFRS, accounting standards are not MPM. Some measures such as operating profits, profit dollars from continuing operation, profit before tax, and the new sub-total operating profit dollars before depreciation, amortization, and impairment within the scope of IS36, or OPDI, which some people call the IFRS 18 version of EBITDA, are not MPM, even though they may appear in public communication. On the other hand, all those are sub-total of income and expense, even if presented in the P&L, that made the other condition of the definition would be MPM. What it gets interesting is ratio. Think of things like an adjusting operating margin percentage, or return on capital employed, where the numerator is an adjusting profit figure. If the full numerator or the full denominator of a ratio is itself a sub-total of income and expense, then that sub-total is an MPM provided the other part of the definition would be made, if it were disclosed on a standalone basis. So if there is an adjusted sub-total of income and expense buried inside a ratio, you still have to trade that sub-total as an MPM. Some question are being raised right now about what constitutes income and expense, and in particular, whether they have to be existing income or expense of the entity. IFRS 18 said that those income and expense do not have to be accounted for under IFRS accounting standards. A related and relevant question is whether a sub-total of income and expense adjusted by a cash low is still an MPM. Taking a step back, could an adjustment simply be viewed as an income or expense measure on a cash basis, whether than on an electoral basis, this question remains unresolved. Okay, so lots of discussion then on whether something is really a sub-total of income and expenses, and it sounds like especially the latter questions you mentioned are not so black and white, and there might be some judgment that might be required, so thank you for that. That's very interesting. Let's move on to the next condition. I heard that maybe you can help us with this one. What does use in public communications mean? So Anna, IFRS 18 is reasonably clear on the principle. Public communications include management commentary, press releases and investor presentation. It explicitly excludes things like oral communications, written transcripts of those oral communications and social media posts. In most cases, it's obvious. If the measure is in your annual results, press release, or in your invested deck on your website, it's public. In some cases, the information can be more difficult to obtain, but it will still be considered public communication. For example, the filing of an annual report with a regulatory authority will be regarded as public communication if any member of the public is able to access that regulatory filing and download the entity's annual report without the authority approving or denying the request. This is the case, even if there is a registration process or a nominal fee. The context of the regulatory environment of the reporting entity must also be considered when determining whether such a filing qualifies as a public communication or not. On the other hand, if an entity communicates a measure to some, but not all users, for example, to a bank to demonstrate compliance with a loan covenant, or if a private equity portfolio company communicates a measure only to its private equity owner, that will not be considered public communication. Okay. Thanks, Hilda. That sounds logical, but I know that there are some complexities in this area as well. Tanki, maybe you can give us some insights on the tricky question that's sitting on the IFRS interpretations committee's pipeline. I think it's something about confidential investor materials. Yes. This is one of the live debates. I would really encourage this nerd to keep an eye on the upcoming IFRS interpretation committee meeting. The issue is, what about materials that are shared within this thoroughly, but are not publicly available. For example, an investor pitch shared in a one-to-one meeting with an analyst or a potential investor and a confidentiality agreement or an investor presentation shared confidentiality with existing shoulders only. The intuitive answer is no, they are confidential, but some would add that if the measure is genuinely being used to communicate management view of performance to user or financial statements, the fact that the distribution is restricted should not exempt it. This is a submission currently with the IFRS interpretation committee and it hasn't been resolved yet. So for now, preparers need to apply judgments, document it carefully and watch the IFRS interpretation committee agenda closely. Okay, that makes sense. So I'll just need to watch the space, but it sounds like the second condition has generated just as much debate as the first. Now, the third condition of the definition, to me at least, is the most abstract. It's management view of an aspect of financial performance of the entity as a whole. Herda, what does this actually mean? Could you please unpack it for us? I know, it is probably the most judgemental condition that needs to be made for a measure to be an NPM. IFRS ITIN helpfully introduces a rebuttable presumption. If you are using the sub-dirtle in your public communications, it is presumed to communicate management's view. To rebut that, you need reasonable and supportable information showing that the measure isn't communicating management's view of performance and that you have some other reason for using it. Examples given an IFRS ITIN, including using the sub-total without prominence or not using it internally to monitor performance. There are two words in the third condition of the NPM definition that do a lot of heavy lifting. The first is aspect. The measure doesn't have to be a complete view of performance, just an aspect of it. The second is as a whole, meaning the measure should relate to the entity overall and not to a specific part of the entity, such as a single segment or a single region. That's an interesting point on segments. We have a whole accounting standard on segments. IFRS 8, how does an entity determine if a segment measure disclosed in accordance with IFRS 8 meets the definition of an NPM? Tangi, maybe you could help us with that one. Thanks Anu, and this is a tricky one. If you look at the three conditions in the definition, one could argue that those measures are required by IFRS 8 and therefore cannot be NPM. However, I think the ISD is clear in the application guidance and in the basis for conclusion that such measures are not specifically required by IFRS 8. While the disclosure of an operating measure is required under IFRS 8, IFRS 8 does not specifically prescribe a precise and defined segment performance measure. Therefore, a segment measure under IFRS 8 that relates to only one segment could also be NPM if the two other conditions are met. It is used publicly outside of financial statement and it communicates management view of an aspect of the financial performance as a whole. Consequently, judgment may be required when assessing whether an individual reportable segment performance measure communicates an aspect of the financial performance of the entity as a whole. I can think of three examples of situations that might indicate this. Firstly, a scenario where an entity has a single operating and reportable segment. Secondly, a scenario where the performance measure relates to a reportable segment containing a main business activity of an entity and that subtotal is presented directly on the face of the statement of Profitolos. And lastly, a scenario where the performance measure is relevant to and used in only one reportable segment. So for example, adjusted net interest income, which is relevant only to the banking reportable segment, while other reportable segments such as retail do not classify net interest income in the operating category of the statement of Profitolos. Okay, so there's a lot to think about before concluding whether a segment measure is an NPM or not. And Tangi, there's also been some debates on another really interesting question, which is measures that include hypothetical income and expenses. Could you explain to us what this issue is all about? Yes, and this is also a live submission to the IFRS interpretation committee. The question is, if a performance measure is adjusted for event or transaction that did not actually occur, so truly hypothetical item, can such a measure really communicate management view of an aspect of financial performance? A classic example would be a measure presented as if a result of acquisition had been owned for the full year, so-called "performance" or "like for lack numbers". And other would be adjustments that stimulate what results would have been under constant exchange rates, or assuming that a dispose of business had never been part of the group. So there are two schools of salt. One view says, yes, those measures still communicate an aspect of performance, the underlying or comparable performance that management want user to focus on. And the other view says, if you're adding back or adding in a amount that never eats the statement of profit or loss, you are not reflecting the actual financial performance of the entity at all, and so by definition it cannot be an NPM. Thanks Tangi, that's really clear. I'm actually really looking forward to seeing what the committee thinks about this question because it's a really interesting one. Heather, let's talk about the actual disclosures now. So if a measure meets the definition of an NPM, so it meets all of the three conditions that we've just spoken about, what does the entity then have to disclose? So the requirements are extensive. At a high level, you need a description of the aspect of performance, the NPM communicates. You also need to describe why that measure provides useful information about the entity's financial performance. The note should also include a statement that the measure isn't necessarily comparable to similar measures used by the entities. It also should include an explanation of how the NPM is calculated. And then finally, the part that might generate the most effort from prepare is a reconciliation is needed between the NPM and the most directly comparable IFRS to find subtotal, with the income tax effect and the non-controlling interest or NCI effect disclosed for each reconciling item. So it's not just the reconciling items, but also their income tax effect and their NCI effect. And because that income tax effect might not be so easily determinable, you also need to give a description of how you determine that income tax effect. And Heather, is there any flexibility regarding the location of these disclosures in the financial statements? So I know all of the NPM information has to be in a single note in the financial statements. If that includes other information, the NPM specific disclosures needs to be clearly distinguished. And the information cannot be cross-reference to information that's provided outside the financial statements. For instance, if you do it in the front half of the annual report. Okay, that's useful to know. Natani, based on all that you've been hearing and discussing in anticipation of IFRS 18, do you think that entities may be tempted to use the implementation as an opportunity to change the way that they communicate their performance to the market? Indeed, I know. Some entities are using the transition to IFRS 18 as an opportunity to refocus or redefine the measure they use. If you are going to have to bring a measure into the audited financial statement with a full reconciliation, including the tax effects, it might also be the time for management teams to ask themselves. Is it really the right measure? Do we need all of this? Should we simplify our performance measure? However, it's important to keep in mind if you add an NPM drop one or change how one is calculated. You need to explain to users the change, provide the reason for the change, and discuss related, restated comparatives. Unless it's impracticable to do so, and the bar for impracticable is higher. Natani, do you think that changes to NPMs could be common? Change to NPM might be quite common. For instance, as a result of reclassification triggered by applying requirements in other IFRS accountings. For example, reclassification has discontinued operation under IFRS 5, or reclassification arising in the first year of application of IFRS 18. Where this mechanically changed the composition of an NPM, they count as a change in how the entity calculates the NPM, and therefore the disclosure required for a change in NPM would apply in those circumstances. Thanks, Tangi. Here's our coming back to you. You mentioned at the start of our discussion that comparatives will need to be restated for the NPM disclosures in the initial year of application. What about interim reports? Are NPM disclosures required in interim reports as well as annual reports? The short answer is yes. IS-34, the standard on interim financial statements, has also been amended so that the NPM disclosures are required in the interim financial statements. So prepare a student to sue this is only a year-end issue. So for 31 December year-end reporters the quarters and the half years already needs this MPM disclosures. I think something else to keep in mind is that entities may communicate specific subtitles in their interim reports that they don't communicate in their annual reports. For example entities of strong seasonality. Those measures will qualify as MPMs for the interim financial statements but not for the annual ones. So I first I think it's clear that the list of MPMs can be different between your interim and annual reporting. And do you know if we've heard any regulatory reviews on MPMs and the requirements on I first I think? So some regulators such as Eastman Europe or Iosca internationally have been setting expectations on alternative performance measures for well over a decade. I first 18 doesn't replace those framework. Rather it sits alongside them. So preparers need to keep in mind those regulator guidance as well. So for example concepts like prominence, labeling, consistency of time and reconciliation to the most directly comparable gap figure might be things that it has been already required by a regulator. So a lot of that will feel familiar to preparers because the concepts over lack with IFRS 18. I think on a practical point in some cases the information that IFRS 18 requires may already be disclosed elsewhere. For example in the management commentary under Eastman's APM guidelines. So but I think preparers need to be careful just to just duplicate what they already have today. They should rather think carefully about making the MPM note fully meet the disclosure requirements of IFRS 18. Thanks Gardiner. And I guess another question that probably is very close to heart. What does MPMs change for preparers from an audit readiness perspective? So I know until now like I mentioned at the start of the podcast most MPMs lift outside of the financial statements. Now under IFRS 18 because MPMs are disclosed within the general purpose financial statements they will also now be in scope of the audit. Now preparers will need to ensure that the appropriate processes or controls are in place and there is appropriate audit evidence for these measures. So my practical advice would be don't leave this to the last minute. Identify your MPMs early engage with your audit team on any judgemental areas and understand what they may need in terms of audit evidence. That's a really good advice Gardiner. If you had to leave our listness as one last message what would it be? I would say don't treat MPMs as a simple disclosure exercise. The substance of these requirements, the reconciliation, the tax and NCI effects, the single note, the consistency of public communications, means this touches finance, tax, investor relations and internal audit. So it's a cross-functional project and the preparers who start early and document their judgment carefully will have a much smoother right. And Tangi, are there any last few takeaways from you? Mine would be watch the pipeline. Several of the most interesting judgments, hypothetical measure, confidential investor materials, the boundary of an aspect of performance are actively being discussed at the IFRS interpretation committee and amongst preparers. And more submissions might come on the topic as preparer implementation is going forward. The answers aren't all settled yet. So preparers should document the judgments they are making. Stay close to the technical updates and be prepared to revisit their position as guidance evolves. Herr Dan Tangi, thank you both so much. You've provided us with so many helpful insights today. And I suspect that this is not the last time that we'll be talking about MPMs on the podcast, given all of the upcoming discussions that you've highlighted for us today. To our listeners, thank you for joining us. Please stay tuned for further episodes in our Decoding IFRS 18 series. Thanks to our published IFRS 18 guidance are in the episode description. To never miss an episode, please subscribe wherever you get your podcasts. And until next time, happy accounting and reporting.