For alternative investment entities—such as real estate funds, private equity, private debt and infrastructure vehicles—IFRS 18 is far more than a presentation update. It represents a structural shift in how performance is communicated. By redefining categories in the statement of profit or loss and introducing new requirements around management performance measures, the standard significantly reshapes financial reporting for the sector.
IFRS18 comes into effect on 1st January 2027 and requires retrospective application, making the 2026 year-end the required comparative period. In practical terms, this means that impact assessments and any required updates to IT systems, processes and internal controls should be largely finalised before the beginning of 2026—or initiated immediately, if not already underway.
Entities that act now will not only ensure compliance by 1 January 2027 but also strengthen the clarity and credibility of their financial reporting in an increasingly demanding investment environment.
1. Rethinking the classification of income and expenses
A central feature of IFRS 18 is the introduction of mandatory categories—operating, investing, financing (the three key categories), discontinued operations and income taxes—supported by tailored guidance for entities whose main business is investing in assets. For alternative investment structures, this has direct implications.
Operating category
For entities whose primary activity is investing in assets, income and expenses arising from those main business activities must be presented within the operating category. This is a fundamental shift: operating profit is intended to reflect core performance, even where that performance consists of fair value movements.
If an entity invests in assets that generate returns individually and largely independently of other resources, related income and expenses are classified as operating. For most alternative investment entities, this includes fair value gains and losses, interest and dividend income, and related costs.
- Real estate entities: Operating will typically include rental income, fair value movements on investment property, interest income from finance leases, gains or losses on disposals, service charge income, and direct property expenses. For developers, revenue from property sales and construction costs also fall within operating;
- Private equity meeting the definition of an investment entity according to IFRS 10: Fair value gains and losses on financial assets, dividend and interest income, management and performance fees, and professional expenses are generally operating items; and
- Private debt vehicles: Interest income, fair value movements on debt investments, and related operating costs are presented in operating. Interest earned on cash balances is also included as part of the operating category.
In essence, IFRS 18 aligns operating profit with what management and investors typically consider the entity’s core performance.
Investing category
The investing category captures income and expenses from assets that generate independent returns but are not part of the entity’s main business activity.
A real estate entity may classify in this category fair value movements from debt or equity investments measured at fair value through profit or loss as well as interest income on cash and cash equivalents. In contrast, a private equity or private debt entity may include income and expenses generated by investment properties.
As a general rule, income and expenses from associates, joint ventures and unconsolidated subsidiaries accounted for using the equity method under IAS 28 must always be presented in the investing category, irrespective of the entity’s main business. IFRS 18 does not prescribe the exact position of equity-accounted results within the investing category. Entities may choose to present them immediately below operating profit and introduce an additional subtotal if this enhances clarity.
Transitional relief is available: where permitted under IAS 28, entities may elect to measure such investments at fair value rather than applying equity accounting.
For many investment entities whose sole business is investing in financial assets, the investing category may be limited in use. As an investment entity is measuring its investment at fair value through profit or loss, all the fair value movements will be presented within the operating category.
Financing category
The financing category includes income and expenses arising from liabilities used to raise finance—such as bank borrowings, bonds and debt instruments. Interest expense and similar effects on other liabilities not used to raise finance (e.g.: lease liabilities, provisions), pension liabilities), will always be included within this category, regardless of the entity’s main business activity.
This consistent treatment reinforces comparability and transparency in financing performance.
Other key presentation considerations
Foreign exchange differences
Under IFRS 18, foreign exchange gains and losses follow the classification of the underlying item. FX on tenant receivables for a real estate entity would therefore be operating, while FX on foreign currency borrowings would be financing.
Similarly, FX movements on core equity or debt investments for private equity or private debt funds are operating, whereas FX on financing liabilities is financing.
Although conceptually straightforward, this approach may require system enhancements to ensure FX movements are tracked and classified appropriately.
Derivatives
Gains and losses on derivatives are classified in line with the underlying item or risk being hedged. For example:
- Derivatives hedging interest rate risk on borrowings are presented in financing; and
- Derivatives hedging foreign exchange risk on investment property or financial investments held as part of the core business are presented in operating.
Where determining the appropriate classification would involve undue cost or effort, IFRS 18 permits presentation within operating as a practical simplification.
Funds with units classified as liabilities
For funds whose units are classified as financial liabilities under IAS 32, distributions are presented either as finance costs in profit or loss or within the statement of changes in net assets. Where units are classified as equity, distribution costs are required to be recognised in the statement of changes in equity.
IFRS 18 does not introduce specific new guidance in this area, and current practice is expected to remain appropriate, provided classification principles are applied consistently.
The subtotal “increase/(decrease) in net assets attributable to holders of units” is commonly used as the profit or loss subtotal in the statement of profit or loss of alternative investment entities with liability presentation, consistent with the illustrative example in IAS 32. This presentation is expected to remain appropriate under IFRS 18, as the new standard retains the requirement to present profit or loss for the period and reinforces the principle that items in the primary financial statements and notes must be clearly labelled and described to faithfully reflect their nature and characteristics.
2. Statement of cash flows
IFRS 18 introduces consequential amendments to IAS 7 that affect the statement of cash flows.
Mandatory starting point (indirect method)
Entities applying the indirect method must now begin the reconciliation with the newly defined mandatory subtotal—operating profit or loss. This removes diversity in practice and aligns the cash flow statement more closely with the revised profit or loss structure.
This change may alter the nature and presentation of non-cash adjustments included in the reconciliation.
Interest and dividends
Dividend income, interest income and interest expense must be presented within a single category in the statement of cash flows, consistent with their classification in profit or loss.
For example, if interest expense is classified within financing in profit or loss, related interest paid must also be presented within financing cash flows.
Where such items appear in more than one category in profit or loss, an accounting policy must be established to determine where the total cash flow amount will be presented. In practice, this situation is expected to be uncommon for most alternative investment entities.
Regardless of an entity’s main business activity, dividends paid are always classified within financing cash flows.
3. Management Performance Measures (MPMs)
One of the most significant and debated aspects of IFRS 18 is the introduction of Management Performance Measures (MPMs).
In many cases, management of alternative investment entities will need to exercise significant judgement in determining which of their existing financial performance measures meet the definition of a MPM under IFRS 18.
Identifying MPMs is likely to be a time-consuming process, requiring careful assessment against each of the three elements embedded in the definition. In addition, the specific disclosure requirements introduced by IFRS 18 for MPMs—including reconciliations and explanatory information—may go well beyond the way that entities disclose currently information regarding the performance and measures used by the management to monitor and evaluate the results of the entity.
The MPM requirements are not limited to listed companies. If a private entity publicly communicates a qualifying subtotal of income and expenses —for example, in investor reports or on a website that are publicly accessible—the disclosure requirements apply.
While the new framework increases reporting obligations, it also offers a structured mechanism for management to explain how performance is monitored and evaluated. Early identification of potential MPMs is essential to allow time for adjustments to systems, controls and governance processes.
4. IFRS 18 implementation: a strategic priority
Despite competing priorities—such as sustainability reporting and Pillar Two tax reforms for example—management should not underestimate the magnitude of IFRS 18 implementation.
As IFRS18 is requiring retrospective application, management should begin implementation efforts now—if this has not already started—to ensure readiness ahead of the mandatory effective date of 1 January 2027.
Key actions include:
- Performing a detailed impact assessment;
- Reviewing classification policies;
- Updating general ledger mappings;
- Enhancing systems to track source and nature of income/expenses;
- Revisiting internal controls;
- Identifying potential MPMs; and
- Training finance teams.
