Non-GAAP measures and the IFRS 18 reckoning

In December 2019, I wrote a short piece on LinkedIn asking a simple question: why do companies report profit so differently from each other, and when would the IASB do something about it? At the time, the IASB had just published an exposure draft (a formal consultation document setting out proposed rule changes before a standard is finalised) proposing to mandate an operating profit subtotal and require disclosure of what it called management performance measures, the metrics companies define themselves and use in investor communications but do not always explain clearly in their financial statements.

Five years later, that proposal became IFRS 18. And for pharma and biotech finance teams, it matters considerably more than most people currently realise.

The original problem

Why non-GAAP measures proliferated

Performance metrics such as profit subtotals have always been important to investors comparing company performance across a sector. The primary financial statements provide traditional headings, gross profit, net profit, income from operations: companies routinely deviate from these when communicating their results to the market.

The result was a landscape in which every major pharmaceutical company used a different definition of “core earnings”, “adjusted operating profit” or “underlying performance”. A CFO at one company would exclude amortisation of acquired intangibles (the annual charge to the income statement as the value of assets purchased in an acquisition is written down over time). A CFO at another would exclude restructuring costs. A third would exclude both, plus licensing deal accounting adjustments. Each was defensible. None were comparable. The IASB’s response, after years of deliberation, was IFRS 18.

What changed

What IFRS 18 actually does

IFRS 18, Presentation and Disclosure in Financial Statements, was issued in April 2024 and is effective for annual reporting periods beginning on or after 1 January 2027. It replaces IAS 1 and introduces three substantive changes.

First, mandatory profit subtotals. All entities must present operating profit or loss as a defined line on the face of the income statement. A second subtotal, profit or loss before financing and income taxes, is also required. These are not optional.

Second, a formal framework for management performance measures. An MPM is any subtotal of income and expenses that management uses in public communications outside the financial statements and that is not specifically required by IFRS. Common examples include adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation, a proxy for operating cash generation that strips out non-cash accounting charges), core earnings, and underlying operating profit. Under IFRS 18, these must be disclosed in a single audited note with a reconciliation to the nearest IFRS-defined subtotal (a step-by-step bridge showing how the adjusted measure links to the equivalent audited line), including the income tax effect and the effect on non-controlling interests (the share of results attributable to minority shareholders in subsidiaries that are not wholly owned) for each reconciling item.

Third, enhanced aggregation and disaggregation requirements. Aggregation means grouping similar items into a single line; disaggregation means breaking a combined figure apart into its components. Too much aggregation hides what drives performance; too much disaggregation creates noise. IFRS 18 requires entities to apply judgement in grouping information in ways that reflect the underlying economics, and to ensure that material items are never hidden inside generic “other” categories in the notes.

The pharma lens

Why this matters specifically for pharma and biotech

Pharmaceutical and biotech companies are among the heaviest users of non-GAAP measures. IFRS-based financial statements for a company with an active deal portfolio will routinely include amortisation of acquired intangible assets from business combinations, fair value remeasurement of contingent consideration (earn-out obligations that must be revalued at every reporting date, with changes flowing through the income statement even when no cash moves), variable consideration adjustments under IFRS 15 (changes to the estimated transaction price for milestone payments whose likelihood of being received has been reassessed), and impairment charges on capitalised development costs under IAS 36 (write-downs of in-licensed assets that can no longer be supported by projected future returns). None of these items reflect ongoing operational performance in any given year.

The standard response has been to present “core earnings” or “adjusted operating profit” that excludes some or all of these items. Under IAS 1, there was no requirement to bring this reconciliation into the audited financial statements. Under IFRS 18, that changes.

The deal accounting connection

Where IFRS 18 meets licensing deal accounting

Items routinely excluded from non-GAAP measures include: amortisation of the intangible assets recognised in the purchase price allocation under IFRS 3 (the exercise of assigning the acquisition price to individual assets and liabilities acquired, typically resulting in large intangible asset values that are then amortised over time), fair value changes on contingent consideration, and impairment charges on in-licensed assets where the original capitalisation assumptions under IAS 38 have not held.

Under IFRS 18, excluding these items from an MPM is still permissible, but it must be formally justified, consistently applied, and transparently reconciled in the audited notes. A company that has been quietly shifting the definition of its “adjusted” measure from year to year will face scrutiny it has not faced before.

Preparation

What finance teams should be doing now

IFRS 18 is effective for periods beginning 1 January 2027, applied retrospectively (meaning prior year comparative figures must be restated on the same basis, not just going forward). For a December year-end company, the 2026 comparative year is already in progress.

• Identify all performance measures currently communicated outside the financial statements.
• Assess each against the IFRS 18 MPM definition.
• Decide which to retain and formalise, which to discontinue, and which the new IFRS-defined subtotals replace.
• Draft the MPM note structure and ensure income tax and non-controlling interest disclosures can be produced from your accounting systems.
• For pharma companies with active deal portfolios: the deal accounting team and external reporting team must work together. Amortisation of acquired intangibles, contingent consideration remeasurement, and impairment charges all have their origin in deal accounting under IFRS 3, IFRS 15, and IAS 38.

The 2019 question has been answered. The more useful question now is: is your finance team ready for what the answer requires?