IFRS 18 retains the existing distinction between presenting operating expenses by nature or by function. Entities that adopt a nature-based presentation are unlikely to see major changes in their current disclosures, apart from the need to categorize income and expenses appropriately (refer to the Tip in June 2026). For those using a functional presentation, the Standard establishes a focused disclosure framework that aims to enhance transparency while providing practical relief from the need for extensive disaggregation. Understanding what information must be disclosed and what does not need to be included will be essential for successful implementation.
Whilst there is no change in the overall requirement to present expenses either by nature or function, IFRS 18 does not require entities to classify all operating expenses using a single basis. While expenses are generally classified by nature or function, an entity may present some by nature and others by function when doing so provides more useful information. This is particularly relevant where certain expenses cannot be allocated without undue cost or through arbitrary allocation.
In accordance with IAS 1, entities are required to disclose all material items by nature. Significant judgement is required to determine the level of disaggregation required to comply with the Standard.
Even when entities present expenses by nature, materiality will still drive which line items are presented or disclosed. Where entities present expenses by function, IFRS 18 requires five specific nature categories to be disclosed separately, in a single note, and provides an exemption for further disaggregation.
| Functional presentation: Disclosing Material Expenses by Nature |
|
The relief from further disaggregation is not a blanket exemption. Entities are still required to separately disclose items based on requirements of IFRS Accounting Standards. Entities applying a functional classification are not required to further disaggregate items beyond the specified classes unless separately required for disclosure.
For example, IFRS 7 necessitates the separate disclosure of interest, impairments, and gains and losses related to financial instruments. An entity following a functional classification is still required to provide these disclosures.
Classifying expenses by nature or function is driven by what is considered useful. When determining how to present expenses and which information is useful, an entity considers its own activities, the main components or drivers of profitability, its internal management reporting, industry standards, and whether an arbitrary allocation of expenses is necessary to assign costs to specific functions.
| Presentation by Nature | Presentation by Function |
| Expenses are classified by their type or economic characteristic rather than the purpose for which they were used | Expenses are classified based on the activity or function they support within the entity |
| Aggregated based on nature | Aggregated based on function |
| Disaggregated based on materiality of item | Disaggregated based on materiality and nature of activities (limited nature) |
| Examples: raw materials consumed, employee
benefit expense, depreciation and amortisation, impairment losses |
Include:
• cost of sales • other functions e.g. administrative and distribution |
When an entity presents a subtotal of gross profit or loss (revenue minus cost of sales), this presentation suggests a functional classification of expenses. Consequently, the disclosure of the five specified categories of expenses is relevant.
The same principle applies when a category of revenue is shown alongside its related expenses, such as net interest income, net fee and commission income, insurance service results, or net rental income. Presenting revenue together with related expenses in this way may suggest a functional classification of expenses and may necessitate specific disclosure requirements.
