So... What Does Your Income Statement Look Like?

IFRS 18 is changing how companies explain profit. U.S. agencies should pay attention.

If you run the accounting or finance function for a U.S. advertising or marketing agency, IFRS 18 probably sounds like somebody else’s problem.

You may be the CFO. You may also be a controller, bookkeeper, operations director, office manager, outsourced accountant, or owner who became the finance department because somebody had to do it.

Technically, for most privately held U.S. agencies reporting under U.S. GAAP, IFRS 18 is somebody else’s rule.

But the thinking behind it should get the attention of anyone who prepares or relies on a report using words such as “operating profit,” “EBITDA,” “adjusted EBITDA,” or “normalized earnings.”

Because IFRS 18 is really about one deceptively simple question:

When management tells me what the business earned, can I see exactly how it got there?

That question is especially relevant in the agency business, where there is no shortage of ways to describe financial performance and where the person producing the report may have learned the agency’s definitions by inheritance rather than from an accounting manual. Boy, oh boy, do I love the ad industry.

First, a little accounting alphabet soup

If IFRS, GAAP, FASB, and AICPA all blur together, you are not alone. Many capable people running agency finance functions learned the business through billing, payroll, job costing, collections, and month-end close, not through a technical accounting program. Here is the plain-English version.

IFRS means International Financial Reporting Standards. These standards are used in many countries outside the United States. U.S. GAAP means U.S. Generally Accepted Accounting Principles: the main accounting rulebook for U.S. companies. The Financial Accounting Standards Board, or FASB, maintains the authoritative accounting standards for nongovernmental U.S. entities.

The AICPA, the American Institute of Certified Public Accountants, is the national professional organization for U.S. CPAs. It issues important professional, ethics, audit, attestation, and private-company accounting-services guidance, but it is not simply another name for U.S. GAAP.

You do not need to become a technical accountant to understand the rest of this article. The useful idea is much simpler: whatever profit number your agency reports, you should know what is in it, what has been taken out, and whether the calculation stays the same from one period to the next.

By the way, EBITDA stands for earnings before interest, taxes, and depreciation and amortization. Who even made this acronym up???

The income statement is more than a report. It is a story.

Agency management teams rarely stop at the bottom line. We talk about gross billing, net revenue, AGI, contribution margin, operating income, EBITDA, adjusted EBITDA, normalized EBITDA, and sometimes several versions of the same number depending on who is asking. Sometimes, I still see salaries and benefits in Cost of Sales!

There is nothing wrong with that. Good management reporting should give owners more insight than a statutory income statement can provide. The problem begins when the bridge between the financial statements and the management version of profit becomes difficult to follow.

A number can be useful without being an accounting-standard number. AGI is a perfect example: it can be one of the most useful numbers in an agency, even though agencies do not always calculate it the same way.

But if management wants someone to rely on any measure, the calculation should be transparent, consistent, and explainable.

What IFRS 18 is trying to fix

IFRS 18, Presentation and Disclosure in Financial Statements, takes effect for annual reporting periods beginning on or after January 1, 2027, and replaces IAS 1. It does not change when revenue is recognized or when an expense is recorded. Its focus is presentation: how financial performance is organized and explained.

Among its most visible changes, IFRS 18 requires defined categories in the statement of profit or loss and introduces two required subtotals: Operating Profit and Profit Before Financing and Income Taxes. That matters because “operating profit” will have a more standardized meaning across IFRS reporters.

In other words, IFRS 18 is trying to reduce the amount of financial-statement geography that depends on management preference.

For anyone responsible for comparative reporting for 2027, let’s not forget that 2026 should be used as a comparison, which means people should really start thinking about this pronouncement THIS YEAR!

And then there is “Adjusted”

This is where I think the standard becomes particularly interesting for the agency world.

IFRS 18 introduces disclosure requirements for Management-Defined Performance Measures, or MPMs.

Broadly, these are management-created subtotals of income and expenses used in public communications to convey management’s view of the company’s financial performance, when the measure is not otherwise specified by IFRS.

Management can still use those measures. IFRS 18 is not banning adjusted performance reporting. It is saying: if this is the number you want investors to focus on, show them what it means and show them how you got there.

A simplified example:

The $5.2 million number may be perfectly legitimate. The point is that once the bridge is visible, the reader can decide whether each adjustment deserves to be added back.

That is a much healthier conversation than simply putting “Adjusted EBITDA: $5.2 million” in large type on page one of a presentation.

Anyone responsible for agency finance should recognize this conversation

Suppose your agency produces $2.0 million of EBITDA. Then management adds back severance, a recruiting push, a failed new-business pitch, consulting costs, an office move, technology implementation costs, and a discretionary owner expense. Suddenly the “normalized” EBITDA is $2.8 million.

Maybe $2.8 million is a better measure of sustainable earnings. Maybe it is not.

The important question is whether each adjustment is defined, supported, and applied consistently.

And there is one phrase I would treat with particular suspicion: “one-time expense.” If a business has a new collection of one-time expenses every year, they are beginning to look suspiciously recurring.

Why should a U.S. agency care?

For most privately held U.S. agencies, IFRS 18 does not change the accounting rules they follow. U.S. GAAP remains U.S. GAAP. But there are several reasons the standard is still worth understanding.

First, the agency business is global. A U.S. agency may be owned by, report to, partner with, or ultimately be acquired by an international group that reports under IFRS. In those situations, presentation and reporting packages can become more than a theoretical issue.

Second, buyers already think this way. Anyone who has gone through an agency sale knows what happens during Quality of Earnings. Reported earnings are only the starting point. Every adjustment is examined to determine whether it represents a genuinely non-recurring item or an ordinary cost of running the business.

Third, lenders and sophisticated owners want repeatable numbers. They do not want a definition of adjusted EBITDA that changes every quarter depending on the result management is trying to explain.

Fourthly, if you are considering the sale of your agency AND a sophisticated buyer is interested in you, perhaps you may even improve the purchase price of your agency with that adoption of this new pronouncement.

So, while IFRS 18 may not govern your agency, the discipline behind it is useful: management can tell its performance story, but the reader should be able to trace that story back to the financial statements.

AGI deserves the same discipline

For advertising agencies, I would take the idea one step further. Many agencies manage the business around AGI or another form of net revenue rather than top-line billings. That can be exactly the right approach provided everybody means the same thing when they use the term.

What is deducted from gross billings to arrive at AGI? Media? Production? Freelancers? Outside services? Markups? Pass-through costs? Are the rules the same from office to office, client to client, and year to year?

If your management team cannot answer those questions consistently, the problem is not IFRS 18. The problem is your management reporting. I would be delighted to lend a set of eyes on your numbers for some guidance.

What I would do if I were running the finance function

I would use IFRS 18 as an excuse to pressure-test the agency’s own income statement and management reporting. This is not a credential test. It is a reporting-discipline test. Start with the numbers that appear in monthly management packages, board reports, bank reporting, bonus calculations, and acquisition discussions.

• Define every non-GAAP or management measure. If you use AGI, contribution margin, EBITDA, or adjusted EBITDA, write down exactly what the term means.
• Create a permanent bridge to the financial statements. Someone should be able to move from GAAP net income or operating income to your management measure without reconstructing the calculation from scratch.
• Lock down the adjustment policy. Decide what qualifies as an add-back before you know whether the quarter was good or bad.
• Track “one-time” items over several years. A recurring pattern of non-recurring adjustments is information in itself.
• Use the same definitions in operating reviews and transaction discussions. A measure that changes meaning when the buyer enters the room is not a very good measure.

So... what does your income statement look like?

That is the question IFRS 18 is forcing IFRS reporters to revisit. I think it is also a question every person responsible for a U.S. agency’s financial reporting should be willing to answer: whether or not that person has CFO on a business card or CPA after a name or is merely a relative of the agency’s owner.

Not just: “What was our profit?”

But:

What do we call operating performance?
What do we exclude?
Why do we exclude it?
Do we treat it the same way every period?
And can someone outside the finance department follow the math?

IFRS 18 may belong to the international accounting world. But the principle behind it is universal:

If you want people to believe your version of performance, show them your work.

So, please feel free to reach out if you want to converse over IFRS 18 or any of the accounting alphabet soups!

The fall is a wonderful time of year for soups!

Sincerely,

Vincent G. Dong, CPA, CA

vdong@vincentdong.com

www.vincentdong.com

Technical note: IFRS 18 is effective for annual periods beginning on or after January 1, 2027, replaces IAS 1, and is applied retrospectively. Its MPM disclosures apply to qualifying measures used in public communications; they are not a general rule for every internal KPI or private-company management report.

IFRS Foundation references: IFRS 18 overview • IFRS 18 key terms