IFRS 18 and transfer pricing: bringing economic discipline to performance reporting
IFRS 18 and transfer pricing: bringing economic discipline to performance reporting
By Marcus Stelloh, Partner: Transfer Pricing and Jodie Allman: Assistant Manager: Transfer Pricing
IFRS 18, Presentation and Disclosure in Financial Statements, replaces IAS 1 and is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. For many entities, the first comparative period is therefore already approaching. Much of the implementation discussion has understandably focused on the mechanics of the new statement of profit or loss categories, the required subtotals and the disclosure of management-defined performance measures (MPMs). Less attention has been paid to a more practical challenge that may arise in complex groups: how should management explain, support and evidence performance measures where the relevant business activity is economically integrated, but not legally or operationally separate?
This is where transfer pricing principles, traditionally associated with international tax, can provide a useful economic discipline for financial reporting teams.
What IFRS 18 changes
IFRS 18 introduces three important enhancements to financial statement presentation and disclosure. It requires income and expenses to be classified into specified categories, introduces new required subtotals in the statement of profit or loss, and brings MPMs into the financial statements. It also provides enhanced guidance on the aggregation and disaggregation of information across the primary financial statements and the notes.
The MPM requirements are particularly significant. Measures that may previously have appeared only in investor presentations, results announcements or management commentary may now require clear disclosure in the financial statements, including an explanation of why the measure provides useful information, how it is calculated, and how it reconciles to the most directly comparable IFRS-defined subtotal. In other words, a performance measure cannot merely reflect a management view; it must be capable of being explained, reconciled and supported on a consistent basis.
When does this become your problem?
The interaction between IFRS 18 and transfer pricing principles is most likely to be relevant where any of the following are true:
Transfer pricing is built on the arm's length principle: profits should be allocated by reference to the functions performed, assets used and risks assumed by the relevant parts of a business, as if those parts were transacting with one another independently. IFRS 18 does not turn financial reporting into a transfer pricing exercise, nor does it require tax transfer pricing methods to be applied mechanically. However, where management needs to explain how value is created across integrated activities, transfer pricing offers a disciplined framework for asking the right economic questions.
The appropriate method will always depend on the facts. In some cases, a cost allocation or benchmarked routine return may be sufficient. In more integrated businesses, however, a profit split approach may be more informative. A residual profit split, for example, first remunerates routine functions at benchmarked, market-tested margins and then allocates the residual profit attributable to unique or non-routine contributions, such as proprietary technology, customer data, brand value or an integrated operating model. The result is not simply an internal allocation; it is a reasoned, evidence-based view of how economic value is generated.
A practical illustration
Consider a retail group with a fast-growing digital channel. The channel contributes a meaningful share of revenue, but it does not have a separate profit and loss account. It uses the group's logistics network, store-based fulfilment, customer loyalty data, technology stack and brand. Management wants to explain channel-level performance in a way that is credible to the board, investors, auditors and, where relevant, tax authorities.
A residual profit split could provide a structured approach. Routine activities such as warehousing, fulfilment and customer support could be benchmarked against comparable independent service providers. The remaining profit could then be allocated by reference to the unique contributions of each channel, including the retail network, brand and customer data on the one hand, and the digital platform and online customer interface on the other. The output would be a channel-level margin that is traceable, methodology-driven and capable of being explained consistently across financial reporting and tax discussions.
Bridging financial reporting and economic reality
Transfer pricing methodologies are well established in international tax practice, grounded in the OECD Transfer Pricing Guidelines and familiar to many auditors, regulators and tax authorities. Their value in an IFRS 18 context is not that they provide a shortcut to financial reporting judgement, but that they bring structure to difficult questions of value creation, attribution and consistency. Used appropriately, they can help make MPMs more supportable, aggregation and disaggregation judgements more transparent, and management's performance narrative more closely aligned with the underlying economics of the business.
This distinction matters. A methodology developed to support an IFRS 18 disclosure will not automatically determine the tax transfer pricing answer, and a tax transfer pricing policy will not automatically satisfy financial reporting requirements. The objectives, materiality thresholds, evidence and governance may differ. But where the same business facts underpin both conversations, there is considerable value in ensuring that finance, tax and reporting teams work from a coherent economic framework.
Looking ahead
For finance and tax teams now scoping IFRS 18 implementation, the practical question is not whether every performance measure requires a transfer pricing analysis. It is where the disaggregation challenge bites hardest, where management's performance narrative depends on shared assets or integrated activities, and whether the methodology supporting that narrative would withstand audit or tax authority scrutiny. Those conversations are worth having early, before comparative information is finalised and before performance measures become embedded in external reporting.
IFRS 18, Presentation and Disclosure in Financial Statements, replaces IAS 1 and is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. For many entities, the first comparative period is therefore already approaching. Much of the implementation discussion has understandably focused on the mechanics of the new statement of profit or loss categories, the required subtotals and the disclosure of management-defined performance measures (MPMs). Less attention has been paid to a more practical challenge that may arise in complex groups: how should management explain, support and evidence performance measures where the relevant business activity is economically integrated, but not legally or operationally separate?
This is where transfer pricing principles, traditionally associated with international tax, can provide a useful economic discipline for financial reporting teams.
What IFRS 18 changes
IFRS 18 introduces three important enhancements to financial statement presentation and disclosure. It requires income and expenses to be classified into specified categories, introduces new required subtotals in the statement of profit or loss, and brings MPMs into the financial statements. It also provides enhanced guidance on the aggregation and disaggregation of information across the primary financial statements and the notes.
The MPM requirements are particularly significant. Measures that may previously have appeared only in investor presentations, results announcements or management commentary may now require clear disclosure in the financial statements, including an explanation of why the measure provides useful information, how it is calculated, and how it reconciles to the most directly comparable IFRS-defined subtotal. In other words, a performance measure cannot merely reflect a management view; it must be capable of being explained, reconciled and supported on a consistent basis.
When does this become your problem?
The interaction between IFRS 18 and transfer pricing principles is most likely to be relevant where any of the following are true:
- The group reports, or expects to disclose, performance measures that span integrated business activities without separate statutory accounts or standalone financial information.
- The business operates digital and traditional channels using shared infrastructure, such as platforms, logistics, technology, customer data or brand assets, while stakeholders increasingly expect channel-level performance insight.
- There is audit, board or regulator scrutiny over aggregation and disaggregation choices, particularly where the management narrative does not align neatly with legal entities or reportable segments.
- The group operates cross-border, where the same internal allocation logic may influence both financial reporting explanations and transfer pricing outcomes, and inconsistency between the two could create avoidable risk.
Transfer pricing is built on the arm's length principle: profits should be allocated by reference to the functions performed, assets used and risks assumed by the relevant parts of a business, as if those parts were transacting with one another independently. IFRS 18 does not turn financial reporting into a transfer pricing exercise, nor does it require tax transfer pricing methods to be applied mechanically. However, where management needs to explain how value is created across integrated activities, transfer pricing offers a disciplined framework for asking the right economic questions.
The appropriate method will always depend on the facts. In some cases, a cost allocation or benchmarked routine return may be sufficient. In more integrated businesses, however, a profit split approach may be more informative. A residual profit split, for example, first remunerates routine functions at benchmarked, market-tested margins and then allocates the residual profit attributable to unique or non-routine contributions, such as proprietary technology, customer data, brand value or an integrated operating model. The result is not simply an internal allocation; it is a reasoned, evidence-based view of how economic value is generated.
A practical illustration
Consider a retail group with a fast-growing digital channel. The channel contributes a meaningful share of revenue, but it does not have a separate profit and loss account. It uses the group's logistics network, store-based fulfilment, customer loyalty data, technology stack and brand. Management wants to explain channel-level performance in a way that is credible to the board, investors, auditors and, where relevant, tax authorities.
A residual profit split could provide a structured approach. Routine activities such as warehousing, fulfilment and customer support could be benchmarked against comparable independent service providers. The remaining profit could then be allocated by reference to the unique contributions of each channel, including the retail network, brand and customer data on the one hand, and the digital platform and online customer interface on the other. The output would be a channel-level margin that is traceable, methodology-driven and capable of being explained consistently across financial reporting and tax discussions.
Bridging financial reporting and economic reality
Transfer pricing methodologies are well established in international tax practice, grounded in the OECD Transfer Pricing Guidelines and familiar to many auditors, regulators and tax authorities. Their value in an IFRS 18 context is not that they provide a shortcut to financial reporting judgement, but that they bring structure to difficult questions of value creation, attribution and consistency. Used appropriately, they can help make MPMs more supportable, aggregation and disaggregation judgements more transparent, and management's performance narrative more closely aligned with the underlying economics of the business.
This distinction matters. A methodology developed to support an IFRS 18 disclosure will not automatically determine the tax transfer pricing answer, and a tax transfer pricing policy will not automatically satisfy financial reporting requirements. The objectives, materiality thresholds, evidence and governance may differ. But where the same business facts underpin both conversations, there is considerable value in ensuring that finance, tax and reporting teams work from a coherent economic framework.
Looking ahead
For finance and tax teams now scoping IFRS 18 implementation, the practical question is not whether every performance measure requires a transfer pricing analysis. It is where the disaggregation challenge bites hardest, where management's performance narrative depends on shared assets or integrated activities, and whether the methodology supporting that narrative would withstand audit or tax authority scrutiny. Those conversations are worth having early, before comparative information is finalised and before performance measures become embedded in external reporting.