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Keeping You Informed
At CBBS, we remain committed to keeping our clients and business partners informed on current affairs, statutory developments, and financial reporting matters that may affect business operations, governance, and compliance obligations.
One of the most important upcoming developments in financial reporting is the introduction of IFRS 18, Presentation and Disclosure in Financial Statements, which replaces IAS 1 and becomes effective from 1 January 2027. The standard was introduced to improve transparency, consistency, and comparability in financial reporting across industries and jurisdictions.
Why IAS 1 Became a Challenge
Under IAS 1, businesses had significant flexibility in how they presented financial performance within the income statement. While this allowed management judgement, it created challenges for investors comparing performance between companies, analysts assessing operational efficiency, lenders evaluating financial risk, and stakeholders interpreting adjusted profit figures.
Different entities often used different definitions of operating profit, EBITDA, and adjusted earnings. This reduced comparability and sometimes made it difficult to distinguish genuine operational performance from presentation choices.
What IFRS 18 Changes
IFRS 18 introduces a more structured approach to financial statement presentation by requiring:
- A mandatory operating profit subtotal in the income statement
- Clear classification between operating, investing, and financing activities
- Enhanced disclosure of Management Performance Measures (MPMs)
- Greater consistency in financial communication with stakeholders
Management Performance Measures (MPMs)
Many businesses use internal performance measures such as adjusted EBITDA, normalised profit, or underlying earnings. Under IFRS 18, these measures remain permitted but companies will now be required to:
- Clearly define each measure used
- Apply calculations consistently across reporting periods
- Provide reconciliations back to the nearest IFRS figure
- Ensure stronger governance and documentation around reporting
The intent is to reduce misleading or inconsistent reporting practices while improving confidence in financial information presented to all stakeholders.
The Impact Beyond the Income Statement
The effects of IFRS 18 extend beyond the presentation of profits. Businesses need to consider the potential impact on:
Debt Covenants and Banking Agreements
Many loan agreements reference EBIT, EBITDA, or bespoke financial metrics negotiated over time. Where IFRS 18 changes how certain items are classified, the numbers underpinning covenant calculations could be affected. Review financing arrangements now to avoid discovering a technical breach after the fact.
Remuneration and Incentive Structures
Where executive bonuses or performance targets are linked to financial KPIs, IFRS 18 may alter those figures even without any change in underlying business performance. Management teams should understand the impact before the next review cycle.
ERP Systems and Reporting Processes
Businesses with complex or group structures may face additional challenges in consistently classifying transactions across subsidiaries, divisions, and reporting entities. System and chart of accounts reviews are an important early preparation step.
Investor Communications and Market Perception
IFRS 18 increases credibility in financial communication. Businesses that use it as an opportunity to align external reporting with how they are genuinely managed will communicate more clearly and credibly with investors, lenders, and key stakeholders.
What Companies Need to Do
To comply effectively with IFRS 18, businesses should begin preparing early. CBBS recommends the following steps:
| Action | What to do |
|---|---|
| Review chart of accounts | Assess reporting structures, ERP configurations, and how transactions are currently classified. Identify items that may require reclassification under IFRS 18. |
| Evaluate KPI definitions | Review all internal and external performance measures. Each requires a clear definition, consistent application, and an auditable reconciliation to the nearest IFRS figure. |
| Review financing agreements | Check debt covenants and banking agreements referencing financial metrics. Reclassification of items could affect covenant calculations and banking relationships. |
| Assess remuneration linkages | Where bonuses or incentive structures are tied to KPIs, understand whether IFRS 18 changes those figures before the next appraisal cycle. |
| Align group reporting | Businesses with group structures should ensure consistent classification across all subsidiaries, divisions, and reporting entities. |
| Strengthen governance | Ensure disclosure governance and documentation standards around financial reporting meet the enhanced requirements of IFRS 18. |
Why This Matters for Management
Investors and financial analysts rely on consistent financial reporting to evaluate business performance, profitability trends, operational efficiency, and long-term sustainability. IFRS 18 improves comparability between businesses and reduces ambiguity in performance reporting, enabling better-informed decision-making.
For management teams, transparent and well-structured financial reporting strengthens investor confidence, stakeholder trust, financing relationships, corporate governance credibility, and the quality of strategic decision-making.
How CBBS Can Assist
IFRS 18 readiness assessments | Financial reporting reviews | Management reporting alignment
Implementation planning | Governance and disclosure guidance
Keeping You Informed
At CBBS, we remain committed to keeping our clients and business partners informed on current affairs, statutory developments, and financial reporting matters that may affect business operations, governance, and compliance obligations.
One of the most important upcoming developments in financial reporting is the introduction of IFRS 18, Presentation and Disclosure in Financial Statements, which replaces IAS 1 and becomes effective from 1 January 2027. The standard was introduced to improve transparency, consistency, and comparability in financial reporting across industries and jurisdictions.
Why IAS 1 Became a Challenge
Under IAS 1, businesses had significant flexibility in how they presented financial performance within the income statement. While this allowed management judgement, it created challenges for investors comparing performance between companies, analysts assessing operational efficiency, lenders evaluating financial risk, and stakeholders interpreting adjusted profit figures.
Different entities often used different definitions of operating profit, EBITDA, and adjusted earnings. This reduced comparability and sometimes made it difficult to distinguish genuine operational performance from presentation choices.
What IFRS 18 Changes
IFRS 18 introduces a more structured approach to financial statement presentation by requiring:
- A mandatory operating profit subtotal in the income statement
- Clear classification between operating, investing, and financing activities
- Enhanced disclosure of Management Performance Measures (MPMs)
- Greater consistency in financial communication with stakeholders
Management Performance Measures (MPMs)
Many businesses use internal performance measures such as adjusted EBITDA, normalised profit, or underlying earnings. Under IFRS 18, these measures remain permitted but companies will now be required to:
- Clearly define each measure used
- Apply calculations consistently across reporting periods
- Provide reconciliations back to the nearest IFRS figure
- Ensure stronger governance and documentation around reporting
The intent is to reduce misleading or inconsistent reporting practices while improving confidence in financial information presented to all stakeholders.
The Impact Beyond the Income Statement
The effects of IFRS 18 extend beyond the presentation of profits. Businesses need to consider the potential impact on:
Debt Covenants and Banking Agreements
Many loan agreements reference EBIT, EBITDA, or bespoke financial metrics negotiated over time. Where IFRS 18 changes how certain items are classified, the numbers underpinning covenant calculations could be affected. Review financing arrangements now to avoid discovering a technical breach after the fact.
Remuneration and Incentive Structures
Where executive bonuses or performance targets are linked to financial KPIs, IFRS 18 may alter those figures even without any change in underlying business performance. Management teams should understand the impact before the next review cycle.
ERP Systems and Reporting Processes
Businesses with complex or group structures may face additional challenges in consistently classifying transactions across subsidiaries, divisions, and reporting entities. System and chart of accounts reviews are an important early preparation step.
Investor Communications and Market Perception
IFRS 18 increases credibility in financial communication. Businesses that use it as an opportunity to align external reporting with how they are genuinely managed will communicate more clearly and credibly with investors, lenders, and key stakeholders.
What Companies Need to Do
To comply effectively with IFRS 18, businesses should begin preparing early. CBBS recommends the following steps:
| Action | What to do |
|---|---|
| Review chart of accounts | Assess reporting structures, ERP configurations, and how transactions are currently classified. Identify items that may require reclassification under IFRS 18. |
| Evaluate KPI definitions | Review all internal and external performance measures. Each requires a clear definition, consistent application, and an auditable reconciliation to the nearest IFRS figure. |
| Review financing agreements | Check debt covenants and banking agreements referencing financial metrics. Reclassification of items could affect covenant calculations and banking relationships. |
| Assess remuneration linkages | Where bonuses or incentive structures are tied to KPIs, understand whether IFRS 18 changes those figures before the next appraisal cycle. |
| Align group reporting | Businesses with group structures should ensure consistent classification across all subsidiaries, divisions, and reporting entities. |
| Strengthen governance | Ensure disclosure governance and documentation standards around financial reporting meet the enhanced requirements of IFRS 18. |
Why This Matters for Management
Investors and financial analysts rely on consistent financial reporting to evaluate business performance, profitability trends, operational efficiency, and long-term sustainability. IFRS 18 improves comparability between businesses and reduces ambiguity in performance reporting, enabling better-informed decision-making.
For management teams, transparent and well-structured financial reporting strengthens investor confidence, stakeholder trust, financing relationships, corporate governance credibility, and the quality of strategic decision-making.
How CBBS Can Assist
IFRS 18 readiness assessments | Financial reporting reviews | Management reporting alignment
Implementation planning | Governance and disclosure guidance