IFRS 18 is final, but it is not yet in force. It applies to annual periods beginning on or after 1 January 2027, so a UAE company with a December year-end will show 2026 as restated comparative figures in its 2027 accounts. That means the income statement your board signs next year is being shaped by decisions your finance team makes this quarter.
The standard changes more than layout. It defines operating profit for the first time, reshapes the cash flow statement and puts management’s own performance measures under audit-grade scrutiny. For a board, that touches earnings presentations, loan covenants and shareholder disclosures. This article explains each pressure point and gives CFOs a seven-step framework for automating how income and expenses are classified.
Quick answer: IFRS 18 replaces IAS 1. It requires every income and expense item to sit in one of five categories (operating, investing, financing, income taxes, discontinued operations), adds two mandatory subtotals (operating profit and profit before financing and income taxes) and requires disclosure of management-defined performance measures. It is effective from 1 January 2027, with earlier application permitted.
What actually changes in the income statement
The IFRS Foundation describes three headline changes: two new defined subtotals in the statement of profit or loss, disclosure of management-defined performance measures, and new principles for aggregating and disaggregating information. The IASB focused on the profit or loss statement and did not rework every part of IAS 1.
The practical differences look like this.
Area | Under IAS 1 | Under IFRS 18 |
|---|---|---|
Operating profit | No standard definition. Companies chose their own. | Mandatory, defined subtotal. |
Categories | None required in profit or loss. | Five: operating, investing, financing, income taxes, discontinued operations. |
Company-defined measures such as adjusted EBITDA | Mostly outside the financial statements. | Qualifying measures disclosed in a note, reconciled to an IFRS subtotal. |
Indirect cash flow starting point | Varied: profit, profit before tax, or operating profit. | Operating profit. |
Interest and dividend cash flows | Accounting policy choice. | Choice removed for most entities. |
Two points matter before going further. First, IFRS 18 is a presentation and disclosure standard, so it does not change how items are recognised or measured. Second, because of that, profit for the year does not move. What moves is the operating profit line, and that is the number investors, lenders and remuneration committees watch.
If you want the detail on performance measures and the 2026 comparative year, our earlier note on IFRS 18 and management-defined performance measures covers it. The rest of this article looks at what boards and CFOs need to do about it.
Why this reaches the boardroom: three pressure points
1. Earnings presentations
Under IAS 1, “operating profit” meant whatever the company said it meant. Under IFRS 18, it has a fixed definition. Operating is the residual category, so anything not classified as investing, financing, income taxes or discontinued operations lands there.
That creates a visible risk. If your results deck has shown an operating profit that includes an associate’s earnings or interest on deposits, the audited number will now be lower than the one analysts are used to. Neither is wrong. The gap needs explaining before the market asks.
IFRS 18 does not ban adjusted measures. It requires measures that meet the definition to be disclosed in the financial statements with a reconciliation. The IFRS Foundation is also still working on how widely “public communications” should be read, so treat investor decks, lender packs and shareholder updates as in scope until you know otherwise.
2. Debt covenants
This is the area least covered in published guidance, and the one most likely to cause a surprise.
IFRS does not define EBITDA. Loan agreements define it themselves and many start from operating profit or a profit figure “as shown in the accounts”, then add back depreciation, amortisation and agreed exceptional items. Financial covenants are normally tested using the company’s accounting principles. If the starting line item changes meaning, the covenant maths can change too, even though nothing in the business has moved.
IFRS 18 does not rewrite your facility agreement. The contract wording decides what happens. Finance teams should check three things in every facility:
- How the key terms are defined. Look at “Operating Profit”, “EBITDA”, “Consolidated Net Income” and “Accounting Principles”.
- Whether accounting standards are fixed at signing. Some agreements freeze them at the signing date. Others follow the standards as they change.
- What the amendment and notification clauses require. Some facilities oblige the borrower to tell the lender when accounting changes affect the covenant calculation.
Model the covenant ratios on both bases for the 2026 comparative period. If the headroom shrinks, open the conversation with lenders before the 2027 compliance certificates are due, and take legal advice on how your specific wording applies. For new or refinanced debt agreed now, name the accounting basis explicitly. Our deal advisory team supports clients on debt structuring and lender discussions.
3. Shareholder disclosures and the tax trail
UAE Corporate Tax starts from accounting income. The Federal Tax Authority’s guide on determining taxable income says taxable persons must prepare financial statements under IFRS, and that those with revenue above AED 50 million must keep audited financial statements. IFRS 18 reclassification does not by itself change taxable income. But the reconciliation from ledger to financial statements to tax return has to stay clean while categories change underneath it.
That trail also depends on records you can produce on demand. Our guide on electronic record-keeping under FTA rules covers the data side, and the lessons from the first Corporate Tax filing cycles show where mismatches have surfaced.
The cash flow statement needs a separate look. For most entities, interest and dividends received move to investing and interest paid moves to financing, and the statement starts from operating profit. Treasury teams that report on operating cash flow will see that figure change.
A seven-step framework to automate IFRS 18 categorisation
The aim is simple. Every income and expense line should arrive in the right category without someone re-working the trial balance by hand each quarter. These steps get you there.
Step 1: Build an inventory of every published performance measure
List each measure used in the board pack, lender reporting, investor decks, press releases and parent-company submissions. Record the definition, the owner and where it appears. This register becomes the basis for your management-defined performance measure disclosures.
Step 2: Confirm whether any specified main business activity applies
Most trading and service companies have none, so investing and financing income sits outside operating profit. Entities that invest in assets or provide financing to customers as a main business activity follow different rules. Check this at each reporting entity, including parent-company separate statements, because the IASB has already addressed a question on how the assessment works there.
Step 3: Write the classification rulebook
Draft a short policy that states how each type of income and expense is classified and why. In outline:
- Operating: the default for everything not captured elsewhere.
- Investing: returns from assets that generate income largely independently of the entity’s other resources, such as associates, joint ventures, investment property and cash and cash equivalents.
- Financing: income and expenses from liabilities that raise finance, plus interest on other liabilities.
- Income taxes and discontinued operations: as defined in the relevant standards.
The standard leaves room for judgement. The IFRS Foundation lists live implementation questions on income from cash and cash equivalents, assets that generate returns independently, and operating expense presentation. Document each judgement and who approved it, because your auditor will ask.
Step 4: Add an IFRS 18 tag to the chart of accounts
Do not renumber accounts. Add a category attribute or dimension to each general ledger account and cost centre in your ERP. That one field drives everything downstream and lets you produce both the old and new formats from the same ledger.
Step 5: Automate the rules and route exceptions to people
Let the tag classify the bulk of postings. Build an exception queue for items that need judgement: foreign exchange differences, gains and losses on derivatives that hedge currency exposure, intragroup balances and one-off items. The IFRS Foundation has published material on the first three, so check it before you set the rules.
Step 6: Build the bridge for every performance measure
For each measure on the Step 1 register, create a controlled schedule that starts at an IFRS subtotal, lists each adjustment with its reason, shows the tax and non-controlling-interest effect, and ends at the management measure. Replace the spreadsheet that currently lives on one analyst’s laptop with a reviewed, version-controlled bridge.
Step 7: Run a shadow close through 2026, then test the controls
Produce the IFRS 18 profit or loss statement and cash flow statement each quarter of 2026 alongside the current format. Reconcile the two, take the output to the audit committee and walk your auditor through the judgements early. Interim reports in 2027 will use the new structure too, so the first half-year is the real deadline for a calendar-year company. Internal audit can test the mapping and exception controls before the external audit begins.
Timing | Milestone |
|---|---|
Now to December 2026 | Inventory measures, write the rulebook, tag the chart of accounts, review covenants |
Quarterly through 2026 | Shadow close in both formats, report differences to the audit committee |
Early 2027 | Agree comparative restatement and disclosure drafts with the auditor |
First 2027 interim period | First external reporting under IFRS 18 |
A worked illustration: same ledger, different operating profit
The figures below are invented for illustration. They assume the company has no specified main business activity and that its bank deposits qualify as cash equivalents.
AED ‘000 | Category | Amount |
|---|---|---|
Revenue | Operating | 100,000 |
Cost of sales | Operating | (58,000) |
Selling, admin and other expenses | Operating | (27,000) |
Operating profit | Mandatory subtotal | 15,000 |
Share of profit of associate | Investing | 2,000 |
Interest income on bank deposits | Investing | 1,000 |
Profit before financing and income taxes | Mandatory subtotal | 18,000 |
Interest expense on bank borrowings | Financing | (4,000) |
Profit before income tax | Additional subtotal | 14,000 |
Income tax expense | Income taxes | (1,500) |
Profit for the year | 12,500 |
Suppose this company’s results deck currently reports “operating profit” of AED 18 million, including the associate and the deposit interest. Under IFRS 18, the statement shows AED 15 million, about 17% lower.
Profit for the year stays at AED 12.5 million. If a facility agreement builds its EBITDA definition from operating profit as presented in the accounts, the starting point for the covenant calculation just fell by AED 3 million. Nothing in the business changed.
Mistakes to avoid
- Treating it as a relabelling exercise. Classification needs judgement and documentation.
- Ignoring the cash flow statement. The starting point and the interest and dividend rules both change.
- Leaving covenants untouched. Check the definitions now, not at the first compliance date.
- Running two versions of operating profit. If the board pack, the deck and the audited accounts disagree, expect questions from every direction.
- Starting in 2027. The comparatives, the interim reports and the lender conversations all begin earlier.
Frequently Asked Questions
Is IFRS 18 effective yet?
Not yet. IFRS 18 applies to annual reporting periods beginning on or after 1 January 2027, and earlier application is permitted. For a calendar-year company, the first annual statements under IFRS 18 are for the year ending 31 December 2027, with 2026 restated as the comparative.
Does IFRS 18 apply to UAE free zone and mainland companies?
It applies to any UAE entity that prepares financial statements under full IFRS Accounting Standards. A company that reports under IFRS for SMEs follows that standard instead. Confirm your reporting framework with your auditor.
Will IFRS 18 change profit or Corporate Tax?
It changes how profit is presented, not how it is measured, so profit for the year stays the same. Corporate Tax still starts from accounting income and the required tax adjustments. The reconciliation between your financial statements and tax return should be reviewed when categories change.
Do we have to restate 2026?
Yes, for presentation. IFRS 18 applies retrospectively, so comparative figures in the 2027 statements must follow the new structure.
Can we still use adjusted EBITDA?
Yes. IFRS 18 does not prohibit it. Measures that meet the definition of a management-defined performance measure must be disclosed in the financial statements with a reconciliation and an explanation.
How does IFRS 18 affect loan covenants?
It does not change the contract, but it can change the number the contract points to. Review how your facility defines operating profit, EBITDA and accounting principles, and whether those principles are fixed at signing.
What changes in the cash flow statement?
Companies using the indirect method start from operating profit. For most entities, the choice of how to classify interest and dividends is removed, so interest and dividends received are generally investing, and interest paid and dividends paid generally sit in financing.
What should a CFO do first?
Build the inventory of published performance measures and read every facility agreement. Those two tasks show quickly where the exposure sits.
Conclusion
IFRS 18 will not change what your company earns. It will change what the market sees first, what lenders calculate from and how closely your own performance measures are examined. Teams that tag the chart of accounts, document their judgements and run a shadow close during 2026 will restate from a position of control. Teams that wait will do it under year-end pressure.
If your finance team is mapping income and expenses to the new categories or reviewing covenant definitions, speak to NR Doshi & Partners. Our CFO services, accounting and finance and external audit teams can help plan the 2026 comparative-year transition.
Author:
Written by the NR Doshi & Partners IFRS Advisory Team. NR Doshi & Partners is an FTA-approved chartered accountancy and business advisory firm, established in 1985, with seven offices across the UAE and a member of DFK International.
