The ripple effects that reach the statement of cash flows, interim reporting, and the standard formerly known as IAS 1's accounting policy rules
Most of the commentary on IFRS 18, including the first five blogs in this series, understandably focuses on the statement of profit or loss, because that's where the standard's headline changes live. But IFRS 18 was never designed to operate in isolation. As a full replacement for IAS 1, it triggers a chain of consequential amendments across the broader suite of IFRS Accounting Standards. This blog looks at the three that matter most in practice: the statement of cash flows (IAS 7), the standard now called IAS 8 Basis of Preparation of Financial Statements, and interim financial reporting (IAS 34).
1. The Statement of Cash Flows: A New Starting Point
For the many entities that prepare their statement of cash flows using the indirect method, IFRS 18 changes something fundamental: the starting point. Prior to IFRS 18, the indirect method reconciliation began with profit or loss , the bottom-line number, after tax and after any discontinued operations. Under IFRS 18's consequential amendments to IAS 7, the starting point becomes operating profit or loss , the first of IFRS 18's two mandatory subtotals.
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Why these matters Starting the cash flow reconciliation from operating profit, rather than profit for the year, means the reconciling items presented in the operating activities section will change. Adjustments for income tax paid, finance income and expense, and investing-category items will need to be added back or removed in a different sequence than preparers are used to, because those items now sit below the new starting point rather than being embedded within it. |
In practice, this means finance teams preparing cash flow statements will need to rebuild their indirect-method reconciliation templates from scratch, rather than simply relabelling the existing starting line. The logic of ‘what gets added back’ and ‘what gets carved out separately’ needs to be re-derived against the new operating profit definition, not assumed to carry over unchanged.
A Worked Illustration: Rebuilding the Indirect-Method Reconciliation
The change in starting point sounds abstract until you actually try to rebuild the reconciliation. Using the same illustrative manufacturing entity from earlier in this series (profit for the year of AED 2,590, operating profit of AED 3,270 after full IFRS 18 classification), here is how the top of the operating activities section of the cash flow statement changes.
Before IFRS 18: starting point is profit for the year
| Cash flows from operating activities (illustrative, AED 000s) | 20X7 |
|---|---|
| Profit for the year | 2,590 |
| Adjustments for: depreciation and amortisation | 620 |
| Adjustments for: net finance costs | 420 |
| Adjustments for: income tax expense | 820 |
| Adjustments for: share of profit of associates | (150) |
| Adjustments for: fair value gains on investment property and equity investments | (310) |
| Working capital movements | (280) |
| Cash generated from operations | 3,710 |
| Interest paid | (410) |
| Income taxes paid | (790) |
| Net cash from operating activities | 2,510 |
After IFRS 18: starting point is operating profit
| Cash flows from operating activities (illustrative, AED 000s) | 20X7 | |
|---|---|---|
| Operating profit | 3,270 | |
| Adjustments for: depreciation and amortisation (operating category assets) | 620 | |
| Adjustments for: expected credit losses and other non-cash operating items | 55 | |
| Working capital movements | (280) | |
| Cash generated from operating category activities | 3,665 | |
| Interest paid | (410) | |
| Interest received | 45 | |
| Dividends received | 130 | |
| Income taxes paid | (790) | |
| Net cash from operating activities | 2,640 | |
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What actually changed Notice that income tax expense, net finance costs and the equity-accounted share of associates' profit no longer appear as reconciling add-backs at all , because they were never part of operating profit in the first place under IFRS 18. Instead, cash interest, dividends and tax are added directly as operating cash flow items (subject to an entity's IAS 7 classification policy), producing a cleaner, more directly traceable reconciliation from a subtotal that itself excludes financing and investing effects. The net cash from operating activities figure can differ from the pre-IFRS 18 figure purely because of how these items are now sequenced and classified, even though total cash flow for the period, across all three sections combined, is unaffected. |
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2. Interest and Dividend Cash Flows: Choice Is Gone
A second, and in some ways more consequential, change to IAS 7 is the elimination of the classification options that IAS 7 historically permitted for interest and dividend cash flows.
Under the pre-IFRS 18 version of IAS 7, entities had a genuine choice in how to classify:
- Interest paid , operating or financing activities.
- Interest received , operating or investing activities.
- Dividends paid , operating or financing activities.
- Dividends received , operating or investing activities.
This flexibility was a long-standing source of inconsistency: two companies in the same sector could classify identical cash flows in entirely different sections of the cash flow statement, purely as a matter of accounting policy choice. IFRS 18 removes that discretion. Although the BDO practice guidance underlying this series focuses primarily on the income statement, the direction of travel is consistent with IFRS 18's broader comparability objective: cash flow classification is being aligned much more closely and consistently across entities, removing the free choice that previously existed.
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Practical tip Entities that have historically used the operating-activities option for interest paid or received should map out, well ahead of transition, how their cash flow statement structure and any related debt covenant or free-cash-flow metrics will be affected once that option is no longer available. |
3. IAS 8: A New Name, and a New Home for Old IAS 1 Content
One of the more easily missed consequential changes is what happened to the standard formerly known as IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. As part of the IFRS 18 project, this standard was renamed IAS 8 Basis of Preparation of Financial Statements, and it absorbed a substantial volume of general-purpose requirements that used to live in IAS 1 but were never really about the structure of the income statement.
Topics relocated from IAS 1 into the renamed IAS 8 include, among others:
- Fair presentation and compliance with IFRS Accounting Standards.
- Going concern assessment and disclosure.
- Disclosure of significant accounting policy information.
- Disclosures about judgements and sources of estimation uncertainty.
These requirements are, in substance, brought forward largely unchanged , this is a relocation exercise, not a rewrite of the underlying accounting. But preparers and auditors need to update their disclosure checklists and cross-references, since citing ‘IAS 1.117’ for significant accounting policy disclosures, for instance, is no longer correct once IFRS 18 is effective; the requirement now lives in IAS 8.
4. IAS 28: A One-Time Transition Opportunity for Certain Investors
A more technical, but genuinely useful, consequential change touches IAS 28 Investments in Associates and Joint Ventures. IAS 28.18 allows certain entities, venture capital organisations, mutual funds, unit trusts and similar entities including investment-linked insurance funds , to elect, on initial recognition of an associate or joint venture, to measure it at fair value through profit or loss under IFRS 9 rather than apply the equity method. Ordinarily, this election is only available at initial recognition.
IFRS 18 recognises that this creates a problem on transition: an entity that previously elected to apply the equity method will always have its share of associate profit or loss classified in the investing category, regardless of whether investing in such entities is actually its main business activity. For a venture capital organisation, that outcome would misrepresent the nature of its core activity. To fix this, IFRS 18 grants a one-time transition opportunity: at the date of initial application, an entity may change its election from equity method to fair value through profit or loss (but not the reverse), allowing income and expenses on qualifying investments to be classified in operating where investing in such assets is a specified main business activity.
5. IAS 34: Interim Reporting Gets Pulled Into the New World Too
For entities that publish interim financial reports, IFRS 18 does not stay confined to the annual accounts. IAS 34 Interim Financial Reporting is affected in two distinct ways.
Ongoing periods, post-transition
Once an entity has fully transitioned to IFRS 18, IAS 34.10's normal rule applies: interim financial statements must use the same headings and subtotals as the entity's most recent annual financial statements. That means the operating profit subtotal, the profit-before-financing-and-income-taxes subtotal, and the entity's chosen classification approach must be consistent between the annual accounts and each subsequent interim report , no drifting back to old presentation styles between quarters.
The special problem in the year of transition
Here's the wrinkle: in the very first year an entity applies IFRS 18 (for a calendar year-end entity, this typically means the year ending 31 December 2027), IAS 34.10 would technically require the entity's Q1 2027 interim statements to use the headings and subtotals from its 31 December 2026 annual financial statements , which were prepared under the old IAS 1, not IFRS 18. That outcome would defeat the purpose of transitioning at all. IFRS 18 fixes this with a specific transition provision (IFRS 18.C4), which overrides IAS 34.10 for that first year: entities must present each heading they expect to use in applying IFRS 18, along with the IFRS 18-mandated subtotals, in their condensed interim financial statements , even though their most recent annual financial statements were prepared under the old standard.
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Also worth noting IAS 34.16A(m), as amended, requires entities to provide disclosures about management-defined performance measures (MPMs) in interim financial reports, consistent with the requirements of IFRS 18.121–125 applicable to annual financial statements. MPM disclosures are not a year-end-only exercise. |
Putting It Together: A Transition Checklist
| Standard affected | What changes | Action for preparers |
|---|---|---|
| IAS 7 | Indirect method starts from operating profit, not profit for the year; interest/dividend cash flow classification options removed. | Rebuild indirect-method reconciliation templates; reassess interest/dividend cash flow classification policy. |
| IAS 8 (renamed) | Absorbs fair presentation, going concern, and accounting policy/estimate disclosure requirements previously in IAS 1. | Update disclosure checklists and internal cross-references away from legacy IAS 1 citations. |
| IAS 28 | One-time option to switch from equity method to FVTPL for qualifying associates/joint ventures on transition. | Venture capital, fund and similar entities should assess whether re-election better reflects their SMBA classification. |
| IAS 34 | Post-transition: headings/subtotals must match latest annual accounts. Transition year: IFRS 18.C4 overrides the default IAS 34.10 rule. | Plan interim reporting formats for the transition year separately from steady-state periods; ensure MPM disclosures are built into interim templates. |
Conclusion
IFRS 18's reach extends well past the statement of profit or loss. The change in starting point for the indirect-method cash flow statement, the removal of interest and dividend classification choices, the quiet but significant relocation of core disclosure requirements into a renamed IAS 8, the one-time IAS 28 re-election window, and the special transition mechanics for IAS 34 interim reporting are all consequences that finance teams need to plan for as part of the same project , not as separate, later work streams. Entities that treat IFRS 18 purely as an income statement redesign risk being caught out by these secondary effects much closer to the 2027 effective date than they'd like.
The consequential amendments to IAS 7, IAS 8 and IAS 34 are easy to overlook until they surface as a last-minute surprise in your transition project. CLA Emirates offers practical IFRS advisory in UAE to help finance teams map these secondary effects into their IFRS 18 project plan from the outset, rather than discovering them the hard way closer to go-live.
Next in this series, we turn to a topic that determines how much detail appears on the face of the statement of profit or loss versus in the notes: the enhanced aggregation and disaggregation guidelines introduced by IFRS 18.
