IFRS 18 will improve statement comparability, but analysts will still retain key judgment space

Overview

This report is an investment playbook on accounting standards IFRS 18 and IFRS 15. Bernstein discusses whether the IFRS 18 standard, due to take effect in January 2027, will make investors 'fall in love' with the new accounting rule, and uses Technip Energies' balance sheet changes after adopting IFRS 15 in 2018 as a case study to show how accounting standards can change investors' understanding of net cash, receivables, contract assets, and contract liabilities.

Core views

The core view is that IFRS 18 is broadly helpful for investors because it will improve consistency in income statement classification, operating profit definitions, management-defined performance measures, and cash flow statement disclosure; however, it is not a perfect standard because non-recurring items still lack a uniform definition and analysts must still estimate sustainable recurring earnings on their own. At the same time, IFRS 18 moves financial income and financial expenses into investing and financing categories, weakening the intuitive appeal of the traditional 'financial result' as a single analytical metric. The Technip Energies case also shows that IFRS 15 can affect the presentation of net cash through accounting reclassification, and that if a company provides more disaggregated information, investors' judgment of margins and cash quality improves materially.

Analysis framework

The report uses a combination of standard-by-standard comparison and company case analysis: it first compares IAS 1 and IFRS 18 across the income statement, MPMs, aggregation and disaggregation, cash flow statement, and balance sheet, then uses the changes in contract assets, contract liabilities, trade receivables, and net cash after TechnipFMC/Technip Energies adopted IFRS 15 to validate the real impact of accounting standards on investment judgment.

Methodology notes

• Accounting standards analysisIFRS 18

  Five categories and five subtotals

  IFRS 18 requires companies to disclose operating, investing, financing, income tax, and discontinued operations categories in the income statement, and introduces or strengthens subtotals such as operating profit, financing, and profit before tax to improve comparability across companies.

• Performance disclosureManagement-defined Performance Measures

  Management-defined performance measures

  IFRS 18 requires income and expense subtotals used by management in public communications and not part of the mandatory subtotals to be disclosed in the financial statements, increasing transparency around non-GAAP or management-defined metrics.

• Accounting standards case studyIFRS 15

  Contract assets and contract liabilities

  Under IFRS 15, contract assets and contract liabilities are fundamentally working-capital items; the report uses the Technip Energies case to show how this standard affects the presentation of trade receivables, contract assets, contract liabilities, and net cash.

• Financial statement analysisAggregation and disaggregation

  Aggregation and disaggregation

  The report emphasizes that the primary statements become more aggregated while the notes become more disaggregated; items should be classified according to similar characteristics such as nature, function, measurement basis, size, geography, and regulatory environment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• IFRS 18

  An upcoming accounting standard that will affect how energy and power companies present financial statements and how comparable they are.

  Strengths

  It standardizes the definition of operating profit, improves MPM transparency, requires a more informative indirect method in the cash flow statement, and requires goodwill to be presented separately on the balance sheet.

  Weaknesses

  It does not define non-recurring items, so analysts still need to estimate recurring operating profit themselves; the traditional financial result metric is also split apart.

  Comparison

  Compared with IAS 1, IFRS 18 is more structured and more transparent, but it does not fully solve the subjectivity involved in profit quality analysis.

  Risks

  After implementation, changes in company disclosure may create restatement of historical metrics and transitional noise in comparability.

• Technip Energies

  The report's core case company, used to illustrate how IFRS 15 affects the interpretation of net cash and working-capital items.

  Strengths

  Its 2024 CMD provided more detailed breakdowns of net contract liabilities and net cash, helping investors clearly identify the cash composition within project profit, contingent provisions, and trade receivables.

  Weaknesses

  Earlier disclosure was relatively high-level, and the IFRS 15 impact within net cash was not sufficiently transparent.

  Comparison

  Compared with the forward-looking IFRS 18 discussion, Technip Energies is an actual case of IFRS 15 already in practice.

  Risks

  If investors look only at total net cash without breaking down contract liabilities, trade receivables, and project costs, they may misjudge cash quality and profit margins.

• Energy and power sector

  The industry context in which accounting standard changes are applied.

  Strengths

  Large project-based businesses with extensive contract asset/liability and cash flow disclosure benefit from the standards changes through finer analytical granularity.

  Weaknesses

  Long-duration projects, advances received, receivables, and contract liabilities have complex relationships, so statement items do not necessarily map directly to operating progress.

  Comparison

  Compared with simple manufacturing or consumer businesses, engineering and energy services companies are more likely to be affected by changes in IFRS 15 and IFRS 18 presentation.

  Risks

  During the transition between standards, investors need to guard against misreading changes in reported profit, cash, and working-capital metrics.

Key data

• IFRS 18 implementation date2027-01-01The report says IFRS 18 will replace IAS 1 on January 1, 2027.
• Main new IFRS 18 categoriesOperating, investing, financingIncome tax and discontinued operations remain unchanged relative to IAS 1.
• IFRS 18 disclosure focusFive categories, five subtotals, MPMs, aggregation and disaggregation, cash flow statement, goodwill presentation on the balance sheetThe report believes these changes will improve transparency and structured comparability.
• TechnipFMC 2017-2018 change in net contract liabilitiesFrom $1,677m to $2,774m, an increase of about $1.1bnThe report attributes most of the change to the impact of IFRS 15 adoption.
• Change in trade receivablesUp $1,513m to $2,468m, about 2.6xThe report says IFRS 15 significantly enlarged trade receivables.
• Change in contract assetsDown by about 25%, or $450m, to $1,295mThis reflects reclassification from contract assets to trade receivables and related items.
• Change in contract liabilitiesUp by about 33%, or $1,116m, to $4,069mThe report believes this is related to Technip Energies' later net cash presentation.
• Technip Energies 2024 CMD disclosed NCLAbout €2.7bnOf which future project costs are below €1.5bn, and net cash held exceeds €1.2bn.
• Breakdown of net cash held>€1.2bn = about €840m IFRS 15 trade receivables + about €240m project profit + about €120m contingent provisionsThe report argues that more disaggregation improves the visibility of the investment case.

Impact & implications

For investors, the greatest value of IFRS 18 is that it standardizes operating profit, the starting point of the cash flow statement, management performance metrics, and goodwill presentation, thereby lowering the cost of cross-company comparison. However, it does not eliminate subjectivity in judging recurring earnings, especially because non-recurring items still have to be identified by analysts. The Technip Energies case reminds investors that accounting standards can simultaneously change disclosure transparency and the structure of financial line items; investors should not look only at total net cash, but also track its composition in trade receivables, contract liabilities, and project margin balances.

Risks

• IFRS 18 does not unify the definition of non-recurring items, leaving recurring earnings subject to substantial analyst judgment.
• Once financial income and financial expenses are split into investing and financing categories, the intuitive appeal of the traditional financial result metric declines.
• Under IFRS 15, the accounting definitions of contract assets, contract liabilities, and trade receivables do not equal a project's actual execution progress, creating a risk of misinterpretation.
• If a company discloses only total net cash without its composition, investors may overestimate cash quality or underestimate project cost obligations.
• The transition to a new standard may bring historical restatements, changes in metric definitions, and transitional noise in cross-company comparisons.

What to watch

• After IFRS 18 formally takes effect in January 2027, whether companies disclose operating profit and financing profit before tax on a consistent basis.
• How companies disclose MPMs, and the reconciliation between those metrics and IFRS mandatory subtotals.
• How analysts define and exclude non-recurring items in order to build a sustainable recurring earnings measure.
• The degree of disaggregation provided by energy engineering companies for contract assets, contract liabilities, trade receivables, and the composition of net cash.
• Whether Technip Energies continues to improve transparency around NCL, project profit, net cash within receivables, and contingent provisions.