In 2027, the new accounting standard IFRS 18 will come into effect, and investors should pay close attention to five major changes.

Overview

This report provides a detailed analysis of the new International Financial Reporting Standard IFRS 18, which will take effect on January 1, 2027. The report highlights that IFRS 18 will bring significant changes to the income statement, management performance measures (MPMs), aggregation and disaggregation, the cash flow statement, and the balance sheet. While the new standard enhances transparency—such as mandating the indirect method for cash flows and requiring separate disclosure of goodwill—it also has shortcomings, including the continued absence of a clear definition of “non‑recurring items.” Furthermore, by examining how Technip Energies leveraged the previous-generation standard IFRS 15 to optimize its net cash position, the report cautions investors to remain vigilant about the potential impact of accounting‑standard changes on a company’s financial performance.

Core views

The core change introduced by IFRS 18 lies in the standardization of the income statement structure. The new standard requires companies to classify profit or loss into five categories: operating, investing, financing, income tax, and discontinued operations. The “operating” category serves as a residual, encompassing revenues and expenses that do not fall into the other four categories. This will compel all companies to adopt a uniform definition of “operating profit”; however, regrettably, the standard‑setting body has once again refrained from defining “non‑recurring items,” meaning analysts will still need to determine on their own which items are one‑off in order to calculate “recurring operating profit.” Another significant change is the increased transparency surrounding management‑defined performance measures (MPMs). IFRS 18 stipulates that if a company uses certain non‑GAAP subtotals—such as EBITDA or adjusted profit—in its public communications (e.g., press releases, presentations)—it must explicitly disclose these metrics and the corresponding reconciliation process in the financial statements. This aims to reduce the scope for companies to mislead investors through self‑constructed indicators. On the cash flow statement, IFRS 18 mandates the use of the indirect method, which derives operating cash flow from operating profit or EBITDA rather than net profit. This shift has been welcomed by investors, as the indirect approach provides richer information, illuminating the sources of discrepancies between profit and cash flow. At the same time, interest and dividend payments are now categorically classified: interest and dividends paid are allocated to financing activities, while interest and dividends received are assigned to investing activities, thereby eliminating the previous discretion. On the balance sheet, goodwill must be presented as a separate line item, no longer concealed within intangible assets, which represents a positive step toward greater transparency. Furthermore, interest income generated from financial assets is now classified under the “investing” function, whereas interest expense on debt is assigned to the “financing” function; these two are clearly segregated, and a new subtotal, “profit before finance and tax,” has been introduced. The report illustrates the practical impact of accounting standards through the case of Technip Energies. Upon the adoption of IFRS 15 in 2018, the company leveraged the provisions governing contract assets and liabilities: it recognized certain advance receipts as contract liabilities (rather than immediately offsetting them against accounts receivable) and disclosed relatively few details in its financial statements, thereby building up a substantial “net contract liability” on its books. This accounting treatment led to a sharp increase in the company’s trade receivables (as IFRS 15 favors gross‑amount recognition), with a corresponding rise in contract liabilities, ultimately enabling it to project a net cash position of approximately €1.2 billion without materially altering its actual cash flows. It was not until the 2024 CMD conference that management disclosed further details, revealing that this apparent net cash primarily consisted of receivables adjusted under IFRS 15. This case demonstrates that companies well‑versed in accounting standards can exploit the rules to optimize their financial presentation, though the implementation of the new IFRS 18 may constrain such practices or alter their manifestation.

Analysis framework

The report first dissects the five key areas of change under IFRS 18—namely, the income statement, MPMs, aggregation and disaggregation, cash flows, and the balance sheet—from a theoretical perspective, elucidating the new standard’s specific requirements and their implications for financial analysis. It then employs a comparative‑analysis approach, highlighting the advancements of the new standard over its predecessor (IAS 1)—such as the harmonization of the operating‑income definition and the mandatory use of the indirect method for cash‑flow reporting—while also identifying lingering issues, including the absence of a formal definition for non‑recurring items. Finally, the report presents an empirical case study—Technip Energies in the context of IFRS 15—revisiting historical data (balance‑sheet changes from 2017 to 2018) to demonstrate concretely how accounting standards shape the presentation of a company’s financial metrics, thereby prompting readers to consider the analogous effects that IFRS 18 may entail. This integrated approach, blending normative analysis with case studies, not only clarifies the rules but also underscores their practical impact.

Methodology notes

• Company Fundamentals and Financial FrameworkReconciliation among the three financial statements

  The Impact of Accounting Standard Changes on the Reclassification of Financial Statement Items

  IFRS 18 has altered the classification logic for line items in the income statement and the cash flow statement (for example, by reclassifying interest income and expenses). Analysts must understand how these reclassifications affect the calculation and comparability of key financial ratios, such as EBITDA and operating cash flow.

• Company Fundamentals and Financial FrameworkOperating Capital Cycle

  The Conversion Relationship Between Contract Assets/Liabilities and Accounts Receivable

  Under IFRS 15, an increase in contract liabilities is often accompanied by a corresponding rise in accounts receivable recognized under the gross method. In the Technip case, this manifested as a structural shift within the working capital line item, thereby affecting the reported net cash position.

Asset mapping & comparison

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

• Technip Energies (TE.FP)

  Case study subject, demonstrating how to leverage IFRS 15 to optimize financial performance.

  Strengths

  Skilled at leveraging accounting standards to engage in financial engineering, creating the appearance of a robust net cash position.

  Weaknesses

  In the past, disclosure transparency was limited; it was only in 2024 that the composition of NCLs was disclosed in detail.

  Risks

  The new standard IFRS 18 may constrain its traditional accounting optimization strategies or give rise to volatility in financial metrics.

Key data

• Effective Date of IFRS 18January 1, 2027Replaces the existing IAS 1 standard
• Change in Technip Energies’ Net Contract Liabilities (NCL)From US$1.677 billion in 2017 to US$2.774 billion in 2018.Primarily due to the implementation of IFRS 15, there was an increase of USD 1.1 billion.
• Changes in Technip Energies’ trade receivablesIn 2018, it increased by 54% compared to 2017.From USD 1.603 billion to USD 2.468 billion, partly due to the full‑amount revenue recognition under IFRS 15.
• Implied Net Cash Composition of Technip Energies>€1.2 billionOf this amount, approximately €840 million relates to accounts receivable adjustments under IFRS 15, €240 million represents project profits, and €120 million is allocated to the contingency reserve.

Impact & implications

For investors, the implementation of IFRS 18 will require adapting to a new income statement structure when reviewing financial reports. In particular, the definition of “operating profit” will become more standardized, though the assessment of “recurring profit” will continue to rely on analysts’ subjective adjustments. Mandatory disclosure of MPMs will enhance the transparency of non‑GAAP metrics, helping to identify whether companies are artificially smoothing their results. The widespread adoption of the indirect method in the cash flow statement will make cash‑flow analysis more intuitive. For firms like Technip Energies, which have traditionally leveraged accounting standards to optimize their financial metrics, the new standard may constrain their ability to fine‑tune these metrics through accounting classifications or compel them to devise new disclosure strategies under the revised framework. Investors should closely monitor the footnotes of the first batch of companies adopting IFRS 18 after 2027, paying particular attention to reconciliation schedules for MPMs and disclosures related to non‑recurring items.

Risks

• IFRS 18 has yet to provide a clear definition of “non-recurring items,” which may continue to result in variations across companies in the calculation of “operating profit from continuing operations,” thereby undermining comparability.
• During the transition period, the company may require time to align its systems and processes with the new standards, which could result in some data volatility in the initial financial reports.

What to watch

• For companies that will be among the first to release IFRS 18 financial statements after January 2027, the key focus will be on the level of detail disclosed in their MPMs.
• Are analysts’ practices for adjusting “non-recurring items” becoming more consistent under the new accounting standards?
• Does the application of the indirect method in the statement of cash flows genuinely enhance the accuracy of cash flow forecasts?