IFRS 18 will improve financial statement transparency, but still leaves gray areas that analysts must judge for themselves
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IFRS 18 will improve financial statement transparency, but still leaves gray areas that analysts must judge for themselves
Bernstein evaluates IFRS 18, which will replace IAS 1 in January 2027, from an energy and power-sector perspective, and uses Technip Energies' application of IFRS 15 to show how accounting standards affect net cash, working capital, and the investment case.
- IFRS 18 will require companies to disclose five categories and five subtotals, and standardize key metrics such as operating profit, which should improve cross-company comparability.
- Management-defined performance measures will be disclosed in the financial statements, increasing transparency around adjusted metrics and public communication.
- The report sees the indirect-method requirement for the cash flow statement as a major positive, because it starts from operating profit or EBITDA and better fits investor analysis needs.
- The main disappointment is that IFRS 18 still does not define non-recurring items, so analysts must still judge sustainable operating profit themselves.
- The Technip Energies case shows that, under IFRS 15, reclassification of contract assets, contract liabilities, and receivables can materially affect the visibility of net cash and the investment case.
Report interpretation
Overview
The report centers on IFRS 18, which will replace IAS 1 in January 2027, and discusses its impact on the income statement, management-defined performance measures, aggregation and disaggregation, the balance sheet, and the cash flow statement. Bernstein argues that the new standard is attractive because it standardizes operating profit, requires disclosure of management metrics, strengthens the indirect method in cash flow reporting, and separately presents goodwill, but it also notes that the standard does not solve the key investment-analysis problem of defining non-recurring items. The report then uses Technip Energies and the changes in its statements after adopting IFRS 15 in 2018 as a case study to show how accounting standards and disclosure granularity can change the market's understanding of net cash and working capital structure.
Core views
The core view is that IFRS 18 will make financial statements more structured and more comparable, and it will force companies to bring into financial-statement disclosure some management metrics that previously appeared only in earnings releases or presentations; that is positive for investors. However, the standard does not automatically provide a complete answer on recurring earnings, especially because it does not define non-recurring items, so analysts still need to make judgments beyond company disclosure. The report also argues that, through the changes in how contract assets, contract liabilities, and trade receivables are presented under IFRS 15, Technip Energies kept the composition of net cash relatively opaque for a long time, and only after more detail was disclosed at its 2024 capital markets day did investors clearly see that net contract liabilities included future project costs, project profit, contingent provisions, and net cash.
Analysis framework
The report combines standard-text interpretation with a company case review: it first compares IAS 1 and IFRS 18 across income-statement classification, subtotals, MPM disclosure, aggregation and disaggregation, goodwill presentation, and the cash flow statement, then uses the balance-sheet reclassifications at TechnipFMC and Technip Energies before and after IFRS 15 adoption to analyze the relationship between contract assets, contract liabilities, trade receivables, and net cash.
Methodology notes
Five categories and five subtotals in the income statement
IFRS 18 requires companies to organize the income statement into operating, investing, financing, income tax, and discontinued operations categories, and to disclose key subtotals such as operating profit and profit before financing and tax, improving structure and comparability.
Management-defined performance measures
The report stresses that IFRS 18 requires income and expense subtotals used in public communications, but not mandated by the standard, to be disclosed in the financial statements, helping investors understand a company's adjusted performance measures.
Reclassification of contract assets, contract liabilities, and trade receivables
The Technip Energies case shows that IFRS 15 affects the presentation of contract assets, contract liabilities, and trade receivables, changing the visibility of net cash and working capital items.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Technip EnergiesCase study subject for IFRS 15
- Strengths
- After more detailed disclosure of net contract liabilities in 2024, investors can better understand the relationship between its net cash, project profit, and trade receivables.
- Weaknesses
- Earlier disclosure of net-cash composition was limited, making it harder for the market to judge how much of the cash came from trade receivables, project profit, or contingent provisions.
- Comparison
- The report draws an analogy between its use of IFRS 15 and the accounting-standard preferences companies may show toward IFRS 18 in the future.
- Risks
- Accounting definitions are not the same as operational execution status; changes in contract assets or contract liabilities cannot be read directly as signs that a project is ahead of or behind schedule.
- Energy and Power sector stocksScope of IFRS 18 impact
- Strengths
- More standardized disclosure of operating profit, cash flow, and MPMs helps improve financial-statement comparability within the sector.
- Weaknesses
- Non-recurring items still need to be judged by analysts, and adjusted-profit metrics may still differ.
- Comparison
- Compared with IAS 1, IFRS 18 places more emphasis on structured classification and mandatory subtotals.
- Risks
- Companies may still influence investors' understanding of earnings quality through disclosure granularity, classification judgments, and management-defined metrics.
Key data
- IFRS 18 effective date2027-01-01The report says IFRS 18 will replace IAS 1 on January 1, 2027.
- IFRS 18 added income statement categoriesoperating, investing, financingThe other two categories are income tax and discontinued operations, which remain from IAS 1.
- IFRS 18 added mandatory subtotalsoperating profit or loss; profit or loss before financing and taxThe report notes that two of the five subtotals are new.
- TechnipFMC 2018 net contract liabilities change$1,677m to $2,774m, up by about $1.1bnThe report says this change was mainly related to adopting IFRS 15.
- 2018 trade receivables change$955m to $2,468m, about 2.6xThe report says trade receivables increased by $1,513m.
- 2018 contract assets change$1,745m to $1,295m, down about 25%The report says contract assets decreased by about $450m.
- Technip Energies 2024 capital markets day disclosed NCLaround €2.7bnThe report says this included future project costs, net cash, project profit, and contingent provisions.
- Technip Energies net cash held>€1.2bnThe report breaks this into about €840m of IFRS 15-related trade receivables, about €240m of project profit, and about €120m of contingent provisions.
Impact & implications
For investors, IFRS 18 may improve comparability of operating profit and cash flow statements across companies, and make management-adjusted metrics more transparent; but it will not eliminate subjective judgment about recurring earnings, non-recurring items, or the nature of financial income. For energy engineering companies, the IFRS 15 case shows that investors should not rely only on the headline net cash number; they also need to track the composition of contract liabilities, trade receivables, project profit, and contingent provisions. Higher disclosure granularity may make cash quality and project profitability, which were previously underestimated or hard to understand, clearer.
Risks
- IFRS 18 does not define non-recurring items, which may leave recurring profit analysis without a unified standard.
- Operating category is defined as a residual item, which may still require additional judgment for some income and expense classifications.
- With financial income and financial expenses split into investing and financing functions, the traditional financial result line is weakened.
- Contract assets and contract liabilities are accounting definitions and should not be directly equated with operational signs that a project is ahead of or behind schedule.
- If a company provides insufficient disclosure granularity, investors may struggle to judge the true quality of net cash, trade receivables, and project liabilities.
What to watch
- After IFRS 18 becomes effective in January 2027, whether companies disclose operating profit and related subtotals on a standardized basis.
- How companies disclose management-defined performance measures, and whether those measures are consistent with public presentation materials.
- Whether comparability between operating profit, EBITDA, and cash conversion improves after the cash flow statement adopts the indirect method.
- Whether companies continue to influence recurring-profit interpretation through their definition of non-recurring items.
- Whether Technip Energies continues to provide a breakdown of net contract liabilities, trade receivables, project profit, and contingent provisions.