A Brief Guide for Accountants

IFRS 18, Presentation and Disclosure in Financial Statements, is primarily known for changing the Statement of Profit or Loss. But its introduction also brings targeted changes to the Statement of Cash Flows through amendments to IAS 7.

The overall cash-flow structure does not change.

Entities will continue to report cash flows within:

• Operating Activities
• Investing Activities
• Financing Activities

However, two changes are particularly important for accountants:

1. Operating profit becomes the required starting point for the indirect method.
2. Previous classification alternatives for interest and dividend cash flows are reduced.

So, while IFRS 18 does not redesign the Statement of Cash Flows, it does require accountants to revisit cash-flow mappings, templates and classification policies.

IAS 7 Before vs After IFRS 18

The accountant shift:

Before: More accounting-policy choices

After: Greater standardization and comparability

Change 1 — Operating Profit Becomes the Starting Point

Under the indirect method, operating cash flow is calculated by starting with a profit measure and adjusting it for non-cash items, working-capital movements and other relevant items.

Before IFRS 18, entities could use different starting points in practice.

This reduced comparability.

IFRS 18 changes that.

The amended IAS 7 requires entities using the indirect method to start from the newly defined:

Operating Profit or Loss

Before vs After — Indirect Method

Consider a company with:

Operating profit: $6.2 million
Depreciation: $0.8 million
Working-capital increase: $0.5 million

BEFORE                                             AFTER IFRS 18

Why does this matter?

The cash-flow statement now begins from the same defined operating subtotal used in the Statement of Profit or Loss.

This should improve comparability and may simplify parts of the reconciliation.

For accountants, this means the existing cash-flow workbook may need to be redesigned rather than simply rolled forward.

Change 2 — Interest and Dividend Classification

This is potentially the more visible change in the Statement of Cash Flows.

Previously, IAS 7 provided alternatives for classifying certain interest and dividend cash flows.

IFRS 18-related amendments reduce those alternatives.

For an entity without specified main business activities, the comparison is:

This means an existing accounting policy may no longer be available.

Practical Example — Manufacturing Company

Assume a manufacturing company currently reports:

Interest received: $120,000
Interest paid: $400,000
Dividends received: $80,000
Dividends paid: $300,000

Historically, it classified all four within operating activities.

Side-by-Side

Accountant impact

This is not merely a presentation wording change.

It may change:

• operating cash flow;
• investing cash flow;
• financing cash flow;
• cash-flow KPIs;
• internal reporting;
• historical trend analysis; and
• comparative information.

The total movement in cash does not change.

What changes is where certain cash flows are presented.

But What About Banks and Finance Companies?

This is where accountants need to be careful.

The simple classification table above should not automatically be applied to every entity.

IFRS 18 identifies entities that have specified main business activities, including circumstances where an entity:

• invests in assets as a main business activity; or
• provides financing to customers as a main business activity.

This can be particularly relevant to Banks; Finance companies; Investment entities; Insurers and other financial-service businesses

For such entities, the classification analysis for interest received, interest paid and dividends received can differ.

Accountant rule:

First understand the entity’s main business activities. Then determine the appropriate IAS 7 classification.

Do not mechanically apply the non-financial-company treatment to a bank.

P&L Categories ≠ Cash-Flow Categories

This is one of the most important concepts for accountants implementing IFRS 18.

Both statements use familiar words: Operating; Investing; Financing

But they do not necessarily mean the same thing.

Therefore:

Do not assume that an item classified as Investing in the P&L must automatically be Investing in the Statement of Cash Flows.

The classification analysis must be performed separately.

What Does Not Change?

Despite these targeted amendments, IFRS 18 does not completely redesign the cash-flow statement.

The following remain:

Operating Activities

Cash flows arising principally from the entity’s revenue-producing activities.

Investing Activities

Cash flows relating to relevant investments and long-term assets under IAS 7.

Financing Activities

Cash flows relating to changes in the size and composition of equity and borrowings, subject to IAS 7’s requirements.

And entities may continue to use either the Direct Method or Indirect Method for presenting operating cash flows.

The new operating-profit starting point specifically affects entities using the indirect method.

What Should Accountants Do Now?

Implementation should start with the existing cash-flow statement and supporting workbook.

1. Identify the Current Method

Is the entity using Direct Method or Indirect Method?

If indirect, the starting point will need to align with IFRS 18 operating profit.

2. Review Interest and Dividend Policies

Document the current classification of:

• interest received;
• interest paid;
• dividends received; and
• dividends paid.

Then identify which classifications need to change.

3. Assess Main Business Activities

Determine whether the entity has specified main business activities relevant to the amended classification requirements.

This assessment should be documented.

4. Update the Cash-Flow Mapping

The ERP and reporting package should separately identify relevant interest and dividend cash flows.

Do not rely on manual year-end reclassification where the underlying system can be appropriately mapped.

5. Rebuild the Indirect Reconciliation

The cash-flow workbook should begin with Operating Profit or Loss and then apply the relevant IAS 7 adjustments.

6. Prepare the Comparative Period

Do not wait until the first IFRS 18 year to discover that historical information cannot easily be remapped.

Historical cash-flow classifications should be assessed early.

Accountant Readiness Checklist

Before IFRS 18 becomes effective:

• Confirm whether the entity uses the direct or indirect method.
• If indirect, change the starting point to Operating Profit or Loss.
• Review current interest and dividend classification policies.
• Identify classifications that will change.
• Assess whether the entity has specified main business activities.
• Document the basis for that assessment.
• Update cash-flow templates and workbooks.
• Update ERP and consolidation mappings.
• Ensure interest and dividend cash flows can be separately identified.
• Prepare comparative-period remapping.
• Test the revised cash-flow statement before implementation.
• Keep P&L and cash-flow classification assessments separate.

The Key Message

IFRS 18 does not replace IAS 7 or redesign the Statement of Cash Flows.

But it does introduce two important changes accountants cannot ignore:

Indirect Method

Old: Different starting points possible

New: Operating Profit or Loss

Interest & Dividends

Old: Several classification alternatives

New: More standardized classification

For accountants, the transition therefore moves from “Our cash-flow statement is not affected by IFRS 18” to “The structure remains, but the starting point and certain classifications must change.”

The practical priority is clear:

Review the policy. Remap the cash flows. Rebuild the reconciliation. Prepare the comparatives.

In Part 2 we will cover the balance sheet and equity u