What IFRS 18 changes in the statement of cash flows

IFRS 18 makes two changes to the statement of cash flows, through consequential amendments to IAS 7. Both apply to annual and interim periods beginning on or after 1 January 2027 (KPMG).

1. The starting point for the indirect method becomes operating profit, rather than profit before tax.
2. The classification options for interest and dividends are removed, and what replaces them follows the entity's main business activities.

The first is mechanical. The second is not, and it is the reason this deserves attention beyond a presentational tidy-up.

The starting point changes

Under IAS 7 as it stood, an entity using the indirect method began with profit before tax and worked back. The amended requirement is to begin with the operating profit subtotal that IFRS 18 introduces (KPMG).

That removes a set of reconciling items and introduces others. Anything now sitting below operating profit, interest and dividends among them, no longer needs backing out of the starting figure, because it was never in it. Anything inside operating profit that is not a cash flow still does.

The practical consequence is that the reconciliation is rebuilt rather than adjusted. A working paper that starts from profit before tax and strips out finance items is not a working paper you can amend into the new shape.

The classification options are gone

This is the substantive change. Under IAS 7, an entity chose:

• interest paid: operating or financing
• interest received: operating or investing
• dividends received: operating or investing

Those choices are removed. For an entity without a specified main business activity of investing in assets or providing financing to customers, which is the ordinary corporate case, the classification is fixed (PwC):

Cash flow	Now classified as
Interest paid	Financing
Interest received	Investing
Dividends received	Investing
Dividends paid	Financing

An entity that previously put interest paid in operating, which many did, moves it to financing. That changes reported operating cash flow with no change in any underlying transaction.

The part that catches people

The two statements are now linked by the same judgement.

Where interest and dividends sit in the cash flow statement follows the assessment of whether the entity has a specified main business activity, and that is the same assessment that decides where they sit in the income statement. One conclusion drives both.

So a decision taken for presentation purposes in the profit or loss statement moves a figure in the cash flow statement as well, and the two have to be consistent. An entity that concludes it invests in assets as a main business activity, and therefore reports investment returns inside operating profit, cannot then classify the related cash flows as investing because it prefers the look of the resulting operating cash flow.

That is worth stating plainly because the two statements are often prepared by different people from different working papers, on different review cycles. The assessment has to be one document that both refer to, not two positions that happen to agree. How to determine your main business activity sets out what that document needs.

What this does to reported operating cash flow

For a leveraged entity that classified interest paid as operating, the effect is mechanical and can be large: operating cash flow rises, financing outflow rises by the same amount, and nothing about the business has changed.

Three consequences follow:

Covenants. A covenant defined on operating cash flow, or on a ratio built from it, is measuring something different from 1 January 2027. It is worth identifying those now rather than at the first test date.

Guidance and consensus. Analysts model operating cash flow. A step change with no underlying cause is a change worth explaining before it is noticed rather than after.

Comparatives. The comparative period is restated, so both years move together and the trend is preserved. That is the reassuring part, and it depends on the restatement being done properly. Whether your comparative year has already begun depends on your year end, and for a December reporter it began in January 2026.

What to do

1. Find every place interest paid, interest received and dividends received sit today, and note which were policy choices rather than requirements.
2. Settle the main business activity assessment once, in writing, and make both the income statement and the cash flow statement working papers reference it.
3. Rebuild the indirect-method reconciliation from operating profit rather than amending the existing one.
4. Quantify the change in reported operating cash flow for the comparative year. That number is what treasury, investor relations and anyone holding a covenant need, and it is knowable now.
5. Check that the classifications in the two statements agree, and that they agree for the same stated reason.

Our free main business activity tool produces the written rationale both statements can point at.

One limit worth stating

This does not cover entities with a specified main business activity of investing in assets or providing financing to customers, where the classifications differ and the interaction with the income statement is more involved. It also says nothing about the direct method, which fewer entities use and which the amendments treat differently. If you are a bank, an insurer or an investment entity, the table above is not your table.

To see the reclassification worked through on your own statement, with the paragraph behind each answer, join the waitlist.