IFRS 18 - The end of creative profit reporting: How the new rules rewrite the income statement

15 April 2026
Accounting & Financial Reporting
South African Accounting Academy

The holiday phase of "choose your own operating profit" is officially over.

For nearly three decades, the rules governing how companies present their financial performance offered a degree of flexibility that occasionally bordered on creative writing. Operating profit, arguably the most watched metric by investors and analysts, was an open-ended concept. A recent global survey of 100 listed companies found that while 63 of them proudly reported an "operating profit," they used nine completely different definitions to calculate it. The result is a profound lack of comparability that frustrates the market, analysts, and regulators alike. How do you compare two competing retailers on the JSE when their baseline definitions of profit are fundamentally different?

That flexibility is about to end. On 9 April 2024, the International Accounting Standards Board released the new global standard for presentation and disclosure, effectively retiring the 27-year-old rulebook. Come 1 January 2027, the structural overhaul of the income statement will be mandatory.

For South African financial directors, auditors, and accounting professionals, this is not a mere update. It is a fundamental shift in how financial performance is categorised, calculated, and communicated to the market. The time to sort out the transition is now, because the rules require full retrospective application. The data you record in 2026 will form the comparative backbone of your 2027 statements.

The core shift: Enforcing structure and clarity

Historically, guidance was often to reverse calculate operating profit from the profit-before-tax line. The new standard eliminates this ambiguity entirely. Approximately 60 percent of the new standard retains familiar core principles, but the remaining 40 percent introduces entirely new, stringent provisions designed to enforce structure and clarity.

The most visible impact will be the mandatory presentation of two new, strictly defined subtotals in the income statement. First, there is a specific, enforceable definition and calculation guideline for operating profit. Second, there is a new subtotal for profit before financing and income taxes. This dissects performance before capital structure and tax impacts are considered.

These subtotals are not optional suggestions. They are the anchors for a completely revised classification system. Every line of income and expense must now be forced into one of five distinct categories: Operating, Investing, Financing, Income Taxes, or Discontinued Operations.

Crucially, the Operating Category now acts as a balancing figure. It catches everything that is not explicitly classified elsewhere. While entities retain the flexibility to prepare statements by nature or by function, there is a catch. If the function method is used, specific line items like depreciation, amortisation, employee benefits, impairment losses, and reversals of inventory must still be explicitly disclosed in the notes.

Deep-Dive Scenarios: How this plays out in South Africa

The theoretical changes sound straightforward, but the practical application will force significant reporting shifts across the South African corporate sector.

Scenario 1: The specialised financial institution

Consider a local bank or a real estate investment trust listed on the JSE. Under the old rules, interest received by a bank might be seen as an investing or financing activity. Under the new standard, for entities with specified main business activities like providing financing to customers, items typically considered investing or financing will now be classified as operating. This requires a fundamental re-evaluation of what constitutes core operations. The entire presentation of the bank's income statement will shift to reflect interest income as the primary operating driver, directly impacting how market analysts value the business based on its core operating profit.

Scenario 2: The retailer and the "other expenses" bucket

A common frustration for anyone analysing South African financial statements is the dreaded "Other Expenses" line item. It often acts as a dumping ground for material, but poorly defined, costs. A large national retailer might have historically grouped various restructuring costs, IT implementation write-offs, and general administrative overruns into a single "Other" line to keep the face of the income statement clean.

The new rules introduce strict principles for grouping numbers together. Information must be aggregated if it shares common characteristics but disaggregated if it does not. Critically, entities must not obscure material information by aggregating it with dissimilar items or by using vague labels. If an "Other" category remains materially large, the retailer must now explicitly disclose the nature and amount of the largest items hiding within it in the notes.

Scenario 3: The listed mining group and custom metrics

South African mining companies are notorious for adjusting their earnings to strip out the effects of volatile commodity cycles or once-off impairments. They heavily rely on custom metrics in their public communications, using terms like "core operating profit" or "normalised headline earnings." These figures feature heavily in SENS announcements and investor presentations, usually presenting a rosier picture than the audited bottom line.

The new standard forces these custom metrics into the light. If the CFO of the mining group uses a custom profit subtotal in a public announcement, they must provide strict disclosures within a single, audited note in the financial statements. They must provide a clear reconciliation back to the most directly comparable, strictly defined accounting subtotal. They must distinguish between normal accounting adjustments and specific management adjustments. They must also explain the exact tax effect and the effect on minority shareholders for every single adjustment made.

Practical Efficiency: The How-To for Your Practice

For accounting professionals and finance teams, preparing for this shift requires immediate operational changes. Waiting until the end of 2026 is a guaranteed path to reporting failures.

Audit your chart of accounts: Review your general ledger and chart of accounts immediately. Ensure that every single account can be cleanly mapped to one of the five new mandatory categories (Operating, Investing, Financing, Income Taxes, Discontinued Operations).
Identify your custom metrics: Compile a list of every custom performance measure your executive team uses in press releases, SENS announcements, and integrated reports. If it is not defined in the new standard, it is a custom metric that will require audited reconciliation.
Update your cash flow mapping: The definitions of investing and financing must now perfectly mirror the new categories in the income statement. Dividends and interest paid are always financing activities. Dividends and interest received are always investing activities. Adjust your cash flow preparation templates to reflect this strict rule.
Reconfigure your indirect cash flow starting point: If you use the indirect method for the statement of cash flows, change your starting point. It is no longer profit before tax; it is strictly the newly defined operating profit.
Review your "Other" buckets: Run an analysis on your "Other Income" and "Other Expenses" lines from the last financial year. Break them down and prepare to disclose the largest components. You can no longer use these lines to sweep material items out of sight.

The Reality Check: Risks and Governance

The introduction of these rules is not just a formatting exercise. It carries severe governance and audit risks for boards and finance teams who fail to grasp the mechanics.

The most aggressive regulatory move in the new standard is the crackdown on the numbers management wants you to believe. By forcing custom metrics into the audited financial statements, the standard shifts the risk directly onto the audit committee and the external auditors. If a CFO announces "Normalised Earnings" to the market, the auditors now have to check the math, verify the tax effects of the adjustments, and sign off on the reconciliation note.

If your finance team cannot produce a mathematically sound, tax-effected reconciliation for a metric used in a press release, you face the very real risk of an audit qualification. Furthermore, the JSE is currently assessing the full implications of these rules on its listing requirements. Discrepancies between public announcements and the audited reconciliations will undoubtedly draw regulatory scrutiny and potential censure.

There is also a significant ripple effect across other standards. The standard governing the basis of preparation of financial statements has been updated to absorb the principles of fair presentation and going concern. It now requires explicit disclosures detailing the basis of asset and liability measurement if an entity is not a going concern. If your governance frameworks are not updated to catch these new disclosure requirements, your financial statements will fail basic compliance checks.

The Future: Evolution, Not Extinction

The transition to this new presentation framework is a massive leap forward for transparency in the South African corporate sector. The creative flexibility of the past is being replaced by the hard clarity of the future. While the initial implementation will demand significant time and system reconfiguration, the end result will be financial statements that are actually comparable, transparent, and reflective of true economic performance.

Accountants and auditors who master these new rules will position themselves as invaluable strategic advisors, guiding their clients and organisations through the most significant reporting shift in a generation.

Ready to Transform Your Practice?

To fully grasp the mechanics of these changes, understand the intersection with JSE reporting requirements, and learn how to audit-proof your management-defined performance measures, access the comprehensive SAAA on-demand webinar, "IFRS 18: Presentation and Disclosure," presented by Prof Hentie van Wyk.

Watch the full technical breakdown here.

(This article is based on insights and technical analysis provided by Prof Hentie van Wyk.)

About the SA Accounting Academy (SAAA)

The SA Accounting Academy (SAAA) is a leading accredited training provider offering a comprehensive suite of learning solutions. From formal qualifications and occupational certificates to practical short courses and continuing professional development (CPD), SAAA equips accounting, tax, and auditing professionals to thrive at every stage of their careers. Explore our full training library at accountingacademy.co.za.

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