IFRS 18 mainly governs the presentation of the income statement and the notes, but it also affects the statement of cash flows indirectly. This effect relates in particular to "the presentation of cash flows from operating activities using the indirect method".
🎯 1. A new starting point for the indirect method: "operating profit"
Previously:
When using the indirect method, companies generally started from "profit for the period" or "profit before tax".
Now:
IFRS 18 sets "operating profit" as the starting point for the indirect method.
This will make cash flows from companies' main operations more consistent and comparable.
📌 2. Because "operating profit" is mandatory, cash flows are clearer
Since operating profit is now a mandatory line in the income statement,
it becomes possible to establish a logical link through this line in the statement of cash flows as well.
📋 3. Example: the new indirect method
Below is the first section of an example indirect-method cash flow statement prepared under IFRS 18:
| Cash flows from operating activities | TRY |
|---|---|
| Operating profit | 1,200,000 |
| + Depreciation and amortisation | 300,000 |
| + Provision expenses | 50,000 |
| − Increase in inventories | (80,000) |
| − Increase in trade receivables | (150,000) |
| + Increase in trade payables | 100,000 |
| = Net cash from operating activities | 1,420,000 |
📌 4. Other changes
The options for classifying interest and dividends have largely been removed. For entities whose main business activity is not providing finance or investing in assets:
- Interest and dividends paid are classified in financing activities,
- Interest and dividends received are classified in investing activities.
For entities with specified main business activities, such as banks and investment entities, classification is linked to how the related income and expenses are classified in the income statement.
As a result, the new structure of the income statement (operating, investing, financing) is more closely aligned with the classification in the statement of cash flows.
Companies should therefore present a consistent definition of operations in terms of both profit and cash in their disclosures.
🔍 What should a company do under IFRS 18?
If it presents its statement of cash flows using the indirect method, it must now start from "operating profit".
It should explain in detail the differences between operating profit and operating cash flows (inventory movements, changes in receivables and payables, etc.).
Structural consistency between the income statement and the statement of cash flows must be ensured.
📌 Summary table
| Feature | IAS 7 (previous position) | IAS 7 as amended by IFRS 18 (new position) |
|---|---|---|
| Starting point for cash flows | Profit for the period / profit before tax | Operating profit |
| Definition of operations | Flexible | Must be consistent with the income statement |
| Classification of interest and dividends | Optional | Options largely removed |
| Presentation requirement | Choice of indirect or direct method | Choice of method remains, but the indirect method's structure is clarified |
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