IFRS 18 vs IAS 1: One Saudi Income Statement Restated Line by Line, Where Operating Profit Moves From 230 to 186 and Net Profit Stays at 180
One Saudi industrial company's income statement under IAS 1, then again under IFRS 18 as endorsed in the Kingdom: the same net profit of 180, and an operating profit that moves from 230 to 186 because investing income leaves it. The five categories and the two required subtotals, what moved from IAS 1 into IAS 8 and elsewhere, how the zakat line is labelled, what does not change, and the questions candidates and preparers ask most.
When the IASB studied 100 companies, over 60 reported an operating profit, calculated at least nine different ways. IFRS 18 Presentation and Disclosure in Financial Statements, which replaces IAS 1 for annual periods beginning on or after 1 January 2027, defines it. It changes presentation and disclosure, not recognition, measurement or net profit.
Company A, a Saudi industrial company with an associate, an investment property, a euro loan and an end-of-service plan, shows the effect: net profit of 180 under both standards, and operating profit down from 230 to 186 because IAS 1 let it keep investment income there. The direction is not a rule; a company that charged lease or end-of-service interest in operating expenses sees operating profit rise.
Company A under IAS 1 and under IFRS 18: operating profit 230 becomes 186, net profit stays 180
Amounts in SAR million; expenses by function. Labels follow IFRS 18 as endorsed by the Saudi Organization for Chartered and Professional Accountants (SOCPA).
| SAR million | IAS 1 | IFRS 18 | IFRS 18 category |
|---|---|---|---|
| Revenue | 1,000 | 980 | Operating |
| Cost of sales | (600) | (600) | Operating |
| Selling and distribution | (80) | (80) | Operating |
| General and administrative | (120) | (105) | Operating |
| Goodwill impairment | In G&A | (10) | Operating |
| Exchange loss on euro payables | In G&A | (5) | Operating |
| Gain on disposal of plant | In other income | 6 | Operating |
| Other income | 30 | Split | Both |
| Operating profit | 230 | 186 | Required (70) |
| Share of profit of associate | 25 | 25 | Investing |
| Rent from investment property | In revenue | 20 | Investing |
| Dividends and gains on shares | In other income | 12 | Investing |
| Interest on bank deposits | In other income | 12 | Investing |
| Profit or loss before financing and Zakat and income taxes | Not presented | 255 | Required (71) |
| Finance costs | (50) | (50) | Financing |
| Profit or loss before Zakat and income taxes | 205 | 205 | Optional (118(e)) |
| Zakat | (15) | (15) | Zakat and income taxes |
| Income tax | (10) | (10) | Zakat and income taxes |
| Profit for the year | 180 | 180 | Total (72) |
Finance costs: loan interest 30, exchange loss on the euro loan 4, lease interest 8, end-of-service net interest 6, provision unwinding 2.
Under the IASB's text, used elsewhere in the Gulf, the 255 and 205 lines read "before financing and income taxes" and "before income taxes", and the fourth category holds only IAS 12 taxes (67). On the IFRS Interpretations Committee's reading zakat cannot sit there, so it falls into operating, the residual (52), giving operating profit of 171, then 240 and 190, and the same 180.
Five categories, two required subtotals and profit or loss
| Category | What it holds | Paragraphs |
|---|---|---|
| Operating | Everything else, volatile and non-recurring items included | 52, B42 |
| Investing | Associates and joint ventures; cash; assets earning a return individually and largely independently | 53 to 58 |
| Financing | Liabilities that only raise finance; interest on leases, end-of-service plans and provisions | 59 to 66 |
| Zakat and income taxes | Zakat under SOCPA's Zakat standard; IAS 12 tax | 47(d), 67 |
| Discontinued operations | As IFRS 5 requires | 68 |
Paragraph 69 requires two subtotals and a total: operating profit or loss (70), profit or loss before financing and Zakat and income taxes (71), and profit or loss (72). Profit or loss before Zakat and income taxes is optional, item (e) on paragraph 118's list of subtotals that are not management-defined performance measures. Companies that invest or lend as a main business activity classify some items differently (49, 50), and some lenders omit the second subtotal (73), as the classification guide shows.
Where each line went, and why another company's operating profit rises instead
Operating profit falls by 44, exactly the investment income IAS 1 let Company A hold: rent 20, dividends and fair value gains 12, deposit interest 12. Investment property and shares earn a return individually and largely independently (53(c), B46); cash income is investing by name (53(b)). The associate already sat below operating profit; an equity-accounted result is never operating (53(a), 55(a)).
Three items stay operating: the plant disposal gain, which follows the asset (B60(a)); goodwill impairment, because operating is the residual (52, B42); and the exchange loss on euro payables, because exchange differences follow the item behind them (B65). With the riyal pegged to the dollar, the question bites on euro, sterling and yuan balances.
Finance costs stay financing: the loan only raised finance (60, B66(b)), and lease, end-of-service and provision interest is interest on other liabilities (61, B54). End-of-service service cost stays operating (B55(b); see end-of-service benefits).
Company A already kept those 16 in finance costs. Had it charged them in general and administrative expenses, its IAS 1 operating profit would have been 214 against the same 186; without investment income, that habit makes operating profit rise.
Management-defined performance measures, aggregation and the expense analysis on the face
A management-defined performance measure (MPM) is a subtotal of income and expenses that a company uses in public communications outside the financial statements to give management's view of an aspect of its performance as a whole, unless paragraph 118 lists it or a standard requires it (117). Each is reconciled in one note to the closest IFRS subtotal, with the income tax and non-controlling interest effect of every reconciling item (122, 123).
Paragraph 118's six exempt subtotals include "operating profit or loss before depreciation, amortisation and impairments within the scope of IAS 36" (118(b)). An EBITDA built exactly that way needs no note; an "adjusted EBITDA" does (Is EBITDA an MPM?). SOCPA left the MPM paragraphs unchanged, so whether the tax effect includes zakat is open.
Aggregation now has rules: items in one line share at least one characteristic, and one dissimilar characteristic can force a split (B21, B22). Operating expenses go on the face by nature, function or a mix (78); Company A uses function lines, so one note splits depreciation, amortisation, employee benefits, impairment losses (its goodwill impairment of 10 included) and inventory write-downs by line item (83).
What does not change, and where the rest of IAS 1 went
Recognition and measurement do not change, so neither does net profit, except that an entity eligible for IAS 28's fair value exemption, such as a venture capital organisation, may move an associate to fair value on first application (C7). A third balance sheet is needed only if reclassifications materially affect the comparative opening balances (37), a judgement.
IAS 8, retitled Basis of Preparation of Financial Statements, takes the general principles, and the IASB's concordance maps the rest; live pages apply it to going concern, covenants, other comprehensive income and the statutory reserve.
| Topic | IAS 1 | New home |
|---|---|---|
| Fair presentation and compliance | 15 to 24 | IAS 8, 6A to 6J |
| Going concern | 25 to 26 | IAS 8, 6K to 6L |
| Accrual basis | 27 to 28 | IAS 8, 6M to 6N |
| Policies, judgements, estimation uncertainty | 117 to 117E, 122 to 133 | IAS 8, 27A to 27I and 31A to 31I |
| Puttable instruments | 80A, 136A | IFRS 7, 19A to 19B |
| Current and non-current, covenants | 60 to 76B | IFRS 18, 96 to 102 and B90 to B108 |
| Nature and purpose of reserves | 79(b) | IFRS 18, 130(b) |
| Two groups of other comprehensive income | 82A | IFRS 18, 88 to 89 |
| Capital management | 134 to 136 | IFRS 18, 126 to 129 |
| Analysis of expenses | 99 to 105 | IFRS 18, 78 to 83 and B80 |
Dates and the zakat line: SOCPA's text first, the IASB's open question second
SOCPA's Accounting Standards Council endorsed IFRS 18 on 26 December 2024 (25/06/1446H), as item 42 of its endorsement document, revised on 24 December 2025. The Capital Market Authority's decision, announced on 30 June 2026, allows early adoption in 2026 only in parallel with approved IAS 1 statements, and requires a preliminary impact assessment in approved interim and annual statements for periods beginning on or after 1 April 2026. A calendar-year listed company's first IFRS 18 statements are its first-quarter interims, due within 30 days, by 30 April 2027 (the Saudi reporting calendar).
For SOCPA reporters the endorsed text settles the zakat line. The "Zakat and income taxes category" holds zakat under the national Standard of Zakat (Revised) beside IAS 12 tax (47(d), 48, 67), the subtotals are relabelled (69(b), 71, 118(e)), and SOCPA added zakat expense to the line items listed in paragraph 75(a)(iv). That text lists zakat and income tax as one line item and does not itself require them on separate lines; whether IFRS 18's disaggregation principles require separation is a judgement, and SOCPA's paper to the IASB favoured separate presentation.
Under the IASB's text it is open. The Interpretations Committee concluded in March 2026, subject to the IASB, that charges outside IAS 12 cannot sit in the income taxes category, and on 21 July 2026 the IASB tentatively decided (10 of 12) to propose admitting "tax charges imposed by a government as a direct substitute for income taxes", shown separately (11 of 12). The exposure draft, expected in the fourth quarter of 2026, was unpublished on 3 November 2026; the staff timetable puts final amendments in the fourth quarter of 2027. Accounting for Zakat tracks it, and IFRS 18 as endorsed in Saudi Arabia covers SOCPA's other changes.
IFRS 18 on one page
| Topic | IFRS 18 as endorsed in the Kingdom |
|---|---|
| Effective | Annual periods beginning on or after 1 January 2027; early adoption allowed |
| Replaces | IAS 1; parts move to IAS 8 and IFRS 7 |
| Categories | Operating, investing, financing, Zakat and income taxes, discontinued operations (47) |
| Required subtotals | Operating profit or loss; profit or loss before financing and Zakat and income taxes (69) |
| MPMs | Reconciled in one note (117, 122, 123); six exemptions (118) |
| Expenses | Nature, function or both on the face (78); five-nature note for function lines (83) |
| Cash flows | Indirect method starts at operating profit; interest paid is financing for most (IFRS 18 cash flows) |
| Transition | Retrospective, comparative year reconciled line by line (C2, C3) |
| Unchanged | Recognition, measurement, net profit |
Questions people ask about IFRS 18
Does IFRS 18 replace IAS 1, or IAS 18?
IAS 1. IAS 18 Revenue is an unrelated standard that IFRS 15 replaced from 1 January 2018.
Does IFRS 18 change the balance sheet?
Barely: goodwill gets its own line (103(d)), SOCPA's text adds accrued zakat (103(q)), and the current and non-current rules carry over almost unchanged.
Is operating profit now EBIT or "core" profit?
No. Restructuring, impairments and litigation stay in; associates and investment income leave (52, B42).
Does IFRS 18 ban "other"?
No, but only without a more informative label, and as precisely as "other operating expenses" (B25, B26).
Are all non-GAAP measures now audited?
Only MPMs enter the financial statements; ratios, free cash flow and spoken or social media figures stay outside (B116, B119).
Must comparatives be restated?
Yes (C2). The C3 line-by-line reconciliation, the shape of Company A's table, replaces IAS 8's per-line effect, and first-year interims reconcile too (C4, C5).
Does IFRS 18 apply under IFRS for SMEs?
No. The third edition, effective 1 January 2027, does not take it in (Full IFRS or IFRS for SMEs).
Where to practise this
In the SOCPA Fellowship this is Financial Accounting, main topic 1 (5 to 15%), subtopics 1/1/10 presentation and 1/2/5 preparation of financial statements, with the task of classifying and aggregating accounts at Application level (1/7); the zakat line also sits in main topic 2 (45 to 65%), subtopic 2/16. The paper examines IFRS as endorsed in the Kingdom, and SOCPA has not announced which cycle first examines IFRS 18 (Is IFRS 18 on your exam?).
Prepito's Financial Accounting course has explained practice questions, starting with free samples. See also the Financial Accounting study guide, How SOCPA Endorses IFRS and the SOCPA Fellowship programme.
Sources: IFRS Foundation, IFRS 18, announcement, Project Summary, IAS 1 concordance, IFRIC Update March 2026, IASB Update July 2026, project page, staff paper, IFRS 15 and IFRS for SMEs; IFRS 18 text in AASB 18; SOCPA endorsement document, exam topics and guidance framework; Capital Market Authority announcement and continuing obligations rules; Saudi Central Bank. Company A is illustrative; positions are as at 3 November 2026 and will move with the IASB's zakat amendment.
Try 5 questions on this material
Question 1 of 5
An entity has two classes of inventory at year end that it values item by item. The first class has a cost of 180,000 riyals and a net realisable value of 195,000 riyals, and the second class has a cost of 240,000 riyals and a net realisable value of 220,000 riyals. The inventory amount that appears in the statement of financial position is:
