Does IFRS 18 spell the end of ‘director’s cut’ reporting?

Companies have long reported their financial performance in two ways. There is the ‘original footage’ of the statutory financial statements. And there is the ‘director’s cut’ of the adjusted or underlying financial position – intended to reflect management’s view of the core business.

 

Business performance reporting has never simply been about statutory compliance. For finance leaders, adjusted reporting of the ‘underlying’ performance offers a way to shape investor confidence, determine executive incentives and gain access to capital.

 

There is nothing illegitimate about this style of reporting. Typically built around adjusted earnings before interest, tax, depreciation and amortisation (EBITDA), it is widely used by boards, lenders and investors to assess operating trends and debt capacity. It reflects the board’s judgement about what is deemed recurring, exceptional or non-core.

 

What influence will the new IFRS 18 reporting standard, which takes effect for annual reporting periods beginning 1 January 2027, have on such ‘director’s cut’ reporting?

 

 

A more discerning audience

In the era of ultra-low interest rates, prior to early 2022, the focus was almost entirely around growth. High liquidity and low discount rates meant investors were more tolerant of adjusted metrics which emphasised future potential over current cash generation. EBITDA multiples were widely used, and adjustments were often accepted without question.

 

In today’s higher rate environment, the cost of borrowing along with more selective capital allocation have increased the focus on cash-flow, balance sheet resilience and earnings quality. This is especially true when the heightened volatility and uncertainty of global finance is contributing to a more complex business environment, as the latest Global Business Complexity Index shows. There is greater market sensitivity to corporate profitability and leverage; consistency and transparency in reporting matter more. In this environment, tolerance for aggressive adjustments naturally declines.

 

At the same time, regulatory expectations have grown. Global minimum tax rules under the Pillar Two framework add complexity to effective tax rate disclosures. Sustainability reporting requirements, such as those under the EU’s Corporate Sustainability Reporting Directive (CSRD), increase demands for consistency between financial and non-financial narratives.

 

In this context, performance narratives come under greater scrutiny. Investors, lenders and regulators are more likely to examine the correlation between statutory profit and adjusted measures. The quality of reported earnings can influence the cost of capital, credit ratings and valuation multiples.

 

IFRS 18 does not create this scrutiny, but it aligns with it. By tightening the presentation of the baseline and formalising the disclosure of management adjustments, the new standard reduces the scope for ambiguity.

 

 

Comparable performance categories

The main purpose of IFRS 18 is to establish a more consistent and comparable baseline for financial reporting. The idea is to make it easier for investors, analysts and other stakeholders to compare apples with apples when benchmarking companies’ financial performance across peers and jurisdictions.

 

The standard introduces a more tightly defined structure for profit and loss statements. It requires companies to classify income and expenses into three categories: operating, investing and financing. It also introduces defined subtotals, including an operating profit measure, and tightens guidance on how items are presented and aggregated.

 

By prescribing clearer categories and subtotals, IFRS 18 reduces flexibility in presentation. Finance leaders’ classification decisions will be more visible, and the margin for presentational interpretation will be narrower. Where companies have been able to shape the layout of their income statements to reflect their narrative, IFRS 18 establishes a more disciplined baseline. This reduces the ability to ‘shape’ operating profit presentation without that choice being visible to users.

 

 

The spotlight falls on MPMs

It is worth noting that IFRS 18 does not prohibit management-defined metrics. Companies can continue to present management performance measures (MPMs), such as adjusted operating profit or adjusted EBITDA. However, the new standard imposes stricter disclosure requirements.

 

MPMs must be reconciled to the most directly comparable IFRS-defined subtotal. Companies must explain clearly how and why each adjustment has been made, and how it provides useful information. They must disclose the tax effect and the impact on non-controlling interests (NCI) for each reconciling item. And they must apply the measures consistently from period to period, or explain and justify any changes.

 

What was previously narrative flexibility becomes documented accountability. There will need to be a documented, auditable bridge between statutory and adjusted results.

 

Recurring adjustments are likely to attract particular attention. If a restructuring charge, acquisition-related cost or other ’exceptional’ item appears year after year, analysts and investors may question whether it is genuinely non-recurring. Under IFRS 18, that debate will take place with greater transparency, as each adjustment must be clearly defined and reconciled.

 

CFOs will need to be prepared to defend any narrative arcs they have applied in their reporting. Are they comfortable defending every recurring adjustment? Can they explain the tax effect of each exclusion? Is the definition of ’underlying’ performance consistent over time?

 

The editing room is no longer out of sight; any changes are clear for all to see.

 

 

Governance and incentives

The implications of IFRS 18 extend beyond published financial statements.

 

Many companies use adjusted metrics to determine executive remuneration and bonuses, measure internal performance, set debt covenant thresholds, and communicate with boards and investors. Boards often rely on underlying measures to assess management effectiveness. Lenders may negotiate covenants based on customised definitions of EBITDA or operating profit.

 

IFRS 18 increases transparency around how those measures relate to statutory performance which, in turn, raises governance questions. Are recurring exclusions truly exceptional, or have they become embedded in the business model? Do bonus metrics align with the statutory performance structure? Are covenant definitions consistent with new reporting subtotals? Would the board be comfortable defending these adjustments publicly? Compensation committees may need to reconsider whether bonus metrics built on heavily adjusted measures remain defensible under the new disclosure regime. Banks and private equity sponsors may also revisit covenant definitions as comparability increases.

 

For CFOs, this elevates performance reporting from a technical accounting issue to a board-level discussion about integrity and alignment. The role shifts from presenting results to stewarding the integrity of the performance framework itself.

 

From screenplay to action: practical steps before 2027

Although IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, preparation will require more than a late-stage disclosure project.

 

A structured approach can help:

• “Review the script”: First, companies should create an inventory of all MPMs and recurring adjustments used externally and internally. Mapping these against the new IFRS-defined subtotals will highlight where reconciliations and explanations are required.
• “Spot the rewrites”: Second, they should analyse patterns in recurring exclusions over the past three to five years to reveal whether certain exclusions are in fact recurring themes. Quantifying how much of adjusted EBITDA depends on specific categories of adjustment can inform discussions with boards and audit committees.
• “Align the cast incentives”: Third, companies should review how well executive remuneration and bonus metrics align with the new presentation structure.
• “Check the contract clauses”: Fourth, they should assess debt covenant definitions against IFRS 18 subtotals.
• “Audit the edit trail”: Fifth, companies should ensure that systems and processes can track the tax and NCI effects of each adjustment.
• “Prepare the audience briefing”: Finally, companies should review their investor communications strategy. Clear explanation of how performance is defined, why certain adjustments are made and how they relate to strategy will be essential in maintaining trust.

 

Creating narrative arcs with credibility

Adjusted EBITDA will remain part of corporate reporting, and editing remains legitimate. These help provide insight into management’s view of sustainable performance and help stakeholders understand underlying trends. IFRS 18 does not seek to eliminate judgement.

 

What the new standard does seek to do is improve transparency and consistency in a way that raises the standard of disclosure around that judgement. The baseline becomes more comparable, the bridge to adjusted metrics becomes more explicit, and the assumptions behind performance narratives become easier to test.

 

For finance leaders, the focus shifts from asking "What do we exclude?” to “How defensible is our definition of performance?” In a more demanding market environment, credibility rests not on creative editing but on transparent explanation.

 

IFRS 18 may not mark the end of the director’s cut, but it ensures that the audience can see how it was arrived at.

 

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Csaba Farkas is Head of A&T Consultancy at TMF Group

 

Main image courtesy of iStockPhoto.com and David Gyung