IFRS 18 - Presentation and Disclosure in Financial Statements - supersedes IAS 1 for annual periods beginning on or after 1 January 2027. The income statement is being restructured into three required categories. A new disclosure regime for management-defined performance measures lands at the same time. Comparative periods need to be restated. With eight months to mandatory adoption, the work that needs to happen now is more than most Saudi mid-market finance teams have planned for.
IFRS 18 was issued by the IASB in April 2024 and represents the most significant change to financial statement presentation in two decades. SOCPA has confirmed the standard's application for Saudi entities reporting under IFRS, including listed companies and private entities applying full IFRS. For practical purposes, every Saudi mid-market business that prepares IFRS-compliant accounts is in scope.
What's actually changing
IFRS 18 changes three things in particular. Each has practical consequences for how the income statement is prepared, how performance is communicated to lenders and boards, and how the audit will be run.
1. Income statement restructured into Operating, Investing, and Financing categories
Under IAS 1, entities had significant flexibility in how the income statement was structured. Under IFRS 18, all income and expenses must be classified into one of five categories - Operating, Investing, Financing, Income taxes, and Discontinued operations - with the first three forming the body of the income statement. The classification rules are prescribed and largely remove the discretion that previously existed.
For a typical Saudi mid-market trading or services business, this means revenue and most operating costs sit in the Operating category, interest income and dividends from passive investments sit in Investing, and interest expense on borrowings sits in Financing. The categories interact differently for entities whose main business is investing or providing financing - banks, insurance, and asset-management businesses have specific provisions that change which items are classified where.
2. New required subtotals
IFRS 18 mandates three subtotals on the face of the income statement: Operating profit, Profit before financing and income taxes, and Profit (for the period). Operating profit is a defined IFRS subtotal for the first time - it has historically been a non-GAAP measure used by management with no consistent definition across entities. The new IFRS 18 definition is prescriptive.
The practical consequence is that operating profit reported in 2027 may not match operating profit reported in 2026 even for unchanged underlying performance, because the classification rules are tighter. This creates a comparability gap that needs to be navigated carefully with lenders, board members, and any covenant counterparties whose definitions reference operating profit.
3. Management-defined performance measures (MPMs)
Many Saudi mid-market businesses report adjusted EBITDA, normalised earnings, underlying profit, or similar measures alongside their IFRS-reported numbers. These are management-defined performance measures. Under IFRS 18, any MPM used in public communications - press releases, investor presentations, lender packs that include the auditor's name - must be disclosed in a single note with a full reconciliation to the most directly comparable IFRS subtotal. The disclosure must explain why the MPM is used, why it provides useful information, and how it's calculated.
The MPM disclosure regime is new. It does not exist in IAS 1. It requires governance around how MPMs are defined, who approves them, and how their use is documented. For mid-market entities that have used adjusted measures informally, this is the area most likely to surface late in audit conversations.
The Saudi-specific implementation considerations
Several IFRS 18 implementation issues land harder in the Saudi context than in markets where the standard is being adopted in parallel.
Zakat and the new operating profit definition. Operating profit is now a defined IFRS subtotal. Zakat is calculated on adjusted basis that may or may not align with the new definition. Where bank covenants, lender packs, or owner-level reporting reference the operating profit number, the relationship between the IFRS-reported figure and the zakat base needs to be re-explained. The zakat treatment itself does not change; the explanation of how the IFRS subtotal relates to it does.
Comparative restatement. The 2027 financial statements will present 2027 numbers under IFRS 18 and 2026 comparatives also restated under IFRS 18. For Saudi entities with December year-ends, this means the 2026 numbers - the year currently in progress - need to be capable of restatement under the new categorisation rules. Without forward planning, the comparative restatement becomes a significant year-end project.
Family business and group consolidation. Diversified family groups often have operating activities, investment vehicles, and real-estate holdings within the same group consolidation. The IFRS 18 categorisation will look different at consolidated level than at individual entity level, particularly for the investment-vehicle entities. Consolidation methodology needs to be tested against the new rules.
Bank covenant interaction. Saudi bank facility documentation often references "operating profit" or "EBITDA" as covenant tests. The IFRS 18 definitions may not match the negotiated covenant definitions. Affected facilities need to be reviewed and, where necessary, the covenant definitions clarified with the lender ahead of the first IFRS 18 reporting period.
What to do in the next eight months
With January 2027 mandatory effective and December 2026 closing the comparative period, the readiness work splits into four phases.
Phase one - April to June 2026 - assessment and gap analysis. Run a structured walkthrough of the existing income statement against IFRS 18 categorisation rules. Identify which line items move and which subtotals change. Quantify the impact on operating profit and the reconciliation to current management reporting. Identify all MPMs in current use and assess them against the new disclosure regime.
Phase two - July to September 2026 - chart of accounts and system mapping. Update the chart of accounts to support IFRS 18 categorisation. Reconfigure the management reporting system to produce both formats - the current format and the IFRS 18 format - in parallel until December 2026. Coordinate with the IT partner where ERP-side configuration changes are required.
Phase three - October to December 2026 - parallel running and stakeholder communication. Run the December 2026 close in both formats. Prepare lender-facing communications explaining the upcoming change. Discuss covenant implications with banking counterparties. Brief the board on the new presentation. Prepare draft MPM disclosures for the auditor's review.
Phase four - January to March 2027 - Q1 2027 reporting in IFRS 18 format. The first IFRS 18 management report is the test. Review the output with the audit partner. Document the position taken on any judgement areas. Confirm the comparative restatement is consistent across the December 2026 audited numbers and the Q1 2027 management pack.
Common misconceptions
Three misconceptions come up in nearly every IFRS 18 conversation we have. They are worth addressing directly.
"It's just presentation - the numbers don't change." The numbers do not change. The classification of those numbers does. Operating profit reported in 2027 will not match operating profit reported in 2026 even if underlying performance is identical, because the line items below the operating profit line are different. For any covenant, KPI, or MPM that references operating profit, the change is real.
"We can early-adopt to get ahead of it." Early adoption is permitted. For most Saudi mid-market entities it does not make sense - it commits the entity to producing two periods of restated comparatives instead of one, and it requires the audit, covenant, and stakeholder communication work to happen earlier. The exception is entities preparing for a strategic transaction in 2027 or 2028, where presenting under the latest standard improves diligence outcomes.
"Our auditor will tell us what we need to do." The auditor will audit the 2027 financial statements. The work to prepare for IFRS 18 - chart of accounts, system mapping, MPM governance, stakeholder communication - is management's responsibility. The auditor's role is to confirm the work has been done correctly, not to do it. Late engagement of the auditor on IFRS 18 questions creates a fee surprise no client wants.
Key takeaways
- IFRS 18 supersedes IAS 1 from 1 January 2027. SOCPA has confirmed application for Saudi entities reporting under IFRS. For most Saudi mid-market entities the standard is mandatory.
- Three things change - income statement categorisation into Operating / Investing / Financing, three required subtotals including a defined Operating profit, and a new MPM disclosure regime for management-adjusted measures used in public communications.
- Saudi-specific issues to address: relationship between the new operating profit subtotal and zakat reporting, comparative restatement of December 2026 numbers, group consolidation for diversified family entities, and bank covenant definitions that reference operating profit or EBITDA.
- The eight-month runway splits into four phases: assessment (Q2 2026), system and chart-of-accounts updates (Q3 2026), parallel running and stakeholder communication (Q4 2026), and first IFRS 18 reporting (Q1 2027).
We run a structured IFRS 18 readiness diagnostic over a fortnight - assessment of impact on operating profit, MPM inventory and disclosure design, comparative restatement plan, lender-engagement note, and audit-coordination plan. A senior partner walks the finance director and board chair through the findings. The remediation engagement is sized against the diagnostic output.