IFRS 18 changes the statement of cash flows

From the IFRS Institute – June 1, 2026

Authors: Valerie Boissou, Komal Ahuja

IFRS 18¹ introduces major changes to the statement of cash flows by amending IAS 7². The amendments require the use of ‘operating profit or loss’ as the starting point for presenting operating cash flows when the indirect method is used. They also require classifying interest and dividend cash flows based on a company's specified main business activities (SMBA). The amendments are effective for annual and interim periods beginning on or after January 1, 2027. For information on how IFRS 18 affects the income statement, read KPMG IFRS Perspectives article, Transition to IFRS 18: how to get started.

When the indirect method is used, cash flows from operating activities are determined by adjusting an earnings measure for the effects of non-cash items, working capital movements, and income and expenses for which the cash effects are investing or financing cash flows. Currently, the earnings measure used as the starting point for this reconciliation is commonly profit after tax. The amendments to IAS 7 (made by IFRS 18) require companies to start instead with the newly defined ‘operating profit or loss’ subtotal.

Using operating profit or loss may simplify the reconciliation to cash flows from operating activities because operating profit or loss likely excludes many income and expenses items for which the cash effects are investing or financing cash flows.

Companies currently have an accounting policy choice to classify interest and dividends received in operating or investing activities, and interest and dividends paid in operating or financing activities. The consequential amendments to IAS 7 remove these options for many companies.

Under the amended IAS 7, a company classifies these cash flows based on its main business activities. Specifically, the new requirements distinguish companies that provide financing to customers and/or invest in assets – i.e. those with ‘specified’ main business activities – and those that do not. Assessing specified main business activities is a new requirement introduced by IFRS 18; it also drives the classification of income and expenses in the income statement and may require significant judgment.

Companies without specified main business activities

For companies without specified main business activities the new classification requirements for interest and dividend cash flows are summarized as follows.

Companies without specified main business activities
Cash flow item	New classification under IAS 7 amended by IFRS 18	Current classification (subject to an accounting policy choice)
Interest paid	Financing	Operating or financing
Interest received	Investing	Operating or investing
Dividends paid	Financing	Operating or financing
Dividends received	Investing	Operating or investing

The removal of the classification option is intended to increase comparability across companies.

Companies with specified main business activities

Companies with specified main business activities also always classify dividends paid as financing cash flows.

However, for interest paid and interest and dividends received, they apply different classification requirements than companies without specified main business activities. These cash flows are classified based on how the related income and expenses are classified in the income statement.

If the income or expense amount (e.g. interest income) is classified in a single category in the income statement, then the related cash flows are classified in that same category in the statement of cash flows.
If the income or expense amounts are classified in more than one category in the income statement, then companies have an accounting policy choice for each cash flow item to classify the related cash flows in one of those categories.

For example, assume a bank classifies all its interest income in the operating category in the income statement, then interest received will be classified as operating cash flows in the statement of cash flows. Similarly, if all its interest expense is classified in the operating category within the income statement, then interest paid will be classified as operating cash flows.

However, the classification becomes more complex if interest income is split across the operating and investing categories in the income statement. In this situation, because interest income is classified in more than one category in the income statement, the bank makes an accounting policy choice to classify the related cash flows in total, as either operating or investing cash flows. It cannot split the cash flows between the two categories and needs to apply its chosen policy consistently.

This specific guidance for companies with specified main business activities (e.g. financial institutions) acknowledges the distinct nature of their operations.

Distinguishing IFRS 18 categories from IAS 7 activities

IFRS 18 requires companies to classify income and expenses into five categories in the income statement, three of which are new – namely, the operating, investing and financing categories. These categories do not align with the operating, investing and financing activities in the statement of cash flows. The International Accounting Standards Board (IASB) decided not to align the definition of operating activities under IAS 7 with the operating category under IFRS 18, recognizing that the statement of cash flows and the income statement serve different purposes and that aligning them would not necessarily improve users’ understanding.

For example, cash proceeds from the sales of property, plant and equipment are classified as investing activities in the statement of cash flows. However, gains or losses on such sales are classified in the operating category in the income statement under IFRS 18 if the property, plant, and equipment do not generate a return individually and largely independently of a company’s other resources. This distinction requires careful judgment when preparing both statements.

Consolidation considerations

The assessment of main business activities is performed at a reporting entity level. In consolidated financial statements, the assessment is performed from the perspective of the group as a whole. This may differ from a parent's assessment in its separate financial statements or a subsidiary's assessment in its separate financial statements. Consequently, additional consolidation adjustments may be required to prepare the consolidated statement of cash flows so as to reflect the group's main business activities (e.g. when classifying interest and dividend cash flows).

IFRS 18 amends IAS 7 and introduces two major changes to the statement of cash flows. First, operating profit or loss becomes the starting point for presenting operating cash flows under the indirect method. Second, more standardized requirements apply to the classification of interest and dividend cash flows. These changes are not just technical refinements – they will affect how companies design processes, map data, and explain period over period cash flow trends to investors. ‑over‑period cash flow trends to investors.

While these changes aim to reduce diversity and improve comparability, it is important to carefully assess whether a company has specified main business activities and understand the distinctions between income statement categories under IFRS 18 and cash flow activities under IAS 7 so as to maintain accurate and compliant financial reporting.

Considering that comparative cash flow information for prior periods must be restated under the IFRS 18 requirements, companies should start reviewing and updating their cash flow reporting policies, systems and processes as early as possible to ensure a smooth transition to IFRS 18.