IFRS 18 makes two changes to the cash flow statement. The indirect method now starts from operating profit rather than profit for the period, and the free choice over where to put interest and dividends is removed. For a leveraged UAE business, the second change can move a substantial figure out of operating cash flow.
A new starting point
Under IAS 7 as applied previously, the indirect method typically began with profit before tax or profit for the period, then adjusted back non-cash items and everything that belonged elsewhere — including finance costs.
IFRS 18 requires operating profit as the starting point. Because financing costs already sit below operating profit in the new income statement, they no longer need adding back. The reconciliation gets shorter and more logical, and it ties directly to a defined subtotal on the face of the income statement.
Practically, your existing cash flow working paper needs rebuilding rather than amending. The adjustments that used to sit at the top are no longer needed, and the ones that remain start from a different number.
The classification choice is gone
This is the change with real consequences. IAS 7 allowed policy choices over interest and dividends. IFRS 18 fixes them:
| Item | Previously | Under IFRS 18 |
|---|---|---|
| Interest paid | Operating or financing, by policy choice | Financing |
| Dividends paid | Operating or financing, by policy choice | Financing |
| Interest received | Operating or investing, by policy choice | Investing |
| Dividends received | Operating or investing, by policy choice | Investing |
If you classified interest paid as operating — a common choice — your operating cash flow is about to increase, and your financing outflow with it. Nothing about the business changes. The presentation does.
Who feels this most
The size of the movement scales with debt. A business with modest borrowings will see a small reclassification. A leveraged one — real estate, contracting, capital-intensive trading — can see operating cash flow move materially.
That matters because operating cash flow is used as a proxy for cash generation in several places:
- Banking covenants testing cash flow cover or debt service ratios
- Valuation models built on cash from operations
- Credit assessments when refinancing or extending a facility
- Internal targets and management reporting
An operating cash flow figure that improves for presentational reasons is not a problem — unless someone reads it as improved performance, or a covenant is tested against a definition that assumed the old treatment. Talk to the bank before the first set of restated numbers arrives.
Comparatives make this a 2026 exercise
IFRS 18 applies to reporting periods beginning on or after 1 January 2027, and comparatives are required. Your 2026 cash flow statement will be restated and presented alongside 2027 on the new basis.
So the reclassification is happening to figures you are producing now. Two implications:
- Capture the data. Make sure interest and dividend flows are separately identifiable in the ledger for 2026, so the restatement is a mapping exercise rather than a reconstruction. This is a chart of accounts question.
- Model the restated comparative before it is published, and check what it does to any ratio anyone monitors.
UAE-specific points
Lease payments. Under IFRS 16 the principal element already sits in financing. IFRS 18 confirms the interest element is financing too — relevant for retail and logistics operations with large lease portfolios.
Intercompany interest. Groups with internal loans should check that the classification is applied consistently across entities, and that it aligns with the transfer pricing position on those balances.
Free zone entities. Where a qualifying income analysis draws on cash flow presentation, confirm the recategorisation does not disturb it.
Frequently asked questions
What changes in the cash flow statement under IFRS 18?
The indirect method starts from operating profit rather than profit for the period, and the classification options for interest and dividends are removed.
Where does interest paid go now?
Financing. The previous option to present it in operating has been withdrawn.
Where does interest received go?
Investing, rather than operating.
Will my operating cash flow change?
If you previously classified interest paid as operating, yes — it will increase, with a corresponding financing outflow. The business is unchanged.
Does this affect covenants?
It can, where a covenant tests operating cash flow or a ratio built on it. Check the definition in the facility agreement and raise it with the bank early.
When do I need to be ready?
Periods beginning on or after 1 January 2027, but comparatives mean your 2026 figures will be restated — so the data needs to be capturable now.
What about lease payments?
The principal element is financing under IFRS 16, and the interest element is financing under IFRS 18. Right-of-use depreciation remains operating.