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Guide

IFRS 18: loan covenants, bonuses and KPIs tied to operating profit

· Reviewed by Noura Alderaan, SOCPA Fellow (No. 1379)

IFRS 18 does not change net profit. It changes which lines sit above and below operating profit. Any loan covenant, bonus scheme, budget or target that refers to "operating profit" or "EBIT" may produce a different number from 2027, although nothing in the business has changed.

1. Why operating profit can move

Under IAS 1 each company chose what to show as operating profit. The international board looked at 100 companies: more than 60 reported operating profit, using at least nine different calculations. IFRS 18 replaces that with one definition: operating is everything not classified as investing, financing, income taxes or discontinued operations.

ItemWhere many companies show it todayUnder IFRS 18
Income from bank deposits and cash balancesOften inside or next to operating resultsInvesting (for a company that is not a bank or investor by main activity)
Share of profit of associates and joint venturesVaries: sometimes within operating profitInvesting
Unusual or one-off itemsSometimes excluded from operating profitOperating, unless they belong to another category
Foreign exchange differencesOften one lineFollow the category of the item that gave rise to them
Interest on lease liabilities and pension obligationsFinance costFinancing
Zakat (Saudi Arabia, as endorsed by SOCPA)Below profit before zakatZakat and income taxes category, below operating profit

2. What to check

  1. Loan and murabaha facility agreements: how each financial covenant is defined, and whether the definitions follow the accounting standards in force or the standards at the signing date.
  2. Bonus and incentive schemes: the profit measure used, and who approves a change to it.
  3. Budgets, board targets and published KPIs that use operating profit or operating margin.
  4. Shareholder agreements and earn-outs that refer to operating profit or EBIT.
  5. Group reporting packs sent to a parent company.

3. A practical sequence

  1. 1

    Recast 2026

    Prepare the 2026 income statement on the IFRS 18 basis next to the IAS 1 version.

  2. 2

    Recompute

    Recalculate each covenant ratio, bonus measure and KPI on both bases.

  3. 3

    Talk early

    Where a ratio moves, raise it with the bank or the remuneration committee before the first IFRS 18 statements are issued.

  4. 4

    Document

    Record the treatment used for zakat and other judgement areas, and agree it with the auditor.

SOCPA made the same point to the IFRS advisory forum in March 2026: the subtotals drive margins, KPIs, covenants and peer comparison.

4. How Entry Post helps

Entry Post prepares the IFRS 18 impact study, restates the comparatives, and builds the disclosure templates and the board and audit-committee briefing. Most impact studies take 4–6 weeks. If we are your auditor, our role stays within what independence rules allow; otherwise we work alongside your auditor.

Frequently asked questions

Does IFRS 18 change net profit?

No. It changes presentation and disclosure, not recognition or measurement. Net profit and equity stay the same.

Can a loan covenant be breached because of IFRS 18 alone?

A ratio defined on operating profit can change when items move between categories. Whether that is a breach depends on how the agreement defines its terms, so each agreement has to be read.

Is operating profit under IFRS 18 the same as EBIT?

Not necessarily. IFRS 18 defines operating profit and a separate subtotal, profit before financing and income taxes; EBIT is not defined by the standard.

When should the check be done?

During 2026, because 2026 is the comparative year and the first IFRS 18 statements for a December year end are the first-quarter 2027 interim statements.

Official sources

General information based on the official sources listed. It is not professional advice for your company.