IFRS 18: Why Corporate Tax professionals should be paying attention
IFRS 18: Why Corporate Tax professionals should be paying attention
By Vuyolwethu Langa, Senior Consultant
Effective for annual reporting periods beginning on or after 1 January 2027, IFRS 18 replaces IAS 1 and introduces significant changes to the presentation and disclosure of financial statements. While the standard does not change the recognition or measurement of income and expenses, it does change how financial performance is presented. From a tax perspective, these changes should not be overlooked.
Why does IFRS 18 matter to tax professionals?
Corporate income tax calculations generally begin with accounting profit before adjusting for tax-specific provisions contained in the Income Tax Act. Taxpayers and their advisors rely heavily on financial statements to prepare tax computations, assess deferred tax, complete tax returns and respond to SARS verification requests.
Although IFRS 18 does not alter taxable income, it changes how accounting information is organised and disclosed in the financial statements. This means tax professionals will need to understand the new presentation requirements to ensure that tax computations remain accurate and that reconciliations between accounting profit and taxable income are properly supported.
The key point is that IFRS 18 does not replace or amend the Income Tax Act. Rather, it changes the presentation of the accounting information from which tax professionals often begin their review. The tax file should therefore continue to reconcile the information contained in the financial statements to the tax computation and ultimately to the income tax return (ITR14).
Key changes and their tax implications
One of the most significant changes introduced by IFRS 18 is the requirement to classify income and expenses into standardised categories, namely operating, investing, financing, income tax and discontinued operations. This creates greater consistency in financial reporting and should make it easier to analyse an entity's financial performance.
For tax professionals, this standardised presentation may also improve the review of tax computations by making it easier to identify adjustments relating to capital transactions, finance costs and investment income. It may also simplify discussions during SARS audits and verification processes where financial statements form part of the supporting documentation.
Another important development is the introduction of a mandatory operating profit subtotal. Historically, entities have applied different definitions of operating profit, making comparisons between companies difficult. While taxable income does not equal operating profit, this standardised measure provides a clearer starting point when analysing financial performance and identifying potential tax adjustments.
For example, the tax computation may still start with accounting profit before tax, but the tax reviewer should be able to trace that amount through the IFRS 18 presentation and understand how significant operating, investing and financing items have been treated.
Management-Defined Performance Measures
Many organisations report alternative performance measures such as Adjusted EBITDA or Adjusted Operating Profit. Under IFRS 18, these are referred to as Management-Defined Performance Measures (MPMs), and entities are required to explain how these measures are calculated and reconcile them back to IFRS figures.
From a tax perspective, these reconciliations may be useful because they provide greater transparency over adjustments made by management. However, tax practitioners should remain focused on the IFRS figures, rather than management's adjusted measures, as the “starting figure” when preparing tax computations, before making the necessary adjustments to determine taxable income in accordance with the Income Tax Act.
Importantly, an MPM should be viewed as a review prompt rather than a tax measure. Where management adjusts operating profit for items such as impairments, restructuring costs, transaction costs or fair value movements, the tax practitioner should assess each adjustment separately and determine whether it:
For example, if an entity reports an Adjusted Operating Profit of R50 million compared with IFRS operating profit of R55 million, the tax practitioner should not simply adopt the adjusted figure. Instead, each adjustment should be analysed under the Income Tax Act, for instance questioning whether the adjustment of R5 million consists of any amounts received by or accrued to the taxpayer during the tax year for purposes of determining the entity’s ‘gross income’ for that year.
Examples of items that may need to be adjusted for in the tax computation, depending on the circumstances and relevant tax provisions, include impairments, restructuring provisions and fair value gains or losses. It is important that tax professionals understand which items are included in the accounting profit before tax used as the “starting figure” for the tax computation and only adjust for non-taxable / non-deductible items that are indeed included in that figure.
This approach ensures that the MPM reconciliation becomes an additional source of information for the tax review without being incorrectly treated as directly impacting the tax computation.
IAS 12 and deferred tax considerations
While IFRS 18 does not change the principles of accounting for deferred tax, tax professionals should consider IFRS 18 together with IAS 12 – Income Taxes, which remains the primary IFRS standard governing current and deferred tax accounting.
IAS 12 addresses matters including current tax, deferred tax, temporary differences, tax losses, unused tax credits, deferred tax assets and liabilities, and tax-rate reconciliations.
For tax professionals, the interaction between the accounting records and the tax computation remains important. Changes in financial statement presentation should not result in changes to the underlying tax analysis, but they may affect how temporary differences and tax balances are presented, reconciled and explained.
Tax teams should therefore ensure that changes arising from IFRS 18 do not disrupt existing deferred tax reconciliations or supporting schedules.
Other IFRS standards with tax implications
IFRS 18 should also be considered alongside other accounting standards that can give rise to tax adjustments or deferred tax consequences.
Depending on the nature of the entity and its transactions, tax professionals may need to consider the tax implications of accounting treatments under:
Pillar Two considerations
For multinational groups that fall within the scope of the OECD Pillar Two rules, IAS 12 also contains specific requirements relating to Pillar Two income taxes.
The IFRS 18 implementation review should therefore not be performed in isolation where the group has Pillar Two considerations. Tax and finance teams should consider whether the relevant disclosures, deferred tax treatment and tax information remain appropriately supported.
This is particularly important for multinational groups where the tax function may already be responsible for CbCR, transfer pricing and Pillar Two compliance.
What does this mean for the ITR14 review?
From a corporate tax compliance perspective, the practical impact of IFRS 18 can be summarised as follows:
AFS → IFRS 18 presentation → MPM reconciliation → Tax computation → ITR14
The tax computation should still be based on the applicable tax principles, supported by the financial statements and supporting schedules, while making the necessary adjustments to arrive at the taxable income and the amounts ultimately disclosed in the ITR14.
Effective for annual reporting periods beginning on or after 1 January 2027, IFRS 18 replaces IAS 1 and introduces significant changes to the presentation and disclosure of financial statements. While the standard does not change the recognition or measurement of income and expenses, it does change how financial performance is presented. From a tax perspective, these changes should not be overlooked.
Why does IFRS 18 matter to tax professionals?
Corporate income tax calculations generally begin with accounting profit before adjusting for tax-specific provisions contained in the Income Tax Act. Taxpayers and their advisors rely heavily on financial statements to prepare tax computations, assess deferred tax, complete tax returns and respond to SARS verification requests.
Although IFRS 18 does not alter taxable income, it changes how accounting information is organised and disclosed in the financial statements. This means tax professionals will need to understand the new presentation requirements to ensure that tax computations remain accurate and that reconciliations between accounting profit and taxable income are properly supported.
The key point is that IFRS 18 does not replace or amend the Income Tax Act. Rather, it changes the presentation of the accounting information from which tax professionals often begin their review. The tax file should therefore continue to reconcile the information contained in the financial statements to the tax computation and ultimately to the income tax return (ITR14).
Key changes and their tax implications
One of the most significant changes introduced by IFRS 18 is the requirement to classify income and expenses into standardised categories, namely operating, investing, financing, income tax and discontinued operations. This creates greater consistency in financial reporting and should make it easier to analyse an entity's financial performance.
For tax professionals, this standardised presentation may also improve the review of tax computations by making it easier to identify adjustments relating to capital transactions, finance costs and investment income. It may also simplify discussions during SARS audits and verification processes where financial statements form part of the supporting documentation.
Another important development is the introduction of a mandatory operating profit subtotal. Historically, entities have applied different definitions of operating profit, making comparisons between companies difficult. While taxable income does not equal operating profit, this standardised measure provides a clearer starting point when analysing financial performance and identifying potential tax adjustments.
For example, the tax computation may still start with accounting profit before tax, but the tax reviewer should be able to trace that amount through the IFRS 18 presentation and understand how significant operating, investing and financing items have been treated.
Management-Defined Performance Measures
Many organisations report alternative performance measures such as Adjusted EBITDA or Adjusted Operating Profit. Under IFRS 18, these are referred to as Management-Defined Performance Measures (MPMs), and entities are required to explain how these measures are calculated and reconcile them back to IFRS figures.
From a tax perspective, these reconciliations may be useful because they provide greater transparency over adjustments made by management. However, tax practitioners should remain focused on the IFRS figures, rather than management's adjusted measures, as the “starting figure” when preparing tax computations, before making the necessary adjustments to determine taxable income in accordance with the Income Tax Act.
Importantly, an MPM should be viewed as a review prompt rather than a tax measure. Where management adjusts operating profit for items such as impairments, restructuring costs, transaction costs or fair value movements, the tax practitioner should assess each adjustment separately and determine whether it:
- requires an add-back in the tax computation;
- is deductible for tax purposes;
- creates a temporary difference and deferred tax consequence;
- has no tax adjustment; or
- requires further explanation or supporting documentation in the tax file.
For example, if an entity reports an Adjusted Operating Profit of R50 million compared with IFRS operating profit of R55 million, the tax practitioner should not simply adopt the adjusted figure. Instead, each adjustment should be analysed under the Income Tax Act, for instance questioning whether the adjustment of R5 million consists of any amounts received by or accrued to the taxpayer during the tax year for purposes of determining the entity’s ‘gross income’ for that year.
Examples of items that may need to be adjusted for in the tax computation, depending on the circumstances and relevant tax provisions, include impairments, restructuring provisions and fair value gains or losses. It is important that tax professionals understand which items are included in the accounting profit before tax used as the “starting figure” for the tax computation and only adjust for non-taxable / non-deductible items that are indeed included in that figure.
This approach ensures that the MPM reconciliation becomes an additional source of information for the tax review without being incorrectly treated as directly impacting the tax computation.
IAS 12 and deferred tax considerations
While IFRS 18 does not change the principles of accounting for deferred tax, tax professionals should consider IFRS 18 together with IAS 12 – Income Taxes, which remains the primary IFRS standard governing current and deferred tax accounting.
IAS 12 addresses matters including current tax, deferred tax, temporary differences, tax losses, unused tax credits, deferred tax assets and liabilities, and tax-rate reconciliations.
For tax professionals, the interaction between the accounting records and the tax computation remains important. Changes in financial statement presentation should not result in changes to the underlying tax analysis, but they may affect how temporary differences and tax balances are presented, reconciled and explained.
Tax teams should therefore ensure that changes arising from IFRS 18 do not disrupt existing deferred tax reconciliations or supporting schedules.
Other IFRS standards with tax implications
IFRS 18 should also be considered alongside other accounting standards that can give rise to tax adjustments or deferred tax consequences.
Depending on the nature of the entity and its transactions, tax professionals may need to consider the tax implications of accounting treatments under:
- IFRS 16 – Leases
- IFRS 9 – Financial Instruments
- IFRS 3 – Business Combinations
- IAS 36 – Impairment of Assets
- IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
- IAS 21 – The Effects of Changes in Foreign Exchange Rates
- IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations
- IFRS 10 and IAS 28 where group structures, subsidiaries and investments are relevant.
Pillar Two considerations
For multinational groups that fall within the scope of the OECD Pillar Two rules, IAS 12 also contains specific requirements relating to Pillar Two income taxes.
The IFRS 18 implementation review should therefore not be performed in isolation where the group has Pillar Two considerations. Tax and finance teams should consider whether the relevant disclosures, deferred tax treatment and tax information remain appropriately supported.
This is particularly important for multinational groups where the tax function may already be responsible for CbCR, transfer pricing and Pillar Two compliance.
What does this mean for the ITR14 review?
From a corporate tax compliance perspective, the practical impact of IFRS 18 can be summarised as follows:
AFS → IFRS 18 presentation → MPM reconciliation → Tax computation → ITR14
The tax computation should still be based on the applicable tax principles, supported by the financial statements and supporting schedules, while making the necessary adjustments to arrive at the taxable income and the amounts ultimately disclosed in the ITR14.
- A practical IFRS 18 compliance review could therefore involve:
- Obtaining the final annual financial statements and MPM note;
- Identifying each adjustment included in an MPM reconciliation;
- Assessing whether each item has a tax consequence;
- Determining whether the item should be added back, deducted, treated as a timing difference or have no tax adjustment;
- Considering the impact on deferred tax where relevant; and
- Cross-referencing the conclusion to the tax computation and ITR14 schedules.
This approach is consistent with the practical compliance framework set out in the accompanying IFRS 18 material: each MPM adjustment should be assessed and documented rather than simply accepted as presented by management.
Preparing for implementation
The implementation of IFRS 18 is likely to require collaboration between finance, accounting and tax teams. Organisations should begin assessing whether their reporting systems, tax computation templates and internal review processes will need updating to align with the new presentation requirements.
In our experience, SARS verification requests often require detailed reconciliations between the financial statements, tax computation and the amounts disclosed in the ITR14. Any change in financial statement presentation has the potential to affect these reconciliations, making it essential for tax professionals to understand the new requirements before the standard becomes effective.
Tax teams should therefore consider updating their review procedures to specifically include:
- review of the IFRS 18 income statement categories;
- review of the MPM note;
- reconciliation of significant MPM adjustments to the tax computation;
- assessment of current and deferred tax consequences, specifically whether finance, investment and fair value movements have been correctly treated for tax purposes; and
- clear cross-referencing between the financial statements, tax computation and ITR14.
Conclusion
While IFRS 18 is fundamentally an accounting standard, its impact extends beyond financial reporting. The way in which financial information is presented influences tax computations, deferred tax calculations, SARS verification processes and the overall interpretation of an entity's financial performance.
For corporate tax professionals, understanding IFRS 18 is not simply about keeping up with changes in accounting standards. It is about ensuring that tax reporting remains accurate, reconciliations are well supported and clients continue to meet their compliance obligations efficiently.
The introduction of MPMs is particularly relevant because these measures provide tax professionals with another useful source of information when reviewing unusual or management-adjusted items. However, the MPM should remain a review prompt and not a substitute for the tax computation.
As the 2027 effective date approaches, early preparation will place both finance and tax teams in a stronger position to implement the standard successfully and to ensure that the transition does not create unnecessary challenges when preparing tax computations, completing the ITR14 or responding to SARS queries.