Nigerian firms brace for sweeping reporting overhaul as Kreston Pedabo unveils IFRS 18 guide

As companies shift towards IFRS 18 financial reporting standard, a Nigerian based leading accounting firm, Kreston Pedabo has released a technical guide outlining the far-reaching implications of the global standard and how firms can navigate it.

The report, titled “IFRS 18: From Disclosure Discretion to Structured Accountability A Technical Guide for Nigerian Entities,” was authored by the company’s Managing Consultant, Albert Folorunsho, Senior Partner, Tax Compliance & Advisory, Killian Khanoba, Partner, Audit & Assurance, Peter Asemah, and Manager, Audit & Assurance, Olaitan Adesanya.

The document provides an in-depth analysis of IFRS 18, Presentation and Disclosure in Financial Statements, issued by the International Accounting Standards Board in April 2024.
The standard replaces IAS one and is regarded as the most significant reform to financial statement presentation in nearly three decades.

In Nigeria, the Financial Reporting Council of Nigeria has confirmed that IFRS 18 will be mandatorily adopted for reporting periods beginning on or after 1 January 2027, with companies required to restate their 2026 financial statements for comparability.

Pedabo noted that IFRS 18 represents a decisive move away from the flexibility that characterised IAS one, adding that under the previous regime, companies had considerable discretion in defining key metrics such as operating profit, often resulting in inconsistencies across industries and jurisdictions.

The new standard introduces a rigid structure, requiring all income and expenses in the statement of profit or loss to be classified into five categories of operating, investing, financing, income tax, and discontinued operations.

It also mandates the presentation of standardised profit subtotals, including operating profit, profit before financing and income tax, and profit before tax. These changes are designed to improve comparability and eliminate ambiguity in financial reporting.

Investors feedback cited in the report highlights long-standing concerns about the absence of a uniform definition of operating profit and the widespread use of poorly explained adjusted performance measures.

The experts stated that one of the most notable impacts of IFRS 18 would be on operating profit, a key indicator closely watched by investors, lenders, and analysts.

The guide explains that many items historically included in operating profit such as income from government securities, dividends from equity investments, and profits from associates would now be classified under the investing category.

As a result, companies are likely to report lower operating profits under IFRS 18, even though their overall profitability remains unchanged.

An illustrative example in the report shows a company with an operating profit of N9 billion under IAS 1 seeing that figure fall to N6.2 billion under IFRS 18 due solely to reclassification.

This shift, the authors noted would require proactive communication to avoid misinterpretation by stakeholders, particularly where financial covenants or performance targets are linked to operating profit.

IFRS 18 also introduces new requirements for Management Performance Measures (MPMs), covering commonly used metrics such as adjusted earnings, EBITDA, and underlying profit.

Under the new rules, any profit-based measure communicated externally that is not defined by IFRS must be disclosed in the financial statements, alongside a detailed reconciliation to the nearest IFRS subtotal.

This includes a breakdown of all adjustments, as well as their tax effects and impact on non-controlling interests.
Pedabo, in its report stated that this requirement will significantly increase transparency, addressing concerns that companies have historically used adjusted metrics to present a more favourable view of performance.

They added that finance teams would need to carefully track all externally communicated metrics, including those mentioned in investor presentations, press releases, and earnings calls.
The impact of IFRS 18, the experts said would vary across industries, noting that for banks and financial institutions, interest income from core lending activities will remain within operating profit, reflecting the nature of their business.

However, income from treasury investments may be classified as investing, depending on whether it is considered part of core operations or a separate activity.

Manufacturing and trading companies they said are expected to see more pronounced changes, as returns from treasury instruments and equity investments are reclassified out of operating profit.

For holding companies, the investing category may become dominant, reflecting their reliance on dividends and associate income rather than traditional operating activities.

Beyond presentation changes, the transition to IFRS 18 will require significant operational adjustments as the organisation stressed that companies must update their chart of accounts, reconfigure financial systems, and ensure accurate classification of all transactions.

The report advises firms to treat 2026 as a transition year, using it to conduct dry runs, test systems, and resolve classification issues ahead of full implementation in 2027.

They noted that there are also potential implications for loan agreements and bond covenants that reference operating profit, adding that companies may need to renegotiate terms to reflect the new definition under IFRS 18.

Failure to prepare adequately could lead to compliance challenges, audit issues, and unintended covenant breaches.
Despite the challenges, the report highlights several benefits of IFRS 18, including standardised reporting which is expected to enhance comparability, improve investor confidence, and support better regulatory oversight.

For Nigerian companies seeking access to international capital markets, they said the adoption of IFRS 18 could reduce information asymmetry and lower the cost of capital.

The authors said the standard also encourages stronger internal governance by aligning externally reported metrics with internal performance measures.

The guide stated that IFRS 18 marks a shift towards greater discipline and accountability in financial reporting.
By standardising key metrics and enforcing detailed disclosures, the organisation said the new standard aims to provide a clearer and more consistent picture of corporate performance.