What Does IFRS 18 Mean for EBITDA and Other Alternative Metrics?

For finance leaders, controllers, auditors, investors, and reporting professionals in the Kingdom of Saudi Arabia, the introduction of IFRS 18 represents an important change in how financial performance is presented and explained. As organizations prepare for the next phase of reporting under Vision 2030 IFRS reporting standards, EBITDA and other alternative performance metrics require closer attention because IFRS 18 introduces clearer requirements around management defined performance measures, standardized subtotals, and reconciliation. IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, although earlier application is permitted.

Why IFRS 18 Matters for Saudi Arabian Reporting

Saudi Arabia's economy is undergoing significant structural transformation, with increasing activity across non oil industries, construction, tourism, digital services, financial services, manufacturing, and other emerging sectors. The latest official economic data shows that Saudi Arabia's real GDP grew by 4.5% in 2025, while non-oil activities increased by 4.9%. GDP at current prices reached approximately SAR 4,789 billion in 2025.

These developments increase the importance of transparent and comparable financial performance information. Investors and other users increasingly examine both statutory IFRS results and alternative metrics such as EBITDA, adjusted EBITDA, operating profit, adjusted operating profit, free cash flow, and other internally defined indicators.

IFRS 18 does not eliminate these alternative metrics. Instead, it establishes a stronger framework for explaining measures that management uses to communicate its view of financial performance. This means Saudi Arabian reporting teams need to understand exactly which measures fall within the IFRS 18 requirements and how those measures should be presented.

What IFRS 18 Changes

IFRS 18 replaces IAS 1 Presentation of Financial Statements and focuses particularly on improving the presentation and disclosure of financial performance. One of its central changes is the introduction of two defined subtotals in the statement of profit or loss.

These are operating profit or loss and profit or loss before financing and income taxes. Operating profit represents income and expenses classified within the operating category. Profit before financing and income taxes combines operating profit with income and expenses classified within the investing category.

The significance for EBITDA is that operating profit becomes a standardized IFRS subtotal, while EBITDA remains an alternative measure unless it meets the specific requirements for a management defined performance measure or falls within another permitted presentation category.

This distinction is essential. IFRS 18 does not redefine EBITDA as an IFRS accounting subtotal. Instead, it creates a clearer relationship between standardized IFRS measures and management metrics.

Is EBITDA Affected by IFRS 18?

EBITDA generally represents earnings before interest, taxes, depreciation, and amortization. It is widely used to evaluate operating performance, profitability, leverage, valuation, and cash generation potential.

However, EBITDA is not itself a defined IFRS subtotal. The treatment under IFRS 18 depends on how an entity calculates, labels, presents, and communicates the measure.

A basic EBITDA measure can be closely connected to operating profit because depreciation and amortization are added back. However, adjusted EBITDA may involve additional exclusions such as restructuring costs, impairment charges, transaction expenses, unusual items, or other management defined adjustments.

The more adjustments an entity makes, the more important transparent explanation becomes.

For example, if an entity communicates adjusted EBITDA outside its financial statements and uses it to communicate management's view of financial performance, it may fall within the definition of a management defined performance measure. IFRS 18 defines such measures as subtotals of income and expenses used in public communications to communicate management's view of an aspect of the entity's financial performance and not specifically required by IFRS Accounting Standards.

Management Defined Performance Measures Under IFRS 18

One of the most important concepts for Saudi Arabian reporting teams is the management defined performance measure.

Under IFRS 18, qualifying measures must be disclosed in the notes to the financial statements. The disclosures are designed to help users understand what the measure represents, why management believes it provides useful information, how it is calculated, and how it compares with the most directly comparable IFRS subtotal.

An entity must generally provide a reconciliation between the management defined performance measure and the most directly comparable IFRS total or subtotal. For example, an adjusted operating profit measure would be reconciled to operating profit.

This requirement can significantly improve transparency around EBITDA and adjusted EBITDA.

Consider an adjusted EBITDA measure that excludes restructuring costs and certain impairment expenses. Under the new framework, the reporting entity needs to explain the basis for those adjustments and provide the relevant reconciliation rather than simply publishing a headline figure.

EBITDA Versus Operating Profit

The introduction of operating profit as a defined IFRS subtotal makes the relationship between EBITDA and statutory performance more visible.

Suppose an entity reports operating profit of SAR 500 million and depreciation and amortization of SAR 120 million. A simplified EBITDA calculation could result in SAR 620 million before considering any additional adjustments.

If management then excludes SAR 40 million of restructuring expenses to calculate adjusted EBITDA, the adjusted EBITDA could reach SAR 660 million.

The important issue is not simply the final number. Users need to understand why each adjustment has been made, whether the adjustment is consistent with the entity's stated methodology, and how the resulting measure relates to the IFRS subtotal.

This improves analytical discipline and reduces the risk that similar labels represent substantially different calculations across different reporting entities.

Other Alternative Performance Metrics

IFRS 18 has implications beyond EBITDA. Saudi Arabian organizations may use a wide range of alternative metrics, including adjusted operating profit, adjusted profit, recurring profit, underlying earnings, operating cash flow measures, free cash flow, and other customized indicators.

Not every alternative metric automatically becomes a management defined performance measure. The definition depends on factors such as whether the measure is a subtotal of income and expenses, whether it is used in public communications, whether it communicates management's view of financial performance, and whether it is already specified or required by IFRS Accounting Standards.

This distinction should be documented carefully.

Finance teams should maintain an inventory of performance measures appearing in annual reports, investor presentations, management reports, earnings materials, websites, regulatory communications, and other public materials. The purpose is to determine which measures could fall within IFRS 18 and which disclosure requirements apply.

Why Reconciliation Will Become More Important

Reconciliation is one of the most significant practical changes for alternative performance reporting.

Under IFRS 18, a management defined performance measure must be reconciled to the most directly comparable IFRS total or subtotal. The standard also requires information about reconciling items and, where necessary, explanations of how those items are calculated and why they contribute to the usefulness of the measure.

This means reporting teams should not treat reconciliation as a final disclosure exercise.

Instead, the reconciliation process should begin during the financial reporting cycle. Each adjustment should have a clear accounting basis, supporting documentation, consistent terminology, and an understandable explanation.

For example, an entity could have a management defined measure that excludes several expenses. If one adjustment relates to a restructuring program and another relates to an unusual impairment event, the entity may need to explain the different reasons for those adjustments rather than placing everything under a broad label such as exceptional items.

What 2026 Means for IFRS 18 Preparation

The year 2026 is particularly important because it represents the final preparation period before IFRS 18 becomes mandatory for annual reporting periods beginning on or after 1 January 2027. Organizations should therefore be testing reporting processes, identifying affected metrics, assessing comparative information requirements, and reviewing the language used in external communications.

The IFRS Interpretations Committee is also actively considering practical IFRS 18 questions during 2026. Current topics include management defined performance measures, public communications, hypothetical income and expenses, classification of income and expenses, and the labeling of subtotals.

This continuing interpretive activity demonstrates why early preparation is valuable.

For Saudi Arabian entities, the timing also aligns with a broader transformation in economic measurement and reporting. Official statistical methodology has been updated to better reflect structural changes in the Saudi economy, including the growth of non oil private sector activities and emerging economic sectors.

Practical Preparation Steps for Saudi Arabian Finance Teams

1. Build a Complete Metrics Inventory

Identify every financial performance measure used across financial statements, management reports, investor materials, presentations, websites, and other public communications.

The inventory should include EBITDA, adjusted EBITDA, operating profit measures, recurring earnings measures, cash flow indicators, and any customized profitability metrics.

2. Determine Which Measures Are Covered

Assess each measure against the IFRS 18 definition of a management defined performance measure.

Do not assume that a measure is outside IFRS 18 simply because it is commonly used in the market. The way the measure is calculated and communicated is important.

3. Establish Consistent Definitions

Create formal definitions for each alternative measure.

For adjusted EBITDA, for example, the entity should clearly document whether restructuring expenses, impairment charges, acquisition related costs, foreign exchange effects, or other items are included or excluded.

4. Prepare Reconciliation Schedules

Build reconciliation schedules between each relevant alternative metric and the most directly comparable IFRS subtotal.

These schedules should be supported by the general ledger and financial reporting systems so that the information can be reproduced efficiently during the annual reporting process.

5. Review Public Communications

IFRS 18 considers public communications when determining whether a measure qualifies as a management defined performance measure. Therefore, organizations should review financial presentations, websites, reports, announcements, and other external materials for consistency.

6. Train Finance and Investor Relations Teams

IFRS 18 implementation is not solely an accounting policy project. Financial reporting, management accounting, investor communications, finance leadership, internal audit, and governance teams may all contribute to the creation and communication of performance metrics.

Training should focus on definitions, reconciliation, consistency, disclosure controls, and the distinction between IFRS subtotals and management defined measures.

Vision 2030 and the Need for Better Performance Transparency

The transformation of Saudi Arabia's economic structure makes consistent financial reporting increasingly valuable. The latest economic data indicates that non oil activities grew by 4.9% in 2025, while construction accounted for 8.0% of GDP at current prices and manufacturing excluding oil refining represented 11.1%.

In this environment, Vision 2030 IFRS reporting standards are increasingly relevant to organizations seeking robust financial reporting practices that support transparency, comparability, and investment analysis.

IFRS 18 can strengthen this environment by creating clearer standardized subtotals while still allowing management to communicate alternative measures that it considers useful.

The Strategic Impact on Financial Analysis

For investors and other users, IFRS 18 may make financial analysis more structured.

Operating profit provides a standardized IFRS reference point. EBITDA can then be assessed as an additional analytical measure rather than being treated as a substitute for statutory reporting.

This distinction can help users identify whether an entity's profitability is driven by operating performance, depreciation and amortization differences, financing effects, investment income, tax effects, or management specific adjustments.

For finance leaders, the strategic advantage is also significant. A well designed performance reporting framework can make internal and external reporting more consistent, reduce reconciliation problems, improve audit readiness, and provide clearer explanations of business performance.

Key Takeaways for KSA Reporting Professionals

The transition to IFRS 18 should be treated as more than a formatting change.

First, operating profit and profit before financing and income taxes will become defined IFRS subtotals.

Second, EBITDA will continue to have analytical relevance, but its presentation and disclosure must be assessed under the new framework.

Third, adjusted EBITDA and similar measures may qualify as management defined performance measures when they meet the relevant criteria.

Fourth, reconciliation and explanation will become central to transparent alternative metric reporting.

Fifth, 2026 should be used as a preparation year for identifying metrics, testing systems, documenting definitions, and strengthening disclosure controls.

Finally, Vision 2030 IFRS reporting standards should be viewed within the wider context of Saudi Arabia's evolving economy, where stronger financial transparency can support better analysis of increasingly diverse business activities.

For KSA finance professionals, the key objective is not to remove EBITDA or other alternative metrics. The objective is to ensure that these measures are clearly defined, consistently calculated, properly reconciled, and presented alongside standardized IFRS information so users can understand both the statutory results and management's interpretation of performance.