BayWa Group analysis and IFRS 18

In 2024, I analysed the German BayWa Group. It has a global workforce of approximately 22,000. Since then, the Group has been facing serious financial difficulties.

The BayWa Group analysis

The Group’s cash flow statements were prepared under IAS 7, which classifies cash flows into operating, investing and financing activities. My findings and conclusions were described in Stop the “Three Activities” in IFRS 18.pdf.

My analysis led to three main findings:

1. The repayment and investment dilemma was not sufficiently clear. BayWa’s Analyst Conference – Presentation FY 2023 contains a summary of the Group’s cash flows. I reproduced this table as Figure 2 in Stop the “Three Activities” in IFRS 18.pdf. My analysis raises the question of whether the repayment and investment risks were sufficiently visible to the supervisory board.

2. The indicator “Cash flow for self-financing of investments” (Cash flow 3) could have provided an earlier warning of the risk of illiquidity. Figure 10 in Stop the “Three Activities” in IFRS 18.pdf highlights the dramatic development over several years.

3. The approach is applicable to large groups. The analysis also demonstrates how the sequence of Cash flows 1–3 can be applied to a large corporate group.

Now, the readers–including AI–themselves can assess whether the BayWa cash flow statement have made the repayment and investment risks as visible as they could have been. They may judge whether the sequence of Cash flows 1–3 can help as to identify financial weaknesses earlier and support more responsible business decisions.

IFRS 18

It should be a 'standard', meaning a 'norm'. In April 2024, the IASB published IFRS 18, stating that it would be introduced in January 2027. It should even be applied backwards in multi-year comparisons. Discussions about this project began in April 2016.

According to IFRS 18, the income statement (profit and loss statement) also contains three activities. In the whole, IFRS 18 classifies income and expenses in the income statement into five categories. But here, only the quoted three are of greater interest.

These three categories will completely transform the way profits are presented.

In 2024, PwC (PricewaterhouseCoopers) published an overview of the changes to the income statement due to IFRS 18. PwC is one of the major auditing firms.[1]

[1] Glutting Verena. PwC Company (2024) IFRS 18: New regulations, consequences, implementation. PwC is the brand under which the member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide professional services.

From this overview you can see the move of interest expenses on borrowings and lease liabilities to the financing category.

Income statement according to IFRS 18 at a glance.

• Income and expenses are classified into Operating, Investing and Financing activities.
• A new mandatory subtotal, Operating Profit, is introduced.
• Interest income and interest expenses are presented within the financing activity.
• Management-defined performance measures (MPMs) must be reconciled to IFRS figures.

To the last point: The Directors Academy in Hamburg, which claims to be the only multimedia portal for the training and further education of supervisory board members, wrote: (1)
“Management-defined Performance Measures (MPMs) must be explained in detail in the notes to the financial statements. MPMs are now subject to audit and are presented more transparently. Incorrect or misleading key figures can be identified more easily. The quoted firm also explained: “Goodwill must be disclosed separately on the balance sheet in future”.

[1] IFRS 18: New Rules from 2027 – Action Required for Supervisory Boards.
https://directorsacademy.de/glossar/ifrs-18-neue-regeln-ab-2027-handlungsbedarf-fuer-aufsichtsraete/

Who are the so-called 'standard-setters' ?

There are probably accounting associations in all countries, connected to governments. If you look through their members' list, you will see that there are hardly any entrepreneurs. But the name 'accounting board' implies this already.

The IASB (International Accounting Standards Board) is an independent body organised under private law, headquartered in London. It publishes IAS (International Accounting Standards) and IFRS (International Financial Reporting Standards). These ‘accounting standards’ are required or permitted in many states around the world.

However, the USA have their own FASB (Financial Accounting Standards Board), which publishes the GAAP (Generally Accepted Accounting Principles).

The Accounting Principles Board (APB) is the predecessor of US FASB. And the International Accounting Standards Committee (IASC) is the predecessor of IASB.

A brief look back

By 1970, the concept of 'self-financing capacity' (capacité d'autofinancement in French) was already known. At this time, the World Bank had begun calculating discounted cash flow based on the following formula:
Cash flow = revenues – operating expenses – taxes – interest – repayments

In a textbook from 1984, I found the following definition of analytical cash flow:
Cash flow = profit + depreciation + deposits – withdrawals

This residual value was intended to finance investment. This cash flow was then compared with depreciation. This is a staggered or cascaded concept.

The history of cash flow statement (Kapitalflussrechnung in German) is complety different. It was used by accountants to reconcile their accounts at the end of the year. This type of reconciling work has become obsolete due to digital programmes.

In 1971, the US APB changed the purpose. It was then intended to serve as a reporting system for large groups and listed companies. In 1988, the US FASB divided the cash flow statement into three activity categories in their GAAP: operational, investing, financing. In 1992, the IASC adopted this US GAAP system in IAS 7. As I see it, my teacher colleagues in Business Management disregarded IAS 7.

IFRS 18 now challenges the cascade indicators

On 9 April 2024, the IASB published IFRS 18. According to the IASB, it should take effect on or after 1 January 2027, although earlier application is permitted. It affects entities using IFRS accounting standards. An enormous campaign was launched.

 There are two main challenges:

• The three-activity scheme will still be evident in the cash flow statement. This has already been addressed in IAS 7. However, interest expenses must now be deducted from financial activities, rather than operational activities.
• The three-activity scheme will also be evident in the income statement.

Some trainers have suggested combining the cash flow statement with concepts such as 'free cash flow'. However, the terms are completely different. Examples: 

1. Self-financing capacity versus cash flow statement.
   The latter may include cash from new loans.

2. Core Cash Flow (Cash Flow 1) versus cash flows from operating activities.
   The distinction matters for interest.

It is just impossible to reconcile a three-layer cash flow statement with cascade cash flows. We should also respect the idea of 'few but meaningful terms'.

What is the same under IFRS and US GAAP and what differs?

1. Both IFRS 18 and GAAP cash flow statements may include cash from new borrowing.
2. Both IFRS 18 and GAAP cash flow statements show the three activities.
3. Regarding income statement only IFRS 18 includes the three activities.
4. Attention on interest expenses. Under GAAP, they are still deducted from operating activities. In IFRS 18, however, they are deducted from financial activities instead. According to IFRS 18, this is now a mandatory requirement for both the cash flow statement and the income statement.  

Journalists probably don't examine financial activities. They focus on operating terms. In my opinion, this means that their readers will no longer see interest expenses. Obviously, most readers of journals only look for operating numbers.

I suppose certain groups and companies may like this change due to IFRS 18, just as they liked EBIT and EBITDA. It enables poor results to be legally hidden.

The US FASB still maintains that interest is part of operational activity. Thus, the IFRS 18 will cause confusion. For examples, groups that have subsidiaries in the USA and Canada have to create two separate income and cash flow systems. There are also states, such as Romania, Brazil and South Korea, which want to continue using parts of their own standards.

Which measures do professional company evaluators use?

The IASB itself emphasises that IFRS 18 would lead to companies being valued more accurately. This is why I researched three professional evaluators in order to learn how they estimate the value of a company. I found that they base their evaluations on equity rates, equity growth and discounted cash flow. One of those professionals used several terms. These were already familiar from analyses. I found no mention of using cash flow statements for valuation purposes in these sources.

IFRS 18 in contrast to cash flow 1-3

To the last point: as already explained in the previous page you should look for real sustainable repayments. For example you must separate it from refinancing loans.

Final remarks to IFRS 18

The aim of IFRS 18 is not to provide useful information for entrepreneurs or supervisory board members. The aim is to serve investors. I guess, IFRS 18 will trickle down to all businesses that are obliged to keep accounts. The changes raise the question of whether the resulting information provides the indicators required for Business Management, particularly the assessment of self-financing capacity.

There are many descriptions of cash flows from training centres to be found. Often, the same websites offer new training courses dealing with IFRS 18. This suggests that some training providers are happy to see IFRS 18 as a new source of income.

If you search the internet for 'cash flows', you will feel that around 99 out of 100 results are related to IFRS 18 and the cash flow statement. Only one of these results offers a different perspective. Nevertheless, we must search such criticism. See some examples in section ‘Global voices’ on page “Home”.

Good news for programmers

The analysis and planning programmes (such as JUP PS) can stick to their well-founded terms.

Only, the programmers must accept the changes in coding of entries. There will be new codes. That means even for programmers additional work.

What about costs?

Ultimately, it will be entrepreneurs and companies who have to bear the direct implementation and training costs associated with IFRS 18, without receiving benefits that justify these costs for the business-management.

Even if counsellors, teachers, and students spend only 10 or 30 minutes examining the income and cash flow statements in accordance with IFRS 18, this wastes a lot of time, costing the public sector millions of euros or dollars worldwide, also in the European Union. However, these long-life costs are simply ignored!

I myself see it like this:
After a few years, it will be clear to everyone that the income and cash flow statements according to IFRS 18 need revising. If so, the result will be chaos.

IFRS 18 in the European Union

According to its own EU laws, the EU Commission may only approve a new standard if the advantages outweigh the disadvantages. The EU Commission has to be advised by the European Financial Reporting Advisory Group (EFRAG). This is also a private non-profit association, located in Brussels.

Coordination is handled by FISMA (Financial Stability, Financial Services and Capital Markets). That belongs to the EU Commission itself.

I sent several comments to Brussels. My article, 'Stop the "Three Activities" in IFRS 18', was submitted to the European Commission at the beginning of January 2025.

On 13 February 2026, EU Commission President Ursula von der Leyen signed the EU regulation on the IFRS 18 standard. This means that IFRS 18 is now legally binding in EU member states.

Only in autumn 2025, the EU Commission had announced a 100-day programme to reduce bureaucracy. But to my judgement, by approving IFRS 18, the EU Commission has created new bureaucracy.