IFRS 18 and Transaction Multiple Comparability

Executive Summary

IFRS 18 improves the classification of income and expenses, profit subtotals and disclosures of management-defined performance measures. Yet identically labelled EBITDA measures may still contain different items, and historical transaction earnings do not automatically change. Transaction multiple analysis requires clear definitions, reconciliation to comparable earnings, and alignment between the businesses and assets represented by enterprise value and earnings.

A New Starting Point for Analysis

IFRS 18 Presentation and Disclosure in Financial Statements replaces IAS 1. Its Hong Kong equivalent is HKFRS 18. Both apply to annual reporting periods beginning on or after 2027-01-01, with earlier application permitted. The Hong Kong requirements discussed below refer to HKFRS 18. [HKFRS 18.IN3, C1; IFRS Foundation overview, Reference 2]

HKFRS 18 classifies income and expenses into five categories: operating, investing, financing, income taxes and discontinued operations. It requires operating profit or loss and, subject to specified exceptions, profit or loss before financing and income taxes. The latter includes income and expenses in both the operating and investing categories. [HKFRS 18.47, 69–74]

These subtotals help identify what earnings contain. Valuation analysis must still establish whether they are comparable with the selected transactions.

This article focuses on EV/EBIT and EV/EBITDA analysis for general non-financial businesses. Entities that invest in assets or provide financing to customers as a main business activity face additional classification requirements. Some income and expenses otherwise classified as investing or financing must be classified as operating. Comparisons therefore require an understanding of each entity's business activities. [HKFRS 18.49–50, 55–58, 65–66]

1 Operating Profit Still Requires Valuation Analysis

The operating category is the default category for income and expenses not classified elsewhere. It extends beyond an entity's main business activities and includes volatile or non-recurring items. [HKFRS 18.52, B42]

Operating profit is therefore not automatically normalised recurring earnings. For example, gains and losses on disposal of property, plant and equipment are classified as operating. Inclusion in operating profit does not establish that a gain should be capitalised at a recurring earnings multiple. [HKFRS 18.B60(a)]

An adjustment depends on the item's relationship to the business, its likelihood of recurring and its treatment in comparable transactions. If disposals form part of the business model, excluding them entirely may understate normal earnings. Labels such as “other income” or “non-recurring” cannot settle the question.

Foreign exchange differences also require their source to be identified. The standard generally classifies them in the same category as the income and expenses from the underlying items, with an exception where this would involve undue cost or effort. Differences on trade receivables and financing borrowings may therefore fall into different categories. [HKFRS 18.B65–B68]

Valuation analysis must consider whether the currency exposure persists and whether comparable transactions exclude equivalent items. Gains and losses should receive consistent treatment, rather than adding back losses while retaining gains.

2 The EBITDA Label Cannot Replace Its Definition

HKFRS 18.118(b) lists operating profit or loss before depreciation, amortisation and impairments within the scope of HKAS 36, excluding that subtotal from the definition of management-defined performance measures. This neither requires every entity to present it nor means that all measures labelled EBITDA use this calculation.

The accompanying Basis for Conclusions explains why the IASB did not name this subtotal EBITDA: operating profit excludes investing income and expenses and may differ from what users understand as earnings before interest and tax. The EBITDA label may nevertheless be appropriate when it accurately describes the measure. [Basis for Conclusions accompanying HKFRS 18, BC363–BC366; explanatory material, rather than requirements of the standard]

The impairment scope matters. HKAS 36 impairments should not be conflated with expected credit losses on financial assets or inventory write-downs. HKFRS 18 also addresses these items separately. [HKFRS 18.75(b)(ii), 83(a)(iv)–(v), 118(b)]

Adding back depreciation, amortisation or impairment already excluded from source EBITDA would double count the adjustment. When rebuilding the denominator, establish whether each amount was included in starting earnings rather than using an entity-wide expense total automatically.

3 MPM Disclosures Help Assess Management Adjustments

A management-defined performance measure (MPM) is a subtotal of income and expenses that meets all three conditions: [HKFRS 18.117]

1. The entity uses it in public communications outside its financial statements.

2. It communicates management's view of an aspect of the financial performance of the entity as a whole.

3. It is neither listed in paragraph 118 nor specifically required to be presented or disclosed by HKFRS Accounting Standards.

Adjusted EBITDA is not an MPM simply because of its name: its calculation and use matter. Gross profit and the subtotal in paragraph 118(b), among others, are expressly excluded. [HKFRS 18.117–118]

Public communications include management commentary, press releases and investor presentations. For MPM identification, they exclude oral communications, transcripts of oral communications and social media posts. Use of the same measure through other relevant channels still requires assessment. The standard presumes that a publicly communicated earnings subtotal conveys management's view of the entity's overall financial performance unless reasonable and supportable information rebuts that presumption. [HKFRS 18.B119, 119–120]

For MPMs, an entity must disclose the calculation in a single note and reconcile the measure to the most directly comparable subtotal listed in the standard or total or subtotal specifically required by HKFRS Accounting Standards, including income tax and non-controlling interest effects for reconciling items. It must also state that similarly labelled measures from other entities are not necessarily comparable. [HKFRS 18.122–123]

These disclosures help assess excluded costs, adjustment rationales and consistency over time. Were costs excluded as non-recurring, outside management's control or on a different calculation basis? Do the same adjustments recur over several years? Do comparable transactions use the same treatment? These questions determine how the disclosures inform valuation.

MPM classification does not replace valuation judgement. Even fully disclosed add-backs require economic justification, particularly for recurring costs or expenditure needed to sustain operations. Subtotals outside the MPM definition also require comparability checks.

The scope has limits. An internally used subtotal does not necessarily qualify as an MPM. A multiple is a ratio, not a subtotal of income and expenses, although an earnings measure used in its numerator or denominator remains subject to MPM disclosures if it independently meets the definition. [HKFRS 18.B116–B117, B127]

Adjusted earnings in transaction materials may therefore have no MPM note reconciliation. Its absence alone does not make a measure unreliable; the definition and calculation must still be obtained.

4 Retaining the Earnings Basis of Historical Transactions

HKFRS 18 applies retrospectively. In the first annual financial statements applying it, entities must reconcile each statement of profit or loss line item for the immediately preceding comparative period between the restated amount and the amount previously presented under HKAS 1. [HKFRS 18.C2–C3]

For a December year-end entity that does not adopt early, first application in FY2027 means restating FY2026 comparatives. This makes FY2026 data preparation relevant; it does not generally require FY2026 financial statements to adopt HKFRS 18 or mean earlier transaction data will also be restated.

Valuation records should distinguish financial statement restatement from valuation adjustments:

Restatement does not automatically normalise earnings. Income already excluded from the restated starting subtotal should not be deducted again. These two stages are a suggested working approach, not a valuation format prescribed by the standard.

Interim transition and LTM earnings. In the first year of application, condensed interim financial statements under HKAS 34 must present the headings expected under the new standard and the specified subtotals. Interim financial statements under HKAS 34 must also reconcile profit or loss line items for the comparative periods immediately preceding the current and cumulative current periods. Equivalent reconciliations for the current period and earlier comparative periods are voluntary. [HKFRS 18.C4–C6]

When constructing last twelve months (LTM) earnings as the previous full year plus current year-to-date earnings less prior year-to-date earnings, all components need consistent starting subtotals, classifications, business perimeters and adjustment policies. Combining old and new bases may mistake presentation differences for performance changes. Where alignment is not possible, disclose the limitation. This is a valuation principle, not an LTM calculation method prescribed by HKFRS 18.

Historical transaction denominators may use announcement earnings, seller-adjusted earnings or a data provider's own measure. Preserve the original definition before assessing whether a comparable basis can be reconstructed.

The process has three steps:

1. Confirm source and period. Record the transaction date, announcement or database source, annual or LTM earnings period and measure definition.

2. Identify and reconcile differences. Check investment income, equity-accounted results, foreign exchange, leases and other adjustments, showing how source earnings become a comparable denominator.

3. Assess data sufficiency. Reflect unresolved differences in limitations, weighting or exclusion decisions. Do not relabel unreconciled EBITDA as a new-standard measure.

Listed company comparisons face the same issue. A dataset combining early adoption, restated figures and old-standard presentation may conceal differences behind identical database field names.

5 Aligning the Earnings Denominator with Enterprise Value

The numerator also requires scrutiny. Clear financial statement classifications do not automatically align transaction enterprise value (EV) with the assets represented by earnings.

If the denominator excludes equity-accounted results but transaction value includes the investment, consider whether that investment's value should be treated separately. Where cash or standalone investment returns are excluded, the treatment of those assets in EV or the bridge to equity value should also be consistent.

Leases require consistent treatment of both earnings and liabilities. For EBITDA reflecting lease capitalisation, check whether EV includes the corresponding lease liabilities. Earnings reflecting rental expenses also need a compatible value basis. Adjusting the denominator alone leaves the numerator's definition unresolved.

Non-controlling interests raise a similar issue. If the denominator includes all earnings of consolidated subsidiaries, check that the numerator represents the corresponding whole-business value rather than only the value attributable to the parent's shareholders.

These are recommendations for consistent valuation analysis, not HKFRS 18 rules for calculating EV or transaction multiples. The standard provides clearer information; valuation analysis must connect it to the business being priced.

Practical Implications

For entities and CFOs: Inventory externally communicated earnings subtotals, assess the MPM criteria and retain annual and interim reconciliations between original financial statements, restated amounts and adjusted earnings.

For auditors: Assess the rationale and consistency of the bridge from financial statements to valuation earnings, and the business and asset perimeter of EV. MPM notes provide evidence, but do not replace judgement.

For valuation practitioners: Record restatement differences separately from valuation adjustments and link them to EV. Check the consistency of LTM components and explain data limitations.

Conclusion

IFRS 18 provides a more consistent analytical starting point. The usefulness of transaction multiples still depends on aligned earnings adjustments and valuation perimeters. MILES emphasises retaining how each multiple was built, the basis for reconciliations and unresolved differences, making the analysis traceable and reviewable.

References

1. Hong Kong Institute of Certified Public Accountants, HKFRS 18 Presentation and Disclosure in Financial Statements, June 2026 revised edition, incorporating consequential amendments effective on 2027-01-01. Source: HKFRS 18. The accompanying Basis for Conclusions, BC363–BC366, is used only to explain the EBITDA labelling considerations.

2. IFRS Foundation, IFRS 18 overview. IFRS 18 issued in April 2024; accessed 2026-10-06. Used for the international effective date and general background.

This article is prepared for general information purposes and does not constitute audit, accounting, or valuation advice. Readers should refer to the applicable accounting standards for authoritative guidance and seek professional advice on their specific circumstances.

About MILES Valuation Advisory

MILES Valuation Advisory is an independent valuation advisory firm based in Hong Kong, providing Business Valuation, Purchase Price Allocation, Impairment Testing, Share-Based Payment Valuation and Financial Instrument Valuation services, with an emphasis on evidence, traceability and audit review requirements.