What will your profit or loss statement look like under IFRS 18?

IFRS 18 Presentation and Disclosure in Financial Statements is a new financial statements presentation standard that replaces IAS 1 Presentation of Financial Statements. Under IFRS 18, all entities will have to change the way they classify expenses in the statement of profit or loss. They will also have to reconsider the level of aggregation and disaggregation of various line items across the financial statements, and this could affect, in particular, the statement of financial position and the statement of profit or loss, including comparatives.

Where to start?

Where to start on your IFRS 18 implementation project? As all entities will be affected by the new requirement to classify expenses into one of five categories, we recommend you start here. Once you have determined the appropriate category for income and expense items, you will need to amend your financial reporting systems so that each item of income or expense is tagged to the appropriate category. In some cases, income or expenses may need to be dissected and recorded in separate general ledger accounts because part of it relates to one category and part to another.

Five income and expense categories

Under IFRS 18, entities will have to classify their income and expenses into one of five categories:

• Investing
• Financing
• Operating
• Income taxes
• Discontinued operations.

Income and expenses are generally classified based on the characteristic of the expense (i.e. the type of asset or liability to which the income or expense relates). However, certain exceptions exist for entities with specified main business activities, resulting in certain income and expenses being classified in the operating category that would otherwise have been classified in the investing and/or financing categories.

While there are five categories for income and expense items, the statement of profit or loss does not include each category directly. Rather, the categories are used to organise the income and expenses into the mandatory sub-totals. You can see how this works in our example statement of profit or loss.

The operating category is the ‘residual’

It is important to note that the operating category is a ‘residual category’. This means that items of income and expense are classified as operating unless they meet the criteria to be classified into another category. Entities must first determine whether each item of income and expense may be (or is required to be) classified into one of the other four categories, and if not, they are allocated to the residual operating category.

Investing category

Income and expenses are classified in the investing category when they relate to certain assets (i.e. specified assets). The table below shows which specified assets generate income and expenses that will be classified in the investing category.

Category	Assets that result in income and expenses are classified in the investing category	Income and expense items included in the investing category
Investing	Investments in associates, joint ventures and unconsolidated subsidiaries Cash and cash equivalents Assets that generate a return individually and largely independently of the entity’s other resources (e.g. debt or equity instruments and investment property).	Income generated from assets (e.g. interest, dividends, rental income) Income and expenses from the initial and subsequent measurement of the assets, including on derecognition of the assets (e.g. depreciation, impairment losses/reversals, fair value gains and losses, gains or losses on disposal) Incremental expenses directly attributable to the acquisition and disposal of the assets (e.g. transaction costs on assets classified at fair value through profit or loss and costs to sell the assets such as broker commissions).

Some things to note about the types of income and expenses relating to the above assets that are included in the investing category:

• Not all of the depreciation expense is allocated to the investing category. For example, depreciation on investment property measured using the cost model, which generates a return individually and independently from other assets of the entity is presented in the investing category, whereas depreciation on property, plant and equipment is shown in the operating category.
• Only the income and expense types listed above are included in the investing category. This can result in a mismatch between income and expenses related to a single asset. For example, while rental income from an investment property is classified in the investing category, cleaning and maintenance fees on that property must be classified in the operating category.
• As trade receivables and property, plant and equipment are not included in the above list of assets, income and expenses associated with these will be classified in the operating category.

Financing category

The classification requirements for the financing category focus on liabilities, whereas the investing category focuses on assets. Allocating income and expenses associated with liabilities to the financing category depends on whether:

• Liabilities arise from transactions that involve only the raising of finance, or
• Liabilities arise from transactions that do not involve only the raising of finance.

Liabilities arising from transactions that involve only the raising of finance

For these types of transactions, the entity receives finance in the form of cash, or an extinguishment of a financial liability, or receives the entity’s own equity instruments. Then, at a later date, the entity will return cash or its own equity instruments. Examples of these liabilities, along with the associated income and expenses include:

Liabilities arising from transactions involving only the raising of finance	Income and expense items included in the financing category
Debt instrument that will be settled in cash (e.g. debentures, loans, notes, bonds and mortgages)	Interest expenses (e.g. on debt instrument issued) Fair value gains and losses (e.g. on a liability designated at fair value through profit or loss) Dividends on shares issued classified as liabilities Income and expenses from the modification and/or derecognition of the liability
Liability under a supplier finance arrangement when the payable for goods or services is derecognised (i.e. financial liability for the goods or services is discharged and the entity will return cash in exchange)
Bond to be settled through delivery of an entity’s shares (i.e. entity receives cash and will return its own equity instruments in exchange)
Obligation for an entity to purchase its own equity instruments (i.e. entity receives its own equity instruments and will return cash in exchange).

Liabilities arising from transactions that do not involve only the raising of finance

These liabilities arise from ‘dual purpose’ transactions. There is a financing element to the transaction when a financial liability is recognised. However, the transaction goes beyond simply raising finance and settling the debt at a later date, with the entity also usually receiving goods and services. Examples of these liabilities, along with the associated income and expense, include:

Liabilities arising from transactions that do not involve only the raising of finance	Rationale for classification (i.e. why the liability does not arise from transactions involving only the raising of finance)	Income and expenses items included in the financing category
Payables for goods or services to be settled in cash	The entity receives goods or services, not finance	Interest expenses on payables arising from the purchase of goods or services, applying IFRS 9
Contract liabilities	The entity receives cash, but will settle the liability by delivering goods or services rather than cash or its own equity instruments	Interest expenses on a contract liability with a significant financing component as specified by IFRS 15
Lease liabilities	The entity receives a right-of-use asset, not finance	Interest expenses on a lease liability, applying IFRS 16
Defined benefit pension liabilities	The entity receives employee services, not finance	Net interest expense (income) on a net defined benefit liability (asset), applying IAS 19
Decommissioning or asset restoration provisions	The entity receives an asset (the increase in the carrying amount of assets), not finance	The increase in the discounted amount of a provision arising from the passage of time and the effect of any change in the discount rate on provisions, applying IAS 37
Litigation provisions	The entity does not receive finance

The above income and expenses will be allocated to the financing category. However, these transactions have another element of income or expense that belongs in the operating category. For example:

• Expenses for the consumption of purchased goods or services
• Current and past service costs arising from a defined benefit plan
• Remeasurements of the fair value of a liability for contingent consideration in a business combination.

In situations where liabilities arise from transactions that do not involve only the raising of finance, IFRS 18 permits the ‘interest’ portion of income and expenses to be classified as financing only if the entity identifies such income and expenses for the purpose of applying other requirements in IFRS® Accounting Standards. If IFRS Accounting Standards don’t require separation of the interest portion of a liability from other movements, that whole liability movement is classified in the operating category. Examples of this include cash-settled share-based payments and movements in other employee provisions calculated under IAS 19.

Additional rules apply to hybrid contracts containing a host liability and to gains and losses on derivatives designated as hedging instruments.

Income tax category

Income tax expense and income arising from the application of IAS 12 Income Taxes and any related foreign exchange differences are classified in the income tax category.

Discontinued operations category

Income and expenses from discontinued operations arising from the application of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are classified in the discontinued operations category.

Operating category

As noted above, income and expense are classified in the operating category if they don’t belong in any of the other four categories. This residual category includes income and expenses from assets that do not generate a return individually and largely independently of the entity’s other resources (e.g. property, plant and equipment, intangible assets, inventories, receivables, etc.). Examples of typical income and expenses included in the operating category are:

• Revenue for goods and services produced or supplied by the entity using a combination of assets
• Interest income from transactions that do not involve only the raising of finance
• Depreciation and amortisation
• Impairment losses/reversals
• Income and expenses from derecognising the asset, or from its classification as held for sale
• Income and expenses arising from a business combination (e.g. income from a bargain purchase and remeasurement of contingent consideration).

Categories are not the same as for the cash flow statement

It is important to note that the investing, financing and operating categories for the statement of profit or loss do not have the same meaning as in IAS 7 Statement of Cash Flows and the same items may be classified differently in the two statements.

Example

Entity A operates a factory. During the year, it sells various items of property, plant and equipment.

Classification in the statement of cash flows	Classification in the statement of profit or loss
Investing activities The cash flows relate to ‘the acquisition and disposal of long-term assets and other investments not included in cash equivalents’ (IAS 7, paragraph 6)	Operating category The gain or loss on disposal of the item of property, plant and equipment would typically be classified in the operating category in the statement of profit or loss because it would not meet the criteria to be classified in the investing category (IFRS 18, paragraph B48(a)).

Example statement of profit or loss

A typical statement of profit or loss may be as follows. This example includes certain subtotals that are not mandatory, but are commonly used by entities, such as gross profit. While there are five categories for income and expense items, the statement of profit or loss does not include each category directly. Rather, the categories are used to organise the income and expenses into the mandatory subtotals.

Line item		Classification	Explanation
Revenue	XXX	Operating category
Cost of sales	XXX
Gross profit	XXX
Other operating income	XXX
Selling expenses	XXX
Research and development	XXX
General and administrative expenses	XXX
Operating profit	XXX	Mandatory sub-total	Sum of the operating category
Fair value gains on investments in equity instruments	XXX	Investing category
Profit before financing and income taxes	XXX	Mandatory subtotal	Sum of the operating and investing categories
Interest expense on borrowings and lease liabilities	XXX	Financing category
Profit before income taxes	XXX	Additional subtotal
Income tax expense	XXX	Income taxes category
Profit from continuing operations	XXX	Additional subtotal
Loss from discontinued operations	XXX	Discontinued operations category
Profit	XXX	Mandatory total	Sum of all categories

More information

Stay tuned for future Corporate Reporting Insights during 2025 as we continue our deep dive into IFRS 18 in order to demystify some of its complexities.

Need help

Implementing new accounting standards can be challenging. Reach out to our team for help with understanding the latest requirements in IFRS 18.