How IFRS 18 classifies income and expenses into operating, investing and financing categories

IFRS 18 Presentation and Disclosure in Financial Statements replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. Its most visible change sits in the statement of profit or loss: every item of income and expense must be classified into one of five categories (operating, investing, financing, income taxes and discontinued operations), and two subtotals become mandatory for most entities, operating profit and profit before financing and income taxes.

Under IAS 1 the statement of profit or loss had very little required structure. Companies chose their own subtotals, and two entities reporting "operating profit" could include or exclude the share of profit of associates, restructuring costs, foreign exchange differences or interest on provisions in different ways. IFRS 18 removes much of that freedom by defining what goes into each category, so that operating profit becomes a comparable figure across IFRS reporters.

The classification is not a free-form judgement about what management regards as core. The operating category is a residual, the investing and financing categories have specific definitions, and an entity whose main business is investing or providing financing to customers moves some items from investing and financing back into operating. Transition is retrospective under IAS 8, so comparatives must be restated, and the new requirements also apply to interim financial statements in the first year of application.

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THE FIVE IFRS 18 CATEGORIES OF THE STATEMENT OF PROFIT OR LOSS.

The IASB's project summary describes the operating category as the default category. It contains all income and expenses that are not classified in the investing, financing, income taxes or discontinued operations categories, which means volatile or unusual items, such as restructuring costs, impairment losses or litigation settlements, stay in operating profit unless another category specifically captures them. Paragraph 52 of the standard expresses this residual rule.

The investing category, under paragraph 53, captures income and expenses from three groups of assets: investments in associates, joint ventures and unconsolidated subsidiaries; cash and cash equivalents; and other assets that generate a return individually and largely independently of the entity's other resources. Typical examples are rental income and fair value changes on investment property, dividends from equity investments and interest earned on bank deposits. Paragraph 54 adds that the category covers both the income generated by these assets and the incremental expenses directly attributable to their acquisition and disposal.

The financing category, under paragraphs 59 to 61, works through a distinction between two kinds of liabilities. For liabilities that arise from transactions involving only the raising of finance, such as bank loans and bonds, financing includes all income and expenses from initial and subsequent measurement, together with incremental issue and extinguishment costs. For other liabilities, such as lease liabilities, pension liabilities and provisions, financing includes only interest income and expenses and the effects of changes in interest rates, where those amounts are identified when applying other IFRS requirements. Other income and expenses on those liabilities remain in operating.

The income taxes category holds the tax expense or income within the scope of IAS 12, and the discontinued operations category holds the amounts required by IFRS 5. Neither of these is new in substance; IFRS 18 simply places them in the same five-part structure. Readers who want the detail on the IFRS 5 side can refer to the Data Studios analysis of presentation and disclosure of discontinued operations.

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Category	What it contains	Typical items
Operating	Residual: everything not classified elsewhere	Revenue, cost of sales, restructuring, impairment
Investing	Associates and JVs, cash, independent-return assets	Equity-method share, rent, dividends, deposit interest
Financing	Finance-only liabilities in full; interest on other liabilities	Loan and bond interest, lease and provision interest
Income taxes	Tax within the scope of IAS 12	Current and deferred tax
Discontinued operations	Amounts required by IFRS 5	Post-tax result of a discontinued unit

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OPERATING PROFIT AND THE OTHER REQUIRED IFRS 18 SUBTOTALS.

Once items are classified, IFRS 18 requires two subtotals for most entities. Operating profit is the total of the operating category. Profit before financing and income taxes adds the investing category to operating profit and shows performance before the effects of how the entity is financed. The standard also keeps the totals of profit or loss, and companies may present additional subtotals when they provide a useful structured summary.

Operating profit under IFRS 18 is a defined term, and it can differ substantially from the operating profit or EBIT figures that companies reported under IAS 1. A share of profit of an equity-accounted associate, for instance, can no longer be shown inside operating profit by an entity without a specified main business activity, because paragraph 53 places it in investing. Restructuring costs cannot be kept outside operating profit, because nothing moves them out of the residual category. The relationship between operating profit, EBIT and EBITDA is examined in the Data Studios comparison of operating profit vs EBIT; under IFRS 18, profit before financing and income taxes is the defined subtotal that comes closest to many companies' existing EBIT measure.

Banks and similar entities generally do not present profit before financing and income taxes, because interest income and expense form part of their operating result. Insurers include the insurance service result and the net financial result in operating, and paragraph 64 keeps insurance finance income and expenses under IFRS 17, and income and expenses from investment contracts with participation features, out of the financing category.

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THE MAIN BUSINESS ACTIVITY ASSESSMENT UNDER IFRS 18.

Paragraph 49 requires every entity to assess whether it has a specified main business activity: investing in particular types of assets, or providing financing to customers. The outcome changes the classification of items that would otherwise sit in investing or financing.

When an entity invests in assets as a main business activity, the income and expenses from those assets move to the operating category, under paragraph 58. For investments in associates and joint ventures held in that way, paragraph 55 still keeps equity-method results in investing, while investments not accounted for using the equity method move to operating. For cash and cash equivalents, paragraph 56 places the income and expenses in operating when they relate to providing financing to customers, and gives an accounting policy choice between operating and investing for the remainder. Paragraph 57 adds that an entity unable to distinguish the two groups applies the policy choice to all of its cash and cash equivalents and classifies them in operating.

When an entity provides financing to customers as a main business activity, paragraph 65 requires it to classify in operating the income and expenses from finance-only liabilities that relate to providing that financing. A car manufacturer with a captive finance subsidiary, or a retailer offering instalment credit, therefore needs to assess the question at the reporting entity level and may end up with part of its borrowing costs inside operating profit.

Paragraph 51 requires disclosure of the fact that an entity has a specified main business activity, and of any change in the outcome of the assessment together with the related amounts.

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FOREIGN EXCHANGE, DERIVATIVES AND OTHER IFRS 18 CLASSIFICATION RULES.

Foreign exchange differences follow the category of the item that gave rise to them. A translation loss on a foreign-currency bond is a financing item, while a loss on a foreign-currency trade payable is an operating item. The IASB summary notes that where this allocation would involve undue cost or effort, the differences may be classified in operating. The detailed rules sit in the application guidance referenced by paragraph 48.

Gains and losses on derivatives and designated hedging instruments are outside paragraphs 60 and 61. Paragraph 63 directs entities to separate application guidance in paragraphs B70 to B76 for these items. Companies with significant hedging programmes need to read that guidance together with their hedge documentation before setting up the mapping.

Interest on a lease liability, the unwinding of a discount on a provision and net interest on a defined benefit liability all go to financing, because they are interest amounts identified when applying IFRS 16, IAS 37 and IAS 19. The remainder of the cost of those liabilities, such as a change in the estimated cash outflows of a provision or current service cost on a pension plan, stays in operating. The measurement of provisions themselves is unchanged; the Data Studios analysis of provisions and contingent liabilities under IAS 37 and ASC 450 covers recognition and measurement.

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IFRS 18 VS US GAAP INCOME STATEMENT PRESENTATION.

US GAAP has no equivalent of the IFRS 18 categories. It does not define operating profit or require an operating subtotal, and public companies follow the captions prescribed by SEC rules together with their own conventions. The FASB's recent work has focused on disclosure: ASU 2024-03 Disaggregation of Income Statement Expenses requires public business entities to disclose, in the notes, amounts of purchases of inventory, employee compensation, depreciation, intangible asset amortization and DD&A included in relevant expense captions, plus selling expenses. The FASB states that the update makes no changes to income statement presentation.

ASU 2025-01 clarified the effective date of ASU 2024-03 for public business entities: annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted. A calendar-year US registrant therefore adopts the new disclosures for 2027, the same year in which calendar-year IFRS reporters first present the IFRS 18 categories.

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Topic	IFRS 18	US GAAP
Defined categories	Five, mandatory	None
Operating profit	Required, defined subtotal	Not defined
Subtotal before financing	Required for most entities	Not required
Expense disaggregation	By-function presenters disclose specified items	ASU 2024-03 note disclosure
Management performance measures	Disclosed in a single note	Outside GAAP; SEC rules on non-GAAP
Effective (calendar year)	1 January 2027	Annual 2027, interim 2028

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The two sets of requirements overlap on expense disaggregation. Under IFRS 18, entities that present operating expenses by function must disclose depreciation, amortisation, employee benefits, impairment losses and inventory write-downs included in each operating line item. Dual reporters can design one data model that serves both disclosures, although the definitions of the categories are not identical.

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WORKED EXAMPLE: CLASSIFYING A STATEMENT OF PROFIT OR LOSS UNDER IFRS 18.

A manufacturing group with no specified main business activity reports the following items for the year, in thousands of euros. The figures are illustrative. Under IAS 1 the group presented "operating profit" of 10,050, excluding restructuring costs and the foreign exchange loss on trade payables and including the share of profit of its associate.

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Item	Amount	IFRS 18 category
Revenue	50,000	Operating
Cost of sales	(31,000)	Operating
Selling and distribution expenses	(5,200)	Operating
Administrative expenses	(4,100)	Operating
Impairment loss on trade receivables	(300)	Operating
Restructuring costs	(900)	Operating
FX loss on trade payables	(120)	Operating
Share of profit of associate	650	Investing
Rental income from investment property	400	Investing
Fair value gain on investment property	200	Investing
Dividend income from equity investment	80	Investing
Interest income on cash and cash equivalents	150	Investing
Interest expense on bank loan	(1,100)	Financing
FX loss on foreign-currency bond	(250)	Financing
Interest expense on lease liabilities	(180)	Financing
Unwinding of discount on decommissioning provision	(60)	Financing
Net interest on net defined benefit liability	(40)	Financing
Income tax expense	(2,050)	Income taxes

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The operating category totals 8,380. The investing category adds 1,480, giving profit before financing and income taxes of 9,860. The financing category totals (1,630), so profit before tax is 8,230, and after income tax of 2,050 the profit for the year is 6,180. The IFRS 18 operating profit of 8,380 is 1,670 lower than the figure the group presented under IAS 1: 900 of restructuring costs and 120 of foreign exchange loss move into operating profit, and 650 of associate profit moves out of it into investing.

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Subtotal	Amount
Operating profit	8,380
Investing category	1,480
Profit before financing and income taxes	9,860
Financing category	(1,630)
Profit before tax	8,230
Income tax expense	(2,050)
Profit for the year	6,180

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IFRS 18 does not change recognition or measurement, so the journal entries are the same as before. What changes is the mapping of each income statement account to a category. The entries for five of the items above show the point: the lease liability of 3,000 bears interest at 6%, the decommissioning provision of 1,500 is discounted at 4%, and the bank loan of 22,000 carries 5% interest paid in cash.

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Account	Debit	Credit	IFRS 18 category of the P&L line
Interest expense on bank loan	1,100		Financing
Cash		1,100
Interest expense on lease liabilities	180		Financing
Lease liabilities		180
Unwinding of discount on provision	60		Financing
Decommissioning provision		60
FX loss on foreign-currency bond	250		Financing
Bonds payable		250
Investment in associate	650
Share of profit of associate		650	Investing
Total	2,240	2,240

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The consequential amendments to IAS 7 make the new subtotal the starting point of the indirect method, so the operating cash flow reconciliation of this group would begin at 8,380. The same amendments remove most of the options for interest and dividends: interest and dividends paid are generally financing cash flows, and interest and dividends received are generally investing cash flows. The previous choices are set out in the Data Studios explanation of how interest and dividends are classified in the statement of cash flows under IAS 7 and ASC 230.

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COMMON ERRORS IN APPLYING THE IFRS 18 CATEGORIES.

The most frequent error in early mappings is treating the operating category as "core business" and parking unusual items elsewhere. IFRS 18 has no category for exceptional or non-recurring items, and restructuring costs, impairments and litigation costs belong in operating unless they relate to discontinued operations. Companies that want to show an adjusted figure can do so as a management-defined performance measure, with the reconciliation and explanations required in a single note.

A second error is placing all costs of lease liabilities, provisions and pensions in financing. Only interest and the effects of changes in interest rates go there; current service cost, changes in estimated cash flows of a provision and depreciation of right-of-use assets stay in operating. A third is classifying all foreign exchange differences in one line, when the standard requires them to follow the underlying item unless the undue cost or effort relief is used.

The main business activity assessment also causes problems for groups with treasury or financing subsidiaries. The assessment is made for the reporting entity as a whole, so a consolidated group and its individual subsidiaries can reach different answers, and the separate financial statements of a finance subsidiary may classify interest in operating while the group classifies it in financing.

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PRACTICAL IFRS 18 CLASSIFICATION CHECKLIST.

A project team preparing for first application can work through the following steps, which follow the structure of the standard:

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Step	Question to answer
1	Does the entity invest in assets or provide customer financing as a main business activity?
2	Which assets generate a return individually and largely independently?
3	Which liabilities arise from transactions that involve only the raising of finance?
4	Which interest amounts on other liabilities are identified under other IFRS?
5	Which category does each FX difference and derivative result follow?
6	Which existing non-IFRS subtotals become management-defined performance measures?
7	Are comparatives and first-year interim statements restated?

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IFRS 18 OPERATING, INVESTING AND FINANCING CATEGORIES: CONCLUSIONS AND JUDGEMENT AREAS.

The structure of IFRS 18 is clear: operating is the residual category, investing covers associates and joint ventures, cash and assets with independent returns, financing covers finance-only liabilities in full and interest on other liabilities, and the subtotals operating profit and profit before financing and income taxes are mandatory for most entities from 1 January 2027, with restated comparatives. US GAAP keeps its unstructured income statement and adds expense disaggregation in the notes from 2027 for public business entities.

The judgement areas are concentrated in a few places: whether an entity has a specified main business activity, whether an asset generates a return largely independently of other resources, which liabilities involve only the raising of finance, the classification of derivative results and foreign exchange differences, and the policy choice for cash and cash equivalents available to some entities. These decisions shape the operating profit figure that analysts will compare, so they need documented reasoning, consistent application across the group and clear disclosure where the standard requires it.

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