IFRS 18 provides that it sets out requirements for the presentation and disclosure of information in general purpose financial statements, to help ensure that they provide relevant information that faithfully represents an entity's assets, liabilities, equity, income and expenses. The new Standard requires income and expenses in the statement of profit or loss to be classified into five specified categories, and it applies, per its own text, to annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.
The Five Categories for Classifying Income and Expenses
The Standard provides that an entity classifies income and expenses included in the statement of profit or loss into one of the following five categories:
- The operating category.
- The investing category.
- The financing category.
- The income taxes category.
- The discontinued operations category.
Required Subtotals in the Statement of Profit or Loss
The Standard provides that an entity presents totals and subtotals in the statement of profit or loss, notably: operating profit or loss, profit or loss before financing and income taxes, and profit or loss. It clarifies that operating profit or loss comprises all income and expenses classified in the operating category.
Effective Date
The Standard provides that an entity shall apply it for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted, and that an entity applying it earlier shall disclose that fact in the notes.
What Does This Mean in Practice?
The Standard provides that it supersedes IAS 1 Presentation of Financial Statements, and aims, through its five categories and mandatory subtotals, to improve the comparability of financial performance across entities, since the statement of profit or loss will be presented in a more standardised way compared with the varied practices that existed under IAS 1.
Why Were These Five Categories Introduced?
Before IFRS 18, IAS 1 did not impose a uniform classification for income and expense items within the statement of profit or loss, which led to wide variation among entities in how they labelled and ordered subtotals such as "operating profit", making it difficult for users of financial statements to compare operating performance across entities in the same sector. By requiring all entities to use a uniform five-category classification (operating, investing, financing, income taxes, discontinued operations) with specified subtotals, IFRS 18 aims to standardise the structure of the statement of profit or loss across entities, while still allowing flexibility in presenting the detail within each category according to the nature of the entity's main business activity.
What About Entities Whose Main Business Is Investing or Financing?
The Standard clarifies that classifying income and expenses into the operating, investing and financing categories first requires an entity to assess whether it has a specified main business activity consisting of investing in particular types of assets or providing financing to customers. If the entity has such a main business activity, it classifies in the operating category some income and expenses that would otherwise have been classified in the investing or financing category had that activity not been a main business activity — reflecting the Standard's aim of having the classification of statement-of-profit-or-loss items reflect an entity's actual business model, rather than a single standard classification applied uniformly regardless of the entity's activity.
Legal References
- IFRS 18 — Presentation and Disclosure in Financial Statements — Paragraphs 1, 47, 49, 50, 69, 70, C1 and C8.
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