The adoption of IFRS 18 will significantly reshape how your income statement is structured. The new standard introduces specific categories for reporting income and expenses, as well as updated subtotals, all intended to bring greater clarity and comparability into financial performance. Ahead of these changes, you will need to understand how to classify each item of income and expense within your statement of profit and loss into the three new categories.

New categories in the statement of profit and loss

Investing

The investing category includes income and expenses from these types of assets:

• Investments in associates, joint ventures and unconsolidated subsidiaries.
• Cash and cash equivalents.
• Other assets that generate a return individually and largely independently of other resources of the entity, such as investments in debt instruments, equity instruments or investment property.

However, if an entity has a main business activity of providing financing to customers or investing in these types of assets, the related income and expenses are generally classified within the operating category instead.

Financing

For most entities, the financing category covers income and expenses of transactions that involve only the raising of finance. For example, this could be a liability under a supplier financing arrangement, or debt instruments settled in cash such as debentures, loan notes, mortgages or bonds. It also includes interest income and expenses, as well as the impact of interest rate changes, related to liabilities that do not only involve the raising of finance. Examples include lease liabilities, trade and other payables, contract liabilities with a significant financing component, unwinding discounts on provisions, remeasurement of contingent consideration on a business combination and net interest on a defined benefit pension obligation.

Where an entity has a main business activity of providing financing to customers, the classification of income and expenses will be impacted, with certain items (for example, those arising from liabilities relating to providing financing to customers) will be presented in the operating category instead of the financing category.

Operating

The operating category captures all income and expenses reported in the statement of profit or loss that do not fall under the investing or financing categories and is not separately shown as discontinued operations or income taxes. In essence, it is the default classification for anything arising directly from the entity’s core operations, no matter how frequent or unusual those items may be.

Operating profit shows the overall result of an entity’s operating activities for the period, without implying that these results are necessarily persistent or recurring.

Results from discontinued operations, as defined under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, will still be reported separately, as will income taxes in scope of IAS 12 Income Taxes, along with any tax related foreign exchange differences.

Although IFRS 18 will not affect the total profit or loss you report, it will alter how your results are presented. The following example demonstrates what this new presentation might look like:

A: Other operating income often includes the gain or loss on sale of investment property. Under IFRS 18, this income or expense must be included as part of investing activities, rather than operating activities.

B: Share of profit/(loss) from associates and joint ventures is typically included as part of operating profit, however, IFRS 18 requires income and expenses from investments in associates, joint ventures and unconsolidated subsidiaries to be classified in the investing category.

C: Finance income often includes income from investments, which will now be classified in the investing category.

D: Foreign exchange gains or losses were typically included as part of administrative expenses. Under IFRS foreign exchange gains and losses will be in the same category as the income or expense items that gave rise to the foreign exchange difference, unless this would cause undue cost or effort (which will be decided on a case-by-case basis).

In addition to these classification changes, IFRS 18 requires specific subtotals and totals to be presented in the statement of profit or loss – including operating profit or loss, profit before financing and income taxes, and profit or loss.

Preparing for revised income statement presentation

Here are the steps to take to prepare your business for IFRS 18:

• Make sure your finance team understands the new requirements.
• Review your current income statement line items and align them with the new categories and required subtotals.
• Identify any reclassifications needed to comply with the new requirements.
• Update your systems, including Chart of Accounts, ERP and reporting templates to extract the relevant information so that all presentation and disclosure requirements are met.

Taking these actions early will help smooth your transition to the new reporting standard.

Getting ready for the new income statement presentation

IFRS 18 brings fundamental changes to how income and expenses are classified and presented, so finance teams should amend their reporting processes well ahead of adoption. Our accounting and financial reporting specialists can help you assess the impact on your current statement of profit and loss, make the reclassifications and update systems, so you can meet the new requirements with confidence. Contact Tiaan Fourie, Lou Ward or your usual RSM adviser to discuss how we can support your organisation in implementing IFRS 18.

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