IFRS18, the new standard on presentation and disclosures in the financial statements has been here only for few months, yet it brings more and more discussion around its requirements and impact.
A key point of discussion is the concept of 'main business activity' along with the specific requirements for classifying income and expenses.
Under IFRS18, companies must classify their income and expenses into five categories: operating, investing, financing, income tax and discontinued operations. The standard also provides specific guidelines for classification within these categories.
Important to note that the description of the first three categories is not necessarily aligned with those in the cash flow statement.
The general framework under IFRS18 for classification of income and expenses categories is designed with a corporate entity (non-financial institution) in mind. However, for some companies, applying the general framework will not accurately reflect the operating result of their activities.
Consequently, the new standard introduces specific presentation requirements for these companies. These will be required to classify income and expenses from their main business activities, which would typically fall under investing or financing categories, into the operating category.
What are the specified main business activities under IFRS18?
IFRS18 defines two categories of specified main business activities:
1. investing in specific type of assets, such as:
(i) assets that generate returns individually and largely independently of the entity’s other resources
These assets are capable of generating returns through holding and selling them as individual assets. Examples include debt and equity instruments, investment properties and rent receivables generated. The income and expenses from these assets include interest, dividend, rental income, depreciation, impairment losses (including expected credit losses) and reversals, fair value gains and losses and income and expenses from derecognition or classification and remeasurement as held for sale.
(ii) investments in associates, joint ventures and unconsolidated subsidiaries (investment entities as defined by IFRS10) not accounted for under the equity method.
2. providing financing to customers (e.g.: banks and other lending institutions, lessors providing finance leases and companies that finance customer purchase of their products).
What are the main considerations when determining whether an entity has one or both specified main business activities under IFRS18?
- Determining the main business activities:
An entity only needs to determine whether it has one or both of the specified main business activities under IFRS18, for the purpose of classifying income and expenses between the operating, investing and financing categories.
In general, it will be clear whether a company has any of the specified main business activity under IFRS18. However, there may be instances where it will be challenging for management to determine if a specified business activity is a main business activity for the company. While this assessment may require some level of judgement, evidence must support the classification of a specified business activity as a main business activity for the entity.
The standard does not provide clear principles or guidance for making such an assessment, but it offers examples of information that could be taken into consideration:
(i) Important indicator of operating performance
Generally, if management uses a measure similar to gross profit to assess or communicate the company’s operating performance, particularly for items typically classified under investing or financing categories (such as net interest income or net rental income), it may indicate that the entity has one of the two specified business activities as a main activity. This measure could be used both externally to explain the entity's performance and internally to assess or monitor performance.
(ii) Segment information
For entities applying IFRS 8, if a reportable segment consists of only a single specified business activity, that activity is considered as a specified main business activity for the entity. Furthermore, if an operating segment, which is not a reportable segment, includes only a single specified business activity, this may indicate that the activity is a specified main business activity of the entity. The entity would need to consider whether the performance of this operating segment is a significant indicator of the entity’s operating performance.
- Level at which the assessment should be carried:
The assessment of whether an entity has a specified main business activity needs to be done at the reporting entity level. As a result, the assessment of a consolidated group’s specified main business activities may differ from the conclusions reached at the subsidiary level. Consequently, the classification of income and expenses in the subsidiary’s and the group’s statement of profit or loss could differ, requiring adjustments during consolidation process.
- Changes in main business activities:
The assessment of whether an entity has a specified main business activity is based on the facts at a certain point in time and may change over time. Any changes in the outcome of the assessment should be applied prospectively, meaning that income and expense amounts previously presented should not be reclassified.
What are the key requirements for classification of income and expenses for entities with specified main business activities?
Specific rules and accounting policies must be followed when determining which income and expenses in the investing and financing categories should be presented in the operating category, based on the entity’s specified main business activity.
Entities that provide financing to customers as a main business activity will classify in the operating category income and expenses from liabilities that arise from transactions that involve only the raising of finance related to the provision of financing to customers. For classifying income and expenses from liabilities arising from transactions that involve only raising finance, not related to providing financing to customers, entities must make an accounting policy choice between the operating and financing categories. Interest income and expenses and income arising from changes in interest rates from other liabilities will remain classified within the financing category.
The operating category for a bank would generally include income and expenses from, for example: net interest result and fee and commission result.
Entities that invest in assets as a main business activity will classify in the operating category the income and expenses that arise from those assets that would otherwise be classified in the investing category.
There are two exceptions to this principle:
- income and expenses from investments in associates, joint ventures and unconsolidated subsidiaries accounted for using the equity method are always classified in the investing category;
- cash and cash equivalents are excluded from the assessment (see (iii) below).
The operating category for an investment property entity would generally include income and expenses from the properties held: e.g: the net rental income, fair value gains and losses and income, expenses from derecognition or classification and remeasurement as held for sale of the properties held, income and expenses from service charges.
Classification of income and expenses from cash and cash equivalents:
New rules for classification of Foreign Exchange (‘FX’) differences
Currently, many companies, regardless of the industry they operate in, report FX differences as a single line item in the statement of profit or loss, usually within operating results.
Under IFRS 18, FX differences must be classified into the new categories of the statement of profit and loss, matching the category of the income and expenses associated with the items that led to the FX differences, unless doing so would require undue cost or effort.
As there are specific classification requirements for the companies with specified main business activities, the classification of FX differences will differ for these companies compared to corporate entities.
For example, a company whose main business activity is to provide financing to customers may enter foreign currency funding activities. When these liabilities relate to the provision of finance to customers, income and expenses, including FX differences will be presented within the operating category. However, when these liabilities are not linked to providing financing to customers, FX differences will follow the accounting policy choice and will therefore be presented either under the operating or financing category. Same classification considerations will apply to a real estate company earning rental income (denominated in foreign currency) from leasing properties in which it invests; it will present the related FX differences within the operating activity.
Next Steps
Implementing IFRS18 will require a holistic approach and a substantial investment for companies.
As the classification of income and expenses depends on the main business activity, this could require changes not only to the company’s general ledger and its mapping to the statement of profit or loss, but also to systems, processes and controls to ensure that the source of income and expenses is accurately identified, and their classification is appropriately applied.
Therefore, it is crucial for management to begin planning the IFRS18 implementation now to ensure a smooth transition before mandatory implementation-i.e., 1st January 2027.
Since IFRS18 requires retrospective application, comparative information (i.e., for 2026) must be prepared using the new requirements and it is expected that entities will have completed their impact assessments and adjustments to IT systems and processes (where necessary) by the end of 2025, which is fast approaching.
Management must ensure that, despite competing priorities like sustainability reporting, adequate attention is given to the IFRS18 implementation and should start developing a project plan for implementation including identifying who is responsible for any changes that are required.
Contact us
Madalina Scarlat - Sabau
Senior manager, CMAAS (Capital markets and Accounting Advisory Services), PwC Luxembourg
Tel: +352 621 333 897
