IFRS 18 Series – Part 1: Classification of income and expenses

In this series, we explore the key changes introduced by IFRS 18 Presentation and Disclosure in Financial Statements. IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027 and must be applied retrospectively. As a result, 2026 will be a critical year for entities to assess the impact of the new requirements, prepare comparative information and ensure systems and processes are implementation ready.

In this first article, we focus on the general requirements in IFRS 18 for classifying income and expenses in the statement of profit or loss. These general requirements do not apply to entities with specialised business activities such as financial service providers (banks, insurance and investment entities) or real estate entities.
 

Overview of categories

The revised structure of the statement of profit and loss centres around three newly defined categories:

These categories do not align directly with similarly named categories in the statement of cash flows; therefore, entities will need to perform a detailed assessment of income and expenses against the specific definitions in IFRS 18, rather than relying on existing cash flow classifications. Our technical guidance includes illustrative examples of presentation under IFRS 18.
 

Mandatory sub-totals

The classification of income and expenses into specific categories is key, as it is these categories that drive the mandatory subtotals that must be presented in the statement of profit or loss.

IFRS 18 introduces two new required subtotals:

1. Operating profit — the total of all income and expenses classified within the operating category.
2. Profit or loss before financing and income taxes — the total of operating profit or loss plus all income and expenses classified within the investing category.

Although many entities already present these or similar subtotals in their financial statements, IFRS 18 establishes consistent definitions, improving comparability across entities. The subtotals defined under IFRS 18 may differ from those previously used by an entity. For example:

• Under IFRS 18, income and expenses from equity-accounted investments are always classified within the investing category and are therefore excluded from operating profit. This represents a change for entities that currently present items such as “share of profit of associates and joint ventures” above the operating profit subtotal.
• Some companies currently present a subtotal labelled “earnings before interest and tax” (EBIT); this may differ from the newly defined subtotal of “profit or loss before financing and income taxes.”

Entities with management remuneration policies tied to specific performance measures in the statement of profit or loss should assess whether those policies need to be updated to reflect the revised measures introduced by IFRS 18.
 

Guidance on common items of income and expenses

The table below illustrates the typical classification of common items of income and expenses when applying the general requirements of IFRS 18.

This list is not exhaustive and does not cover all possible outcomes. The appropriate classification will depend on the entity’s specific facts and circumstances.

 

Item of income or expense	Typical classification
Revenue from contracts with customers (IFRS 15)	Operating
Inventories expensed during the period	Operating
Depreciation of property, plant and equipment	Generally operating
Share of profit from associates or joint ventures (equity method)	Investing
Provisions recognised as an expense (e.g. litigation, restructuring)	Operating
Fair value gains or losses on investment property	Investing
Share-based payment expenses	Operating
Interest expense on bank borrowings measured at amortised cost	Financing
Expected credit losses on trade receivables	Operating
Interest on cash and cash equivalents	Investing
Interest on lease liabilities	Financing

 

Areas of additional complexity- Foreign exchange differences

IFRS 18 introduces new requirements for the classification of foreign exchange differences recognised in profit or loss. Such differences must be classified in the same category as the income and expenses arising from the items that gave rise to them, unless doing so would involve undue cost or effort.

For example, income and expenses relating to trade receivables are generally classified in the operating category. Accordingly, foreign exchange differences arising on trade receivables denominated in a foreign currency would also be classified as operating.

Judgement is required where the related income and expenses span more than one category. For instance, an entity may enter into a foreign-currency-denominated consulting services arrangement that includes extended payment terms (for example, services provided over six months but paid over 18 months). This arrangement gives rise to two components:

1. Service expenses, which would generally be classified in the operating category as the services are received; and
2. A financing component arising from deferred payment terms, which would be classified in the financing category

Many entities’ existing systems may not be designed to capture foreign exchange differences at this level of granularity. Historically, some entities have presented all foreign exchange differences in a single line item, while others have included exchange differences on borrowings within finance costs.

Additional complexities may arise in a group context as a result of complex intercompany and treasury arrangements. For example, the foreign currency effects of intercompany loans could be classified as operating or investing/financing (depending on whether the entity is the lender/borrower). Similar mismatches may arise for foreign exchange differences relating to centralised cash pooling arrangements.

The effort required to comply with the IFRS 18 requirements will therefore vary by entity. Importantly, the ‘undue cost or effort’ exemption is considered to have a high threshold. An entity cannot simply default to classifying all foreign exchange differences as operating solely because system changes would be required.
 

Conclusion

The introduction of IFRS 18 represents a change in how entities present their financial performance, with the classification of income and expenses forming a cornerstone of the new requirements. While many classifications may appear intuitive, applying the standard in practice will require careful analysis, judgement and, in some cases, enhancements to systems and processes.

With retrospective application required, 2026 provides a crucial window for entities to assess impacts, identify areas of complexity—such as foreign exchange differences—and plan for a smooth transition.

In the next articles in this series, we will examine management-defined performance measures (MPMs), the new aggregation and disaggregation principles introduced by IFRS 18, and additional presentation considerations related to the operating category in the statement of profit or loss.