Why every income statement is about to look and feel different, a plain-English guide to categorisation
If you have spent any part of your career reading, preparing or auditing financial statements, you probably think of the income statement as one of the more settled corners of accounting. Revenue at the top, expenses in the middle, profit at the bottom, and everything else is a matter of taste. IFRS 18 Presentation and Disclosure in Financial Statements quietly ends that assumption. Issued by the International Accounting Standards Board (IASB) in April 2024 and effective for annual reporting periods beginning on or after 1 January 2027, IFRS 18 replaces IAS 1 and, for the first time, tells preparers exactly where each item of income and expense must sit within the statement of profit or loss. This blog is the first in an eight-part series unpacking IFRS 18. Here, we look what categorisation means, why the IASB felt it was necessary, and how the pieces fit together before we dive into the operating, investing and financing categories individually in later instalments.
Why Categorisation Was Needed in the First Place
Under the old regime, IAS 1 was famously light touch. It required a statement of profit or loss, it listed a handful of line items that had to appear somewhere, and beyond that it left preparers largely to their own judgement about structure and subtotals. That flexibility sounds appealing in theory, but in practice it created a genuine comparability problem.
Some companies presented an "operating profit" subtotal; others didn't. Among those that did, the definition of what counted as "operating" varied wildly, one entity's operating profit excluded restructuring costs and impairments, another's included everything except finance costs and tax. Investors and analysts, who lean heavily on subtotals like operating profit to compare companies within the same sector, were often comparing figures that were not actually comparable at all. The IASB's Primary Financial Statements project, which ran for the better part of a decade, was a direct response to this feedback.
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The absence of a defined ‘operating profit’ in IAS 1 was one of the most frequently cited comparability gaps by investors during the IASB’s outreach for the Primary Financial Statements project. IFRS 18 addresses this head-on by making operating profit a mandatory, precisely defined subtotal. |
The Five Categories: The Backbone of IFRS 18
At the heart of IFRS 18 is a deceptively simple idea: every single item of income and expense recognised in the statement of profit or loss must be classified into exactly one of five categories. Nothing is left unclassified, and nothing can straddle two categories.
| Category | What it broadly captures |
|---|---|
| Operating | The default category for income and expenses arising from an entity's main business activities, essentially everything left over once investing, financing, tax and discontinued operations items have been identified. |
| Investing | Income and expenses from assets that generate a return individually and largely independently of the entity's other resources (e.g. dividends, gains on disposal of investments). |
| Financing | Income and expenses from liabilities that involve only the raising of finance, plus interest expense on all liabilities and the unwinding of discounting. |
| Income taxes | All income tax expense or income recognised in accordance with IAS 12. |
| Discontinued operations | The single line result of discontinued operations, classified in accordance with IFRS 5. |
Notice something important here: the operating category is defined residually. IFRS 18 does not give preparers a checklist of what belongs in "operating”, instead, it defines investing, financing, income tax and discontinued operations precisely, and whatever income or expense does not meet the criteria for those four categories automatically falls into operating. This design choice matters enormously and is why, in this series, we devote an entire blog to each of the operating, investing and financing categories individually.
From Categories to Subtotals: Why This Actually Changes the Statement
Classifying items into categories is not an academic exercise, it directly drives the structure of the statement of profit or loss, because IFRS 18 requires two mandatory subtotals that are built directly from the categories:
- Operating profit or loss, the total of all income and expenses classified in the operating category. This is now a required, standardised subtotal for every entity applying IFRS 18, not an optional one.
- Profit or loss before financing and income taxes, the total of operating profit or loss plus all income and expenses in the investing category. This subtotal is designed to show how a business performs before the effects of how it happens to be funded.
A simplified illustration of how these subtotals stack up in a typical statement of profit or loss looks like this:
| Line item | Category |
|---|---|
| Revenue | Operating |
| Cost of sales | Operating |
| Selling, G&A and other operating expenses | Operating |
| Operating profit | Mandatory subtotal |
| Share of profit of equity-accounted associates / fair value gains on investments | Investing |
| Profit before financing and income taxes | Mandatory subtotal |
| Interest expense on borrowings and leases | Financing |
| Profit before tax | Additional subtotal |
| Income tax expense | Income taxes |
| Profit for the year | Total |
Two things are worth flagging here. First, the label "operating profit" or "investing category" does not literally have to appear against each line in the statement, IFRS 18 cares about the underlying classification driving the subtotals, not the cosmetic labelling. Second, notice that "profit before tax" is an additional (not mandatory) subtotal; only operating profit and profit before financing and income taxes are compulsory for most entities under IFRS 18.
Not Every Entity Classifies the Same Way
One of the more nuanced features of IFRS 18, one we explore in depth in our dedicated blog on specified main business activities (SMBAs), is that the classification rules are not identical for every entity. A bank that lends money to customers, or an investment company that holds a portfolio of financial assets as its core business, would produce a meaningless "operating profit" if interest income and investment gains were pushed into the investing and financing categories, since those items are the whole point of the business. IFRS 18 recognises this and requires entities with specified main business activities of investing in assets, or providing financing to customers, to classify the related income and expenses in the operating category instead of investing or financing. This single design feature has significant consequences for banks, insurers, real estate investment vehicles, and captive finance companies, and it is why we have set aside an entire blog in this series just for SMBAs.
Beyond Categorisation: The Bigger Picture of IFRS 18
Categorisation of income and expenses is the centrepiece of IFRS 18, but the standard reaches further. It also introduces:
- New aggregation and disaggregation principles governing how much detail should appear on the face of the statement of profit or loss versus in the notes.
- Mandatory disclosures for management-defined performance measures (MPMs), those ‘adjusted profit’ or ‘underlying earnings’ figures companies love to quote in investor presentations, which now require formal reconciliation to an IFRS-defined subtotal.
- Consequential amendments to other standards, notably IAS 7 (Statement of Cash Flows), IAS 8 (renamed and substantially restructured from its old title covering accounting policies, changes in estimates and errors) and IAS 34 (Interim Financial Reporting).
Each of these deserves and gets its own treatment later in this series.
Before and After: The Same Company, Two Very Different Income Statements
Nothing makes the impact of IFRS 18 clearer than putting the old and new versions of an income statement side by side. Below is an illustrative manufacturing company, no specified main business activities, fairly typical cost structure, shown first as it might have looked under IAS 1's largely unregulated format, and then as it must look once IFRS 18's categories and mandatory subtotals are applied to the same underlying figures.
How it used to look, under IAS 1
IAS 1 gave preparers wide discretion over structure and subtotals. This is a realistic example of how many manufacturers presented their results, note the self-defined ‘EBIT’ style subtotal and the absence of any standardised logic for what sits above or below it.
| Line item (IAS 1, illustrative, AED 000s) | 20X7 | |
|---|---|---|
| Revenue | 12,400 | |
| Cost of sales | (7,200) | |
| Gross profit | 5,200 | |
| Distribution expenses | (680) | |
| Administrative expenses | (1,150) | |
| Other income (incl. FV gains on investment property, dividend income) | 310 | |
| Share of profit of associates | 150 | |
| Finance costs (net, includes interest expense, FX losses, lease interest) | (420) | |
| Profit before tax | 3,410 | |
| Income tax expense | (820) | |
| Profit for the year | 2,590 | |
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Notice ‘Finance costs (net)’ is a single blended line under IAS 1, it could legally include interest expense, foreign exchange differences, and fair value movements on hedging derivatives, all bundled together with no standardised composition. 'Other income' similarly mixes fair value gains on investment property with dividend income, two very different economic sources sitting in one undifferentiated line. |
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How it looks now, under IFRS 18
Applying IFRS 18's five categories to the same underlying transactions produces a structurally different statement. Every item is traced to operating, investing, financing, income taxes or discontinued operations, and the two mandatory subtotals, operating profit, and profit before financing and income taxes, must appear.
| Line item (IFRS 18 , illustrative, AED 000s) | 20X7 | Category |
|---|---|---|
| Revenue | 12,400 | Operating |
| Cost of sales | (7,200) | Operating |
| Gross profit | 5,200 | Additional subtotal |
| Distribution expenses | (680) | Operating |
| Administrative expenses | (1,150) | Operating |
| Operating profit | 3,370 | Mandatory subtotal |
| Share of profit of associates | 150 | Investing |
| Fair value gains on investment property | 180 | Investing |
| Dividend income on equity investments | 130 | Investing |
| Profit before financing and income taxes | 3,830 | Mandatory subtotal |
| Interest expense on bank loans and lease liabilities | (420) | Financing |
| Profit before tax | 3,410 | Additional subtotal |
| Income tax expense | (820) | Income taxes |
| Profit for the year | 2,590 | Mandatory total |
The bottom-line profit for the year hasn't changed, AED 2,590 either way, because IFRS 18 is a presentation and classification standard, not a recognition and measurement standard. What has changed is everything above it. The blended ‘other income’ and ‘finance costs (net)’ lines are gone, replaced by items traced individually to their category. And a genuinely new number now exists that never existed before in a standardised form: operating profit of CU3,370, a mandatory subtotal built entirely from the operating category, sitting well below what this company's old ‘other income’-inflated presentation might have implied.
A closer read: what moved, and why
| Item | Old treatment | New treatment | Why |
|---|---|---|---|
| Share of profit of associates | Shown as its own line, order/placement discretionary | Investing category, feeds 'profit before financing and income taxes' | Equity-accounted results are always investing under IFRS 18, regardless of where an entity chose to show them before. |
| FV gains on investment property + dividend income | Blended into one 'other income' line | Split into two distinct investing-category lines | IFRS 18's aggregation principles require items with dissimilar characteristics to be shown separately where material. |
| Interest expense, net of FX and hedging movements | Blended into one 'finance costs (net)' line | Isolated to financing-category interest expense only; FX and derivative movements follow their underlying item's category | IAS 1's mandatory 'finance costs' line is not carried forward; each component is classified on its own merits under IFRS 18. |
Practical Implications for Preparers, Right Now
Even though the effective date is annual periods beginning on or after 1 January 2027 (with early application permitted), the practical reality is that finance teams need to start now. Categorisation is not a cosmetic relabelling exercise; it requires:
- A full inventory of every income and expense line currently recognised, mapped against the IFRS 18 category definitions.
- An entity-level assessment of whether the business has specified main business activities, which changes the classification outcome for a subset of items.
- Redesign of chart-of-accounts and consolidation systems so that the categorisation can be produced systematically each period, not reconstructed manually at year-end.
- Alignment with investor relations teams, since previously reported ‘operating profit’ figures may shift materially once the IFRS 18 definition is applied.
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Worth remembering IFRS 18 requires full retrospective restatement of comparative information on transition, meaning the prior year's income statement will also need to be recategorized and represented under the new structure, this is not a prospective-only change. |
Conclusion
IFRS 18's categorisation model is, at its core, an attempt to solve a genuinely old problem: two companies in the same industry could report wildly different-looking income statements simply because IAS 1 never told them how to structure one. By mandating five categories, two required subtotals, and a consistent logic for how items flow between them, the IASB has traded some of that historical flexibility for a meaningful gain in comparability. For preparers, the message is simple, this is not a disclosure checklist update, it is a structural redesign of the income statement, and the earlier your organisation starts mapping its income and expenses against the new categories, the smoother the 2027 transition will be.
Getting ready for IFRS 18 is a significant undertaking, at CLA emirates we have a team of IFRS consultants and are well placed to support you through it. Our team can assess how IFRS 18 will affect your income statement, review your proposed categorisation for consistency with the standard and work with you for the transition so your are audit ready ahead of 2027.
Our IFRS advisory team in Dubai and UAE can review your proposed categorisation ahead of time, so there are no surprises when the numbers reach the audit. If you would like our IFRS consultants UAE team to pressure test your transition approach before it is reported, CLA Emirates would be glad to help you get ahead of IFRS compliance requirements before 2027.
In the next blog in this series, we roll up our sleeves and get into the detail of the operating category, the largest, most heterogeneous, and in many ways the most consequential of the five categories introduced by IFRS 18.
