A practical walkthrough of one of the more technical classification calls preparers will face
Of the three profit-or-loss categories that require an active classification decision, operating, investing and financing, the investing category is arguably the one that demands the most judgement. Unlike operating, which simply absorbs whatever is left over, and unlike financing, which is anchored to a fairly intuitive idea (liabilities that raise finance), the investing category is built around a specific, sometimes subtle test: does the underlying asset generate a return individually and largely independently of the entity's other resources? This blog unpacks that test, walks through the assets and income streams it typically captures, and looks at where the edge cases lie.
The Three Gateways Into the Investing Category
IFRS 18.53 specifies that only income and expenses relating to three types of specified assets can be classified in the investing category:
- Investments in associates, joint ventures and unconsolidated subsidiaries.
- Cash and cash equivalents.
- Other assets that generate a return individually and largely independently of the entity's other resources.
If the asset in question does not fall into one of these three buckets, the related income and expense cannot go into investing, full stop, regardless of how ‘investment-like’ it might feel. And even where the asset does qualify, only certain types of income and expense relating to that asset are eligible: broadly, the income the asset generates, gains and losses on its initial and subsequent measurement (including derecognition), and incremental costs directly attributable to acquiring or disposing of it.
Gateway 1: Associates, Joint Ventures and Unconsolidated Subsidiaries
Where an entity applies the equity method to an associate or joint venture under IAS 28, its share of the investee's profit or loss always lands in the investing category, this holds true regardless of whether the entity has specified main business activities. Where equity accounting is not used (for example, an investment entity measuring associates at fair value through profit or loss under IFRS 10), the same investing classification generally applies, unless the entity has a main business activity of investing in such assets, in which case the income may instead be classified in operating.
Gateway 2: Cash and Cash Equivalents
Interest income on cash and cash equivalents is, for most entities, classified in the investing category by default. This is a useful anchor point: a manufacturing or retail business that earns modest interest on its bank balances will typically see that interest income sits in investing, contributing to ‘profit before financing and income taxes’ but not to operating profit itself. The position becomes considerably more complex, however, for entities that invest in financial assets or provide financing to customers as a main business activity, a nuance we return to in our blog on specified main business activities.
Gateway 3: Assets With an Independent Return , the Real Judgement Call
The broadest and most judgement-heavy gateway is the third: other assets that generate a return individually and largely independently of the entity's other resources. IFRS 18's application guidance points to two classic examples of assets that typically meet this test:
- Debt or equity investments.
- Investment property (and the rental receivables that arise from it).
A useful clarification buried in IFRS 18.B45: the ‘return’ being tested for does not have to be positive. An asset that generates a loss can still meet the test, the question is about independence from the rest of the business, not profitability.
Income and expenses typically captured
- Interest
- Dividends
- Rental income
- Depreciation (e.g. on investment property)
- Impairment losses and reversals
- Fair value gains and losses
- Gains and losses on derecognition, or on classification and remeasurement as held for sale
The Flip Side: Assets That Fail the Independence Test
Just as important as knowing what qualifies is knowing what doesn't. IFRS 18.B48 is explicit that assets an entity uses in combination with other resources to produce or supply goods or services do not generate an independent return. This typically rules out:
- Property, plant and equipment used in operations (a factory, a head office, a distribution centre).
- Assets arising from the production or supply of goods and services, trade receivables being the most obvious example.
- For entities that provide financing to customers as a main business activity, the loans made to those customers (these instead sit in operating for such entities).
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Practical case, the same building, three different answers How a building is classified in the statement of financial position often decides how it is classified in the statement of profit or loss. A homebuilder that regularly sells buildings holds them as inventory, income and expenses land in operating. A company using a building as its head office holds it as property, plant and equipment, again, operating. But a company holding an equivalent building purely for rental income or capital appreciation classifies it as investment property under IAS 40, and the related income and expenses (rental income, fair value gains, depreciation) land in the investing category, because that asset does generate a return individually and largely independently of the entity's other resources. Three near-identical buildings, three different classification outcomes, all depending on how the asset is used. |
Presentation Requirements for the Investing Category
Unlike operating profit, IFRS 18 does not mandate a specific subtotal solely for the investing category , there is no requirement for a stand-alone ‘total investing income’ line. Instead, investing category items feed directly into the second mandatory subtotal, profit or loss before financing and income taxes, which is defined as the sum of operating profit or loss and all income and expenses classified in investing. Entities remain free to present an additional voluntary subtotal isolating investing income if they believe it is useful, subject to the general aggregation and disaggregation principles covered later in this series.
A Snapshot Table: Investing Category at a Glance
| Question | Typical answer |
|---|---|
| Does the asset need to be held for a specific purpose to qualify? | No, the test is about how the asset generates a return, not management's stated intention, although intention and use often correlate. |
| Can an asset with a negative return still qualify? | Yes, IFRS 18.B45 confirms losses do not disqualify an asset from the investing category. |
| Does equity-accounted profit always sit in investing? | Yes, whenever the equity method is applied , this is one of the few classification outcomes that does not depend on specified main business activities. |
| Do trade receivables ever qualify for investing? | No, they are explicitly identified as failing the independence test because they arise from operating activities. |
| Is there a mandatory 'total investing income' subtotal? | No, investing items flow into 'profit before financing and income taxes' rather than a stand-alone mandatory subtotal. |
Why This Matters Beyond Compliance
For analysts and investors, the investing category is where IFRS 18 delivers one of its clearest comparability wins. Historically, gains on the disposal of a financial investment might have shown up buried within ‘other income’ in one company's accounts and as a stand-alone ‘investment gains’ line in another's, with no consistent logic connecting the two. Under IFRS 18, the classification test is the same for every preparer, which means the investing category, and, by extension, the gap between operating profit and profit before financing and income taxes , becomes a genuinely comparable measure of how much of a company's performance is coming from its core operations versus its investment portfolio.
The Comprehensive Investing Category Checklist
Unlike the operating category, the investing category is defined positively, only items connected to the three specified asset gateways can appear here. That makes it possible to build a genuinely comprehensive checklist. The table below consolidates the investing category items referenced across IFRS 18's application guidance, organised by the specified asset gateway they arise from.
| Specified asset gateway | Income and expenses typically classified in investing |
|---|---|
| Associates, joint ventures and unconsolidated subsidiaries (equity method) | Share of profit or loss of equity-accounted investees; impairment of the equity-accounted investment; gains/losses on partial disposal or dilution. |
| Associates, JVs and unconsolidated subsidiaries (fair value through profit or loss, non-SMBA) | Fair value gains and losses; dividend income; gains and losses on derecognition. |
| Cash and cash equivalents (non-SMBA entities) | Interest income on bank deposits and short-term money market instruments. |
| Debt investments (bonds, notes held as investments) | Interest income; fair value gains and losses (if FVTPL); impairment losses and reversals (if amortised cost or FVOCI); gains/losses on disposal. |
| Equity investments (shares held as investments, not subsidiaries) | Dividend income; fair value gains and losses; gains/losses on disposal. |
| Investment property (IAS 40 fair value model, non-SMBA) | Rental income; fair value gains and losses; depreciation (cost model); impairment losses and reversals; gains/losses on disposal or reclassification as held for sale. |
| Other assets with an independent return | Incremental costs directly attributable to the acquisition or disposal of any of the above (e.g. broker fees, due diligence costs on an investment acquisition). |
| Derecognition and remeasurement events | Gains and losses on derecognition of an investing-category asset; remeasurement gains/losses on classification as held for sale, where the underlying asset itself sits in investing. |
How This Populates a Real Statement of Profit or Loss
Continuing with the same illustrative manufacturing entity from earlier in this series (no specified main business activities), here is how a representative set of investing category items feeds into the second mandatory subtotal, profit before financing and income taxes (illustrative figures, AED 000s):
| Line item | 20X7 | Gateway | |
|---|---|---|---|
| Operating profit (brought forward) | 3,270 | Mandatory subtotal from operating category | |
| Share of profit of associates (equity method) | 150 | Associates/JVs , always investing | |
| Dividend income on equity investments | 130 | Other assets with independent return | |
| Fair value gains on investment property | 180 | Other assets with independent return (non-SMBA) | |
| Interest income on cash and cash equivalents | 40 | Cash and cash equivalents (non-SMBA) | |
| Impairment of available-for-sale debt investment | (35) | Other assets with independent return | |
| Profit before financing and income taxes | 3,735 | Mandatory subtotal: operating profit + all investing category items | |
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Reminder There is no mandatory 'total investing income' subtotal required between operating profit and profit before financing and income taxes, investing items may be shown as several discrete lines, as above, or aggregated, subject to the general aggregation and disaggregation principles. |
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Interaction With the Financing Category: Two Sides of the Same Balance Sheet
It is worth pausing on why the IASB chose to define investing and financing as mirror-image categories, each anchored to a defined type of item , specified assets for investing, and liabilities that raise finance for financing , rather than defining both residually the way operating is defined. The answer lies in comparability. Interest expense on a bond and dividend income on an equity investment are both, in a loose sense, ‘financial’ in nature, but they sit on opposite sides of the balance sheet and represent fundamentally different economic relationships , one is the cost of capital raised, the other is a return on capital deployed. By anchoring investing to specified assets and financing to specified liabilities, IFRS 18 avoids collapsing these two very different economic stories into a single, blended ‘non-operating’ category, which is exactly what many entities did in practice under IAS 1.
A Common Pitfall: Confusing Investing Category With Investing Activities in the Cash Flow Statement
As we flagged briefly in our first blog and expand on later in this series, the investing category in the statement of profit or loss and investing activities in the statement of cash flows under IAS 7 are similarly named but not aligned concepts. A manufacturer selling a piece of surplus property, plant and equipment will classify the associated cash proceeds as an investing activity in the cash flow statement , the sale relates to a long-term asset, which is exactly what IAS 7 investing activities are meant to capture. But the gain or loss on that same disposal in the income statement will typically land in the operating category, not investing, because property, plant and equipment used in the business does not generate a return individually and largely independently of the entity's other resources , it fails the very test this blog has focused on. Preparers moving between the two statements need to keep this distinction firmly in mind; it is one of the more common points of confusion when teams first start applying IFRS 18 in practice.
Conclusion
The investing category asks preparers to do something IAS 1 never required: apply a consistent, principle-based test to decide whether an asset's return is genuinely independent of the rest of the business. Get the associates, cash, and ‘other assets’ gateways right, and the classification of dividends, fair value movements, rental income and disposal gains largely falls into place. The building example above is worth keeping close at hand, it is a simple, memorable illustration of how the same physical asset can land in three completely different categories purely because of how it is used within the business.
Deciding whether an asset genuinely earns its own, independent return is rarely as clean in practice as it looks on paper, and that is exactly where a second opinion pays off. CLA Emirates IFRS consultants in UAE work alongside finance teams to pressure-test these classification judgement calls, associates, cash, dividends, and everything in between, so your investing category holds up under audit and investor scrutiny.
Next in this series, we turn to the financing category, where the guiding question shifts from ‘does this asset generate an independent return’ to ‘does this liability do nothing more than raise finance’.
