Why a bank, an insurer, and a real estate investor don't classify income the same way as everyone else, and what happens when a group has all three
Everything we've covered so far in this series, operating, investing, financing, has assumed a conventional business: one that sells goods or services, occasionally invests spare cash, and occasionally borrows money. But IFRS 18 recognises that this description simply doesn't fit every entity. For a bank, lending money is the business, not a side activity. For a real estate investment company, holding investment property for rental yield and capital growth is the business. If such entities were forced to apply the default classification rules, their income statements would be almost meaningless, most of their revenue-generating activity would be pushed into investing and financing, leaving an ‘operating profit’ subtotal that told users almost nothing about how the business actually performs. This is the problem that specified main business activities (SMBAs) are designed to solve, and it's the subject of this blog.
What Counts as a Specified Main Business Activity
IFRS 18 recognises exactly two types of specified main business activity:
- Investing in assets that generate a return individually and largely independently of the entity's other resources, as a main business activity.
- Providing financing to customers as a main business activity.
Where either applies, the classification outcome flips: income and expenses that would otherwise be pushed into the investing or financing categories are instead classified in the operating category, because they represent the core, revenue-generating activity of the business rather than a peripheral treasury or investment function.
This Is a Fact, Not a Choice
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Important principle The assessment of whether an entity has specified main business activities is a matter of fact, not an accounting policy election or a management assertion (IFRS 18.B33). An entity cannot elect into or out of SMBA treatment , it must assess its own activities objectively, and once the facts point to a main business activity, the associated classification requirements are mandatory. |
How Entities Assess Whether They Have an SMBA
IFRS 18 points to two main sources of evidence.
1. Use of ‘gross-profit-like’ subtotals
If an entity uses a subtotal similar to gross profit, one that nets together income and expenses that would otherwise sit in investing or financing , as an important indicator of operating performance, either externally or for internal monitoring, this points strongly towards an SMBA. The classic example is a bank's ‘net interest income’ or ‘net financial margin’ metric: a lender that habitually reports and monitors interest income less interest expense as a core performance indicator is providing clear evidence that lending is a main business activity, not a treasury sideline.
2. Segment reporting under IFRS 8
Where an entity applies IFRS 8, its reportable and operating segments can be informative. If a reportable segment comprises a single business activity (say, an investment property portfolio), that is deemed evidence that the activity is an important indicator of the entity's operating performance and therefore a main business activity. Non-reportable operating segments provide supporting, but not definitive, evidence.
Entities Can Have More Than One SMBA
A frequently underappreciated point is that the two types of SMBA are assessed independently, and an entity can have neither, one, or both:
| Scenario | Example |
|---|---|
| Invests in assets only | A listed real estate investment company holding commercial property for rental income and capital growth. |
| Provides financing to customers only | A retailer of heavy machinery that finances customer purchases through instalment loans. |
| Both investing in assets and providing financing | A bank that lends to customers (financing SMBA) and also holds a proprietary trading portfolio of financial assets (investing SMBA). |
| Multiple asset classes within the investing SMBA | An insurer that invests in both real estate and financial assets as main business activities, fair value movements on both would be classified in operating. |
Illustrative Examples From the Standard
IFRS 18's application guidance gives non-exhaustive examples of entities likely to have specified main business activities:
| SMBA type | Example entities |
|---|---|
| Investing in assets as a main business activity | Investment entities as defined by IFRS 10; investment property companies; insurers. |
| Providing financing to customers as a main business activity | Banks and other lending institutions; entities that finance customers' purchases of the entity's own products; lessors providing finance leases to customers. |
A useful, slightly less obvious example: a heavy machinery manufacturer that leases equipment to customers under finance leases, or that legally transfers title with a corresponding instalment loan agreement, is providing financing to customers as a main business activity , even though its headline business is described as ‘manufacturing’, not ‘finance’.
Group Complexity: When Subsidiaries Don't Match the Parent
This is where SMBAs become genuinely challenging for corporate groups, and it's an area every group finance function needs to plan for carefully. The SMBA assessment is made at the reporting entity level , which for consolidated financial statements means the group as a single unit of account, not subsidiary by subsidiary. This can produce a very different answer at group level than at individual subsidiary level.
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Worked group example , three subsidiaries, three different answers Consider a holding company with no substantive operations of its own and three subsidiaries: an automotive parts manufacturer, a private lender providing customer loans, and a real estate company investing in commercial property at fair value. In their own individual financial statements: the manufacturer has no SMBA; the lender has an SMBA (providing financing to customers); and the real estate company has an SMBA (investing in assets). But at the consolidated parent level, the manufacturer's operations are so much larger than the lender's and the real estate company's combined that neither the lending nor the real estate activity is an important indicator of the group's overall operating performance , and neither subsidiary is a reportable segment under IFRS 8. The result: the parent concludes it has no specified main business activities at the consolidated level, even though two of its three subsidiaries do at their own level. |
The practical fallout of that scenario is significant: the lender and the real estate company apply SMBA classification in their own standalone financial statements (interest income in operating for the lender; rental income and fair value gains in operating for the real estate company), but on consolidation, the parent must reverse those classifications , reclassifying interest income back to investing and financing categories, and fair value gains on investment property back to investing , purely for the purposes of the consolidated income statement. This is a genuine consolidation adjustment, not a cosmetic relabeling, and it needs to be built into group reporting templates and consolidation system logic well ahead of the transition date.
Why This Matters So Much for Large, Diversified Groups
Large groups with genuinely diversified operations , conglomerates spanning manufacturing, financial services, and real estate, for instance , face the SMBA question at every level of the corporate structure: standalone legal entity, sub-consolidation, and ultimate group. It is entirely possible, and indeed common, for the same underlying transaction to be classified differently depending on which level of financial statements you're looking at. Groups should expect to maintain a formal, documented SMBA assessment at each reporting level, refreshed periodically, since the assessment can change over time as the relative scale of business lines shifts.
Change in Assessment
Because the SMBA determination is a matter of fact rather than an accounting policy, it is reassessed as facts and circumstances change , for example, if a business line that was previously immaterial to the group grows to become an important indicator of performance, or is divested. A change in SMBA status is not a voluntary change in accounting policy; it flows from a change in the underlying facts, and disclosure is required to explain any such change and its effect on classification.
Conclusion
Specified main business activities are, in many ways, the safety valve that makes IFRS 18's rigid five-category structure workable for the real world. Without this concept, a bank's income statement would be almost unreadable under a literal application of the investing and financing category rules. But the concept comes with real complexity for groups: the SMBA assessment is entity-specific, fact-based, and can genuinely diverge between a subsidiary's own financial statements and the consolidated group accounts. Any organisation with lending, investing, or leasing activities embedded anywhere in its group structure should be running the SMBA assessment now, at every relevant reporting level, well before the 2027 effective date.
Determining whether your business, or a specific entity within your group, has a specified main business activity is a judgement call with real consequences for how your income statement reads. CLA Emirates IFRS consultants in UAE regularly help groups run and document this assessment across every reporting level, giving you defensible, audit-ready IFRS compliance in the UAE from day one.
In the next blog, we shift focus to the statement of cash flows and the consequential amendments IFRS 18 brings to IAS 7, IAS 8 and IAS 34.
