Ifrs accounting standards in practice

Introduction

Overview of changes introduced by IFRS 18

IFRS 18 Presentation and Disclosure in Financial Statements was issued by the International Accounting Standards Board (IASB) in April 2024 IFRS 18 supersedes IAS 1 Presentation of Financial Statements and has resulted in numerous consequential amendments to IFRS® Accounting Standards including IAS 8 Basis of Preparation of Financial Statements (renamed from Accounting Policies, Changes in Accounting Estimates and Errors).

IFRS 18 introduces significant changes to numerous requirements, primarily how an entity:

X Presents its statement of profit or loss, including the classification of income and expenses and new mandatory subtotals;

X Aggregates and disaggregates information disclosed in financial statements; and

X Discloses information about management-defined performance measures

This publication concentrates on the initial two items, providing insights into their application and implications A dedicated IFRS Accounting Standards In Practice guide is currently in development, specifically addressing management-defined performance measures BDO’s comprehensive IFRS Accounting Standards offer detailed guidance to ensure accurate and consistent financial reporting in line with international requirements.

In Practice publications may be accessed on BDO’s IFRS and Corporate Reporting microsite

IFRS 18 is mandatorily effective for annual reporting periods beginning on or after 1 January 2027 (i.e 31 December

2027 annual financial statements for entities with calendar year-ends), subject to any relevant jurisdictional endorsement Earlier application is permitted

The issuance of IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers, IFRS 16 Leases, and IFRS

The introduction of 17 insurance contracts has fundamentally altered the measurement requirements within IFRS Accounting Standards for many common transactions faced by entities Similarly, IFRS 18 is anticipated to have a significant impact on how companies present their financial statements, making it essential for organizations to understand these standards to ensure accurate financial reporting and compliance.

While IFRS 18 does not alter the recognition and measurement requirements established by IFRS Accounting Standards, organizations should not underestimate the impact of the new standard The IASB has provided preparers with significant guidance and flexibility to adapt to these changes, emphasizing the importance of understanding its implications for financial reporting.

3 years to prepare for the adoption of the standard, which is a similar implementation timeframe similar to that given for the implementation of IFRS 9, 15 and 16.

Understanding the history that led to the development and issuance of IFRS 18 is essential before exploring its requirements for the statement of profit or loss This background provides context for how and why IFRS 18 was introduced to enhance revenue recognition standards and improve financial statement comparability across global entities.

Background on Primary Financial Statements Project

IFRS 18 was developed as part of the primary financial statements project This project was undertaken by the

IASB because the board received feedback from stakeholders that IFRS Accounting Standards did not have detailed requirements on:

X classification of income and expenses in the statement of profit or loss;

X presentation of subtotals above ‘profit or loss’ (e.g operating profit) in the statement of profit or loss; or

X aggregation and disaggregation of information presented in the primary financial statements or disclosed in the notes.

The absence of standardized detailed requirements resulted in inconsistent practices among entities, with many defining and reporting an ‘operating profit’ subtotal differently This lack of uniformity hindered accurate comparison of financial performance across organizations, highlighting the need for clearer accounting guidelines to ensure consistency and transparency.

Between 2015 and 2019, the IASB conducted research to enhance IFRS Accounting Standards by addressing key concerns As a result, the IASB introduced a new basis for classifying income and expense items in the statement of profit or loss into specific categories This change mandates the inclusion of subtotals in the profit or loss statement, thereby improving comparability between entities and providing clearer financial insights for stakeholders.

The IASB has announced that entities must disclose information about management-defined performance measures, which are income and expense subtotals used in public communications to reflect management’s perspective on financial performance, such as 'adjusted profit.' However, IFRS 18 specifies certain exclusions for particular subtotals that do not require additional disclosures, ensuring clarity and relevance in financial reporting.

In December 2019, the IASB released an exposure draft titled General Presentation and Disclosures to seek feedback on proposed reporting requirements After carefully considering the comments received, the IASB finalized and issued IFRS 18 in April 2024, establishing updated standards for general presentation and disclosure practices in financial reporting.

Overview

Key changes introduced by IFRS 18

Note that this section is not an exhaustive summary of all the effects of IFRS 18 and consequential amendments

The most significant effects of IFRS 18 (and consequential amendments to IFRS Accounting Standards other than IFRS 18) relate to the following topics:

Classification of income and expenses in the statement of profit or loss

All income and expenses are classified into one of five categories:

Income and expenses are typically classified according to the nature of the asset or liability they relate to, ensuring clear categorization in financial statements However, for entities with designated main business activities, certain income and expenses may be reclassified into the operating category, even if they would normally fall under investing or financing categories Understanding these classification rules is essential for accurate financial reporting and compliance with accounting standards.

See section 3 of this publication

The principles of aggregation and disaggregation provide a new framework for presenting assets, liabilities, equity, reserves, income, expenses, and cash flows These guidelines ensure that the aggregation and disaggregation of financial statement items are consistently applied and clearly disclosed in the primary financial statements and accompanying notes Implementing these principles enhances transparency and accuracy in financial reporting, allowing stakeholders to better understand the financial position and performance of an entity.

See section 4 of this publication.

Totals and subtotals presented in the statement of profit and loss

After classifying income and expenses into proper categories and aggregating them appropriately, entities must present mandatory and additional subtotals in their statement of profit or loss For example, companies are required to display 'operating profit,' which summarizes all income and expenses within the operating category, providing a clear view of core business performance.

See section 5 of this publication.

Disclosure of management-defined performance measures

IFRS 18 requires entities to disclose information about management-defined performance measures (MPMs), which are a subtotal of income and expense that:

(a) an entity uses in public communications outside financial statements;

(b) an entity uses to communicate to users of financial statements management’s view of an aspect of the financial performance of the entity as a whole; and

(c) is not listed in IFRS 18.118, or specifically required to be presented or disclosed by IFRS Accounting Standards.

A common example of an MPM could be an ‘adjusted profit’ measure, which excludes share-based payments expenses and impairment of goodwill.

A separate IFRS Accounting Standards In Practice publication is being prepared for management-defined performance measures.

Entities using the indirect method to prepare their statement of cash flows typically begin with operating profit or loss as the starting point Prior to the adoption of IFRS 18, the starting point in the cash flow statement was profit or loss, highlighting a shift in reporting standards to improve financial transparency and comparability.

IFRS 18 also eliminates the classification options for interest and dividend cash flows, which will increase consistency

Other changes Statement of financial position

X IFRS 18 requires goodwill to be presented as a separate line item in the statement of financial position, separate from other intangible assets IAS 1 did not require this disaggregation (IAS 1.54(c))

X Prior to the effective date of IFRS 18, IAS 33 permitted entities to disclose additional earnings per share amounts using a reported component of the statement of comprehensive income as the numerator

X IFRS 18 amends IAS 33 and permits additional earnings per share amounts only when the numerator is:

• A total or subtotal specified by IFRS 18 in IFRS 18.69, 86 or 118; or

IAS 33 imposes additional disclosure requirements when an entity reports extra per share amounts beyond basic and diluted earnings per share, such as adjusted operating profit per share These disclosures become even more significant if the disclosed amount is based on a management-defined performance measure used as the numerator in the calculation.

Most requirements applicable to the preparation of primary financial statements other than the statement of profit or loss

IFRS 18 does not significantly affect how the other primary financial statements (e.g statement of financial position, statement of cash flows, statement of changes in equity, etc.) are prepared other than the introduction of new aggregation and disaggregation requirements (see section 4), with some exceptions, such as those noted above applicable to:

X The statement of financial position (separate presentation of goodwill); and

X The statement of cash flows (operating profit or loss being the starting point for the indirect method and the reduction of classification options for interest and dividend cash flows).

Fair presentation and compliance with IFRS

Relocated to IAS 8 substantially unchanged.

Going concern Relocated to IAS 8 substantially unchanged.

Offsetting Substantially unchanged from IAS 1

Frequency of reporting Substantially unchanged from IAS 1.

Comparative information Substantially unchanged from IAS 1.

Consistency of presentation Substantially unchanged from IAS 1.

Topics substantially unchanged from IAS 1

Many requirements from IAS 1 have been incorporated into IFRS 18 and other IFRS Accounting Standards with minimal changes, ensuring consistency across standards Additionally, a significant portion of IAS 1’s provisions has been moved to IAS 8, which covers the Basis of Preparation of financial statements This transfer aims to streamline accounting guidance and improve clarity across the International Financial Reporting Standards.

Financial Statements (renamed from Accounting Policies, Changes in Accounting Estimates and Errors)

Certain other requirements were relocated from IAS 1 to other IFRS Accounting Standards, such as IFRS 7 Financial

Current/non-current classification of assets and liabilities

The amendments to IAS 1, which largely align with its previous standards, specifically impact the classification of loans as current or non-current These changes will become effective for annual reporting periods starting on or after January 1, 2024 For detailed guidance, refer to BDO’s IFRS Accounting Standards In Practice on the Classification of Loans as Current or Non-Current.

Structure of notes Substantially unchanged from IAS 1.

Disclosure of accounting policy information Relocated to IAS 8 substantially unchanged.

Disclosures about judgements and sources of significant estimation uncertainty

Relocated to IAS 8 substantially unchanged.

Capital disclosures Substantially unchanged from IAS 1.

Disclosures about puttable financial instruments classified as equity

Relocated to IFRS 7 substantially unchanged.

Miscellaneous other disclosures (declared dividends, cumulative preference dividends not recognised, domicile and legal form, description of the nature of the entity’s operations, etc.)

Classification of Income and expenses

General considerations

3.1.1 Classification of income and expenses - general requirements

IFRS 18 requires entities to classify all items of income and expense into one of five categories (IFRS 18.47):

X The income taxes category (section 3.5)

X The discontinued operations category (section 3.6)

The structure of a statement of profit or loss depends on how income and expense items are classified For entities lacking specific main business activities and subject to certain classification exceptions (see section 3.8), a typical profit or loss statement may include common subtotals like gross profit, although these are not mandatory This approach helps in presenting a clear and meaningful financial performance overview tailored to the entity's characteristics.

Operating profit XXX Mandatory specified subtotal

Fair value gains on investments in equity instruments XXX Investing category

Profit before financing and income taxes XXX Mandatory specified subtotal 1

Interest expense on borrowings and lease liabilities XXX Financing category

Profit before income taxes XXX Additional subtotal

Income tax expense XXX Income taxes category

Profit from continuing operations XXX Additional subtotal

Loss from discontinued operations XXX Discontinued operations category

Profit before financing and income taxes is a crucial subtotal for most organizations, serving as a key indicator of operational performance However, entities whose primary business activity involves providing financing to customers may be exempt from this requirement, depending on their specific accounting policies outlined in section 5.1.

BDO comment – labelling of categories

IFRS 18 does not require an entity to label items of income and expense based on the five categories in IFRS 18 For example, in the illustration above, the fair value gains on investments in equity instruments is classified in the investing category, however, the term ‘investing category’ does not appear in the statement of profit or loss The classification of items of income and expense into the five categories noted above is used to produce the mandatory specified subtotals in IFRS 18 as these subtotals are based on how income and expenses are classified See section 5.1.

X ‘Operating profit or loss’ is required to be presented by IFRS 18.69(a), and it is defined as comprising all income and expenses classified in the operating category (IFRS 18.70)

Under IFRS 18.69(b), 'Profit or loss before financing and income taxes' must be presented, representing the total of operating profit or loss and all income and expenses classified under the investing category (IFRS 18.71) This subtotal includes all income and expenses from both operating and investing activities, providing a comprehensive measure of a company's performance before financing costs and income taxes.

For more information on mandatory and additional subtotals, refer to section 5.

BDO comment – category names and inconsistency with the statement of cash flows

The categories of operating, financing, and investing in IFRS 18 are similarly titled to those in IAS 7; however, the IASB intentionally did not seek to align the classification of income and expenses in the profit or loss statement with the cash flow classifications in the cash flow statement During the development of IFRS 18, there was stakeholder debate about using different terminology, such as ‘non-operating’ instead of ‘investing,’ but the IASB ultimately maintained the original labels as proposed in the exposure draft (IFRS 18.BC87).

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Entities without specified main business activities typically classify income and expense items into five categories based on item characteristics and associated assets and liabilities For example, fair value gains and losses on financial assets like equity instruments measured at fair value through profit or loss are categorized under investing activities because these assets generate returns independently of the entity’s other resources (IFRS 18.B46(a) and 53(c)).

BDO comment – operating category as the ‘residual’

The operating category is a residual classification, meaning that income and expense items are normally included here unless they meet specific criteria for classification in other categories, as outlined in IFRS 18.52 It is essential for entities to carefully assess each item of income and expense to determine whether it should be classified into one of the other four categories or remains in the operating category Accurate classification helps ensure compliance with IFRS standards and provides clearer financial reporting.

This publication clarifies the classification requirements for income and expenses, focusing on the primary categories beyond the default operating category Specifically, it covers the investing category in section 3.2 and the financing category in section 3.3, which serve as the residual classifications for various financial items.

Operating profit XXX Mandatory specified subtotal

Fair value gains on investments in equity instruments XXX Investing category

Profit before financing and income taxes XXX Mandatory specified subtotal

Interest expense on borrowings and lease liabilities XXX Financing category

Profit before income taxes XXX Additional subtotal

Income tax expense XXX Income taxes category

Profit from continuing operations XXX Additional subtotal

Loss from discontinued operations XXX Discontinued operations category

Profit before financing and income taxes is a crucial subtotal for most entities, serving as a key indicator of operating performance However, entities primarily engaged in providing customer financing may have an exception to this rule, depending on their specific accounting policies outlined in section 5.1.3 Understanding these distinctions is essential for accurate financial analysis and compliance with accounting standards.

For entities with specified main business activities, certain income and expenses classified in the investing and financing categories may be classified in the operating category if criteria are met.

3.1.2 Classification of income and expenses – entities with specified main business activities

IFRS 18 contains exceptions to the general classification requirements for entities that have specified main business activities (IFRS 18.49) That is to say, for certain entities, the primary activities that are undertaken to run its business will affect how items of income and expense are classified For entities with specified main business activities, certain items of income and expense that would otherwise be classified in the investing and/or financing categories are classified in the operating category For example, if an entity has a main business activity of investing in financial assets (i.e particular types of assets - IFRS 18.49(a)), then the fair value gains and losses on financial assets (e.g debt or equity instruments) measured at fair value through profit or loss are classified in the operating category

IFRS 18's main business activities requirements can be visually represented, highlighting how certain income and expenses are reclassified from investing and financing categories into operating activities, ensuring clearer financial reporting and compliance.

Certain income and expense items require special considerations, including those related to cash and cash equivalents, hybrid contracts with a liability host, and foreign exchange differences These specific considerations are detailed in section 3.9.

The following sections address how:

X Items of income and expense are classified into the five categories generally (sections 3.2 through 3.6);

X An entity assesses whether it has specified main business activities (section 3.7);

X If an entity does have specified main business activities, it applies additional requirements in classifying income and expenses (section 3.8); and

X An entity classifies specific items of income and expense where special requirements apply (section 3.9).

Investing category

This section outlines the specific requirements for entities whose primary business activity is not investing in assets For additional guidance relevant to entities engaged in such designated main activities, refer to section 3.8.1.

3.2.1 General classification requirements – specified assets

Except when an entity has specified main business activities, an entity classifies in the investing category specified income and expenses from (IFRS 18.53) certain assets (i.e specified assets):

(a) Investments in associates, joint ventures and unconsolidated subsidiaries;

(b) Cash and cash equivalents; and

(c) Other assets if they generate a return individually and largely independently of the entity’s other resources.

The "Specified income and expenses" restrict the classification of certain income and expenses to the investing category, ensuring only designated financial activities are included Not all income and expenses related to assets outlined in IFRS 18.53 automatically fall under the investing category; they must meet specific criteria to be classified accordingly.

Guidance on each of these three classes of assets is provided below

3.2.2 Specified income and expense classified in the investing category

IFRS 18.53 requires that only specified income and expenses to be classified in the investing category if they arise from the three categories of assets noted above These specified expenses are:

Income and expenses (IFRS 18.54) Common examples (IFRS 18.54 and B47)

(a) The income generated by the assets X Interest

(b) The income and expenses that arise from the initial and subsequent measurement of the assets, including on derecognition of the assets

X Impairment losses and reversal of impairment losses

X Fair value gains and losses

(c) The incremental expenses directly attributable to the acquisition and disposal of the assets

X Transaction costs on financial assets classified as fair value through profit or loss

X Costs to sell assets, such as broker commissions on financial instruments

IFRS 18.53, which lists three classes of assets and IFRS 18.54, which specifies types of income and expenses, must be applied together Only income and expenses that are listed in 18.54 and that arise from the classes of assets listed in IFRS 18.53 may be classified in the investing category.

BDO comment – incremental expenses (IFRS 18.54(c))

IFRS 18.54(c) includes only ‘incremental’ expenses directly attributable to the acquisition and disposal of assets, therefore, not all directly attributable costs will meet the criteria to be classified in the investing category

The IASB considered alternative approaches, such as classifying all directly attributable expenses in the investing category, but rejected them due to their complexity and high application costs for entities This approach could also necessitate the allocation of employee benefits when staff manage both investments and other activities, making it impractical and difficult to implement effectively (IFRS 18.BC109).

3.2.3 Practice aid – criteria to classify income and expenses in the investing category for entities without specified main business activities

This practice aid outlines the key criteria for classifying income and expenses within the investing category, specifically when an entity’s primary business activity is not investing in such assets It emphasizes that, as detailed in section 3.8.1, the process becomes considerably more complex when determining the appropriate classification in these scenarios.

Does the income or expense arise from specified assets (IFRS 18.53)?

(a) Investments in associates, joint ventures and unconsolidated subsidiaries;

(b) Cash and cash equivalents; and

(c) Other assets if they generate a return individually and largely independent of the entity’s other resources

Is the income/expense specified in IFRS 18.54?

Asset income includes the revenue generated by the assets themselves, while expenses related to initial and subsequent measurements, as well as at derecognition, impact overall profitability Additionally, any incremental expenses directly attributable to the acquisition and disposal of assets should be accounted for to ensure accurate financial reporting and compliance with accounting standards.

Example 3.2-1 – classification of depreciation in the investing category

IFRS 18.B47 notes that depreciation is an example of ‘income and expenses that arise from the initial and subsequent measurement of the assets’, however, this does not mean that depreciation in general will be classified in the investing category.

For entities without specified main business activities, only depreciation relating to assets that meet the criterion in IFRS 18.53(c) may be classified in the investing category.

Entity A owns a property, plant, and equipment used for manufacturing widgets, while also owning a building rented out to tenants to generate rental income The company accounts for the building as investment property under IAS 40, applying the cost model As Entity A does not have a specific main business activity, its asset management includes both manufacturing and investment properties.

Depreciation on the property, plant and equipment must be classified in the operating category because the depreciation does not arise from (IFRS 18.53):

(a) Investments in associates, joint ventures and unconsolidated subsidiaries;

(b) Cash and cash equivalents; and

(c) Other assets if they generate a return individually and largely independently of the entity’s other resources.

IFRS 18.B48 and B49 also emphasises that income and expenses from assets that an entity uses in combination to produce or supply goods or services do not generate a return individually and largely independently of the entity’s other resources, and are therefore classified in the operating category For example, income and expenses relating to assets that arise from the production or supply of goods and services, such as trade receivables.

Depreciation on investment property is classified under the investing category because it relates to income and expenses arising from the initial and subsequent measurement of the asset, as outlined in IFRS 18.54 Investment property is considered an asset that generates returns independently of other resources, according to IFRS 18.53(c) Additionally, lease income derived from the investment property is also categorized as part of the investing activity since it is income generated directly by the asset.

The above analysis may be demonstrated by applying the classification practice aid as follows:

Property, plant and equipment depreciation

Does the income or expense arise from specified assets (IFRS 18.53)?

(a) Investments in associates, joint ventures and unconsolidated subsidiaries;

(b) Cash and cash equivalents; and

(c) Other assets if they generate a return individually and largely independent of the entity’s other resources

Does the income or expense arise from specified assets (IFRS 18.53)?

(a) Investments in associates, joint ventures and unconsolidated subsidiaries;

(b) Cash and cash equivalents; and

(c) Other assets if they generate a return individually and largely independent of the entity’s other resources

Is the income/expense specified in IFRS 18.54?

The income generated by assets is a key component of financial performance Additionally, income and expenses that arise from the initial and subsequent measurement of these assets, including derecognition, play a vital role in financial reporting Incremental expenses directly attributable to the acquisition and disposal of assets are also essential to understanding their overall cost and value Proper management and reporting of these elements ensure accurate asset valuation and compliance with financial standards.

Is the income/expense specified in IFRS 18.54?

The income generated by assets is a key component of overall financial performance Additionally, all income and expenses arising from both the initial and subsequent measurement of these assets—including upon derecognition—must be carefully accounted for It is also essential to consider the incremental expenses directly attributable to the acquisition and disposal of assets, as these directly impact financial outcomes.

Example 3.2-2 – non-specified expenses related to specified assets

Certain income and expenses linked to assets outlined in IFRS 18.53 may need to be classified as operating items if they are not specified in IFRS 18.54 This classification can lead to a mismatch between income and expenses associated with the same asset, impacting financial reporting accuracy Proper classification ensures compliance with IFRS standards and provides clearer insight into asset-related financial performance Understanding these distinctions is essential for accurate asset valuation and financial statement presentation under IFRS.

For example, assume the same fact pattern as example 3.2.1., with additional case facts.

Financing category

The classification requirements for the financing category focus on liabilities, whereas the investing category focuses on assets.

Classification of income and expenses in the financing category affects the determination of the mandatory subtotal

Under IFRS 18, the financial statement must include a separate category for "profit or loss before financing and income taxes," as this allows users to analyze a company’s operational performance independently of its financing structure The mandatory subtotal isolates income and expenses related to financing, enabling comparisons of operational performance across entities regardless of differences in debt or equity financing methods, such as the cost of debt financing.

This section outlines the specific requirements applicable to entities whose primary business activity does not involve providing customer financing For guidance on entities primarily engaged in offering financing services, please refer to section 3.8.2, which addresses companies for whom providing financing to customers is their main business activity.

To classify income and expenses arising from liabilities, an entity is required to distinguish liabilities between

(a) liabilities that arise from transactions that involve only the raising of finance; and

(b) liabilities other than those described in (a) — that is, liabilities that arise from transactions that do not involve only the raising of finance.

Separate requirements apply to income and expenses that relate to these two different types of liabilities

3.3.2 Liabilities that arise from transactions that involve only the raising of finance

Liabilities that arise from transactions that involve only the raising of finance are where an entity (IFRS 18.B50):

(a) receives finance in the form of cash, or an extinguishment of a financial liability, or receipt of the entity’s own equity instruments; and

(b) at a later date, will return in exchange cash or its own equity instruments.

For such liabilities, IFRS 18.60 requires entities to classify in the financing category the amounts included in the statement of profit or loss for:

(a) income and expenses that arise from the initial and subsequent measurement of the liabilities, including on derecognition of the liabilities; and

(b) the incremental expenses directly attributable to the issue and extinguishment of the liabilities — for example, transaction costs.

Certain exceptions to the income and expenses outlined in IFRS 18.60 apply, particularly concerning hybrid contracts with a liability host, as well as gains and losses on derivatives and designated hedging instructions For detailed guidance on these exceptions, refer to the 'exceptions to classification principles' section and sections 3.9.2, 3.9.3, and 3.9.4.

Examples of such liabilities include, along with associated specified income and expenses in IFRS 18.60:

Liabilities that arise from transactions that involve only the raising of finance (IFRS 18.B51)

Specified income and expenses classified in the financing category

A debt instrument that will be settled in cash, such as debentures, loans, notes, bonds and mortgages—an entity receives cash and will return cash in exchange

X Interest expenses (for example, on debt instrument issued);

X Fair value gains and losses (for example, on a liability designated at fair value through profit or loss);

X Dividends on shares issued classified as liabilities; and

X Income and expenses from the modification and/or derecognition of the liability

A liability under a supplier finance arrangement is derecognized when the payable for goods or services is settled, meaning the entity is discharged of its financial obligation This process involves returning cash in exchange for the goods or services received, effectively closing the liability and reflecting the settlement in financial statements.

A bond that will be settled through delivery of an entity’s shares—an entity receives cash and will return its own equity instruments in exchange;

An obligation for an entity to purchase its own equity instruments—an entity receives its own equity instruments and will return cash in exchange.

Under IFRS 18, a liability is recognized solely based on a binary assessment: whether it arises from a transaction involving the raising of finance Liabilities that do not meet this criterion are detailed in the subsequent section, providing clear guidance on what does not qualify under this standard.

3.3.3 Liabilities that arise from transactions that do not involve only the raising of finance

Liabilities stemming from transactions beyond just raising finance have a broader scope, but only income and expenses related specifically to financing activities are classified under the financing category, making it more limited than transactions solely involving financing.

For liabilities that arise from transactions that do not involve only the raising of finance (for example, the items listed below), an entity classifies in the financing category (IFRS 18.61):

(a) interest income and expenses, but only if the entity identifies such income and expenses for the purpose of applying other requirements in IFRS Accounting Standards; and

Income and expenses resulting from fluctuations in interest rates are recognized only if the entity specifically identifies these amounts for the purpose of applying other IFRS Accounting Standards.

Any income or expenses not covered under IFRS 18.61 should be classified as operating items Exceptions to these classification principles are detailed in the section "Exceptions to the Classification Principles," along with specific requirements for hybrid contracts, foreign exchange differences, and gains or losses on derivatives in sections 3.9.2, 3.9.3, and 3.9.4.

Liabilities stemming from transactions solely related to raising finance generally involve a more limited set of income and expenses classified under the financing category This practical distinction helps clarify the nature of liabilities based on whether they result from financing activities or other transactions Understanding this differentiation is essential for accurate financial reporting and compliance with accounting standards.

In a supplier finance arrangement, if an entity derecognises a payable to a supplier and instead recognizes a liability under the arrangement, any income and expenses resulting from this derecognition are classified within the operating category, as stipulated by IFRS 18.B61(b).

The table outlined in the article categorizes various liabilities resulting from transactions that extend beyond mere financing activities, emphasizing why they are not classified as ‘pure financing’ liabilities under IFRS 18.B53 It further provides examples of income and expenses that fall within the financing category, particularly for entities without specific main business activities, as specified in IFRS 18.61.

Liabilities that arise from transactions that do not involve only the raising of finance (IFRS

Rationale for classification (i.e why the liability does not arise from transactions that involve only the raising of finance) (IFRS 18.B53)

Examples of income and expenses that will be classified in the financing category (IFRS 18.B54)

Payables for goods or services that will be settled in cash (IFRS 9) The entity receives goods or services, not finance in the form specified by IFRS 18.B50(a).

Interest expenses on payables arising from the purchase of goods or services, applying IFRS 9.

Contract liabilities (IFRS 15) The entity receives cash, but will settle the liability by delivering goods or services rather than cash or its own equity instruments as required by IFRS 18.B50(b).

Interest expenses on a contract liability with a significant financing component as specified by IFRS 15.

Lease liabilities (IFRS 16) The entity receives a right-of- use asset, not finance in the form specified by IFRS 18.B50(a).

Interest expenses on a lease liability, applying IFRS 16.

(IAS 19) The entity receives employee services, not finance in the form specified by IFRS 18.B50(a).

Net interest expense (income) on a net defined benefit liability (asset), applying IAS 19.

Decommissioning or asset restoration provisions (IAS 37) The entity receives an asset (the increase in the carrying amount of assets), not finance in the form specified by IFRS 18.B50(a).

The increase in the discounted amount of a provision arising from the passage of time and the effect of any change in the discount rate on provisions, applying IAS 37.

A litigation provision (IAS 37) The entity does not receive finance in the form specified by IFRS 18.B50(a).

BDO comment – interaction between IFRS 18 financing category requirements and IAS 23 Borrowing Costs

IFRS 18's requirements for interest income and expenses indirectly interact with IAS 23, which mandates the capitalization of borrowing costs into the carrying amount of assets when specific criteria are met Specifically, for qualifying assets such as inventories or property, plant, and equipment that take a substantial period to prepare for use or sale, borrowing costs must be capitalized For instance, during the long-term construction of a building, borrowing costs are typically capitalized into the asset's carrying amount as part of the construction process.

Borrowing costs capitalised as part of a qualifying asset's carrying amount can originate from liabilities arising both from financing transactions and other sources According to IAS 23, borrowing costs encompass expenses from various categories, including interest expenses calculated using the effective interest rate method under IFRS 9 for financial liabilities like bank loans Additionally, interest related to lease liabilities recognized under IFRS 16 is also included as part of borrowing costs.

When borrowing costs are capitalised into the carrying amount of a qualifying asset, the IFRS 18 classification requirements for interest income and expenses become inapplicable This is because these costs are no longer recognized as interest income or expenses in profit or loss, but are instead re-characterised according to the nature of the asset.

Entity H is constructing a building to serve as its head office, making it within the scope of IAS 16 During the construction phase, Entity H capitalized borrowing costs as part of the building’s carrying amount, in accordance with IAS 23 Upon completion, the carrying amount includes both the construction costs and the capitalized borrowing costs, reflecting the total investment in the asset.

Operating category

Under IFRS 18, the operating category is considered residual, meaning that unless income and expenses are allocated elsewhere, they must be classified here This standard mandates that entities classify income and expenses from their core business activities in the operating category, ensuring consistent reporting However, income and expenses related to investments accounted for using the equity method are always classified under the investing category, regardless of their nature.

Entities with specific main business activities, such as investing in assets like real estate, have modified classification rules for income and expenses If a company's primary focus is investing in assets like investment property, associated income and expenses (e.g., fair value gains or losses) are classified as operating rather than investing activities to accurately reflect the entity’s core operations This approach ensures that financial statements provide a true and fair view of the company's main business activities.

As the operating category is defined as a residual (i.e it must be used when other categories do not apply), IFRS

Section 18 does not specify detailed criteria for classifying income and expenses within the operating category Generally, income and expenses expected to be classified as operating include those related to core business activities, especially when an entity lacks defined main business operations A non-exhaustive summary of such income and expenses is provided in the accompanying table, clarifying typical classifications under these circumstances.

Income and expenses Examples of income and expenses classified in the operating category (assuming an entity does not have specified main business activities)

Income and expenses from assets that do not generate a return individually and largely independently of the entity’s other resources

X Revenue from the sale of goods and services, including:

X Revenue from contracts with customers (IFRS 15)

X Depreciation, impairment and gains and losses on disposal of property, plant and equipment

X Expenses arising from inventories (e.g expenses when inventories are derecognised such as ‘cost of sales’ and similar items, net realisable value write-downs)

X Expenses related to trade receivables and contract assets (e.g expected credit losses applying IFRS 9)

Income and expenses related to liabilities that arise from transactions that do not involve only the raising of finance and that are not (IFRS 18.61):

X Interest income and expenses; or

X Income and expenses arising from changes in interest rates.

Expenses related to the consumption of goods and services for which a liability is recognized, such as cleaning services, catering, repairs, and maintenance, are categorized as X expenses These are associated with executory contracts that do not qualify for asset recognition, highlighting the importance of proper expense accounting for accurate financial statements Properly identifying these expenses ensures compliance with accounting standards and improves financial reporting transparency.

X Remeasurement of cash-settled share-based payment liabilities (IFRS 2)

X Contract modifications gains and losses (IFRS 15)

X Modification gains and losses on lease liabilities (IFRS 16)

X Changes in the best estimate required to settle a provision (IAS 37)

Other items required to be classified in the operating category

X Income and expenses from issued investment contracts with participation features recognised applying IFRS 9 (see section 3.3)

X Insurance finance income and expenses included in the statement of profit or loss applying IFRS 17 (see section 3.3)

X Income and expenses related to business combinations, such as bargain purchase gains, income and expenses relating to the remeasurement of contingent consideration (IFRS 18.B49(f), BC144) (see section 3.9.5)

Income and expenses within the operating category encompass all financial activities not allocated to other categories These include both regular and irregular transactions that are integral to day-to-day operations According to IFRS 18.B42, volatile, unusual, or non-recurring income and expenses cannot be excluded from the operating category, ensuring a comprehensive view of operational financial performance.

Example 3.4-1 – classification of ‘extraordinary items’

IAS 1.87 specifically forbade entities from presenting line items labelled as ‘extraordinary items’ in the statement of profit or loss IFRS 18 does not contain any explicit requirements concerning extraordinary items, however, entities would apply the general requirements of IFRS 18 applicable to classify income and expenses that an entity may consider ‘extraordinary’

Entity G has significant manufacturing facilities that are destroyed by a tornado, resulting in material property, plant and equipment and inventories being derecognised as a result of their destruction

Entity G applies IFRS 18 to classify expenses related to derecognition of property, plant, and equipment and inventories Since these assets do not generate a return individually or independently of the entity’s other resources, their derecognition income and expenses are classified within the operating category, ensuring proper financial reporting in accordance with IFRS 18 guidelines.

For detailed guidance on how an entity aggregates and disaggregates information in the profit or loss statement, refer to Section 4 Proper understanding of this process is essential, as it influences how Entity G presents and discloses expenses related to the tornado, ensuring transparency and compliance with reporting standards.

Income taxes category

Income and expenses are classified in the income taxes category if they are (IFRS 18.67):

1 Within the scope of IAS 12 Income Taxes; or

2 Foreign exchange differences related to income and expenses within the scope of IAS 12 (see section 3.9.3 for further information on the classification of foreign exchange differences).

BDO comment – the scope of IAS 12

Identifying income and expenses under IAS 12 for income tax classification is typically straightforward, as current and deferred tax expenses and recoveries are generally recognized in profit or loss However, there are notable exceptions, such as the tax effects of gains and losses included in other comprehensive income.

Income taxes encompass not only current tax expenses but also include the write-down and recovery of deferred tax assets recognized in profit or loss, in accordance with IAS 12's recoverability criteria Additionally, this category accounts for the impact of uncertain tax treatments reflected in profit or loss, as outlined in IFRIC 23 Uncertainty over Income Tax.

Treatments, because IFRIC 23 interprets how to measure items in the scope of IAS 12

Determining whether income and expenses fall within the scope of IAS 12 can sometimes be challenging, especially when it comes to items like penalties and interest on income taxes Clarifying the applicability of IAS 12 to these specific items is essential for accurate financial reporting.

In September 2017, the IFRS Interpretations Committee published an agenda decision clarifying the accounting treatment for interest and penalties related to income taxes The Committee confirmed that entities do not have a choice between applying IAS 12 or IAS 37 for these amounts; instead, the applicable standard depends on the nature of the amount Specifically, if an entity considers a particular interest or penalty amount to be part of income tax, IAS 12 is applied to that amount Conversely, if the entity does not interpret the amount as income tax, IAS 37 is applied This guidance helps ensure consistent accounting practices for interest and penalties related to income taxes across entities.

The agenda decision referenced a March 2006 ruling on IAS 12 scope, clarifying that IAS 12 applies specifically to income taxes based on taxable profit Not all taxes fall within IAS 12's scope, as taxable profit differs from accounting profit, meaning taxes do not need to derive directly from accounting profit to be covered Additionally, IAS 12 requires disclosure of the relationship between tax expense and accounting profit, highlighting their distinction The Committee emphasized that the term ‘taxable profit’ refers to a net amount rather than a gross figure, providing further clarity on the scope of IAS 12.

Discontinued operations category

Income and expenses are classified in the discontinued operations category if they are income and expenses from discontinued operations as required by IFRS 5 (IFRS 18.68)

IFRS 5.33(a) requires the following total to be presented as a single line item in the statement of profit or loss:

(i) the post-tax profit or loss of discontinued operations; and

The post-tax gain or loss is recognized when assets or disposal groups classified as discontinued operations are measured at fair value less costs to sell or upon their disposal This accounting treatment ensures accurate reflection of the financial impact associated with discontinuing a segment Proper recognition of these gains or losses provides stakeholders with clear insights into the financial effects of asset disposals or disposal group classifications.

This single line item specified by IFRS 5.33(a) must be classified in the discontinued operations category in accordance with IFRS 18.68.

Applying the March 2006 and September 2017 agenda decisions requires entities to assess whether interest and penalties related to income taxes fall under the scope of IAS 12, which determines their classification within the income taxes category in the statement of profit or loss If interest and penalties are considered outside the scope of IAS 12, companies must identify appropriate accounting treatments to ensure accurate financial reporting Understanding these scope distinctions is essential for compliance and precise financial statement presentation.

12, then they must be classified in the operating category

While IFRS Accounting Standards do not provide clear guidance on how to perform this assessment, understanding the basis for calculating interest and penalties—such as whether they are based on taxable profit or a percentage of taxable profit—can help entities determine the appropriate approach.

BDO comment – income and expense that will not be included in the ‘single line item’ – IFRS 5.33(a)

This publication does not summarise all of the requirements of IFRS 5, however, a discontinued operation in defined in IFRS 5 as:

A component of an entity that either has been disposed of or is classified as held for sale and:

(a) represents a separate major line of business or geographical area of operations;

(b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

(c) is a subsidiary acquired exclusively with a view to resale.

A ‘component of an entity’ is defined as ‘operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.’

To present the results of a discontinued operation in compliance with IFRS standards, an entity must satisfy specific criteria outlined in IFRS 5.33(a) Successfully meeting these criteria allows the entity to classify the operation as discontinued, enabling it to be reported under the discontinued operations category in accordance with IFRS 18.68 This ensures transparent and consistent financial reporting of discontinued segments, aligning with international accounting regulations.

IFRS 5.33(a)(ii) also requires the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation to be included as part of the single line item This measurement to the lower of carrying amount and fair value less costs to sell is required by IFRS 5.15, however, not all write-downs as a result of applying IFRS 5.15 will be included in the single line item required by IFRS 5.33(a)(ii).

When an entity plans to dispose of property, plant, and equipment—such as a distribution center—and classifies it as an asset held for sale, IFRS 5.15 mandates measuring the asset at the lower of its cost and fair value less costs to sell However, any impairment loss recognized under IFRS 5.20 in this scenario is not presented as a discontinued operation and is excluded from the single line item reported under IFRS 5.33(a)(ii) This is because IFRS 5.33(a)(ii) only includes post-tax gains or losses related to discontinued operations, which requires meeting the specific definition of a discontinued operation.

Disposing of a single item of property, plant, and equipment, such as a distribution centre, does not qualify as a discontinued operation under IFRS standards Consequently, any write-down recognized in accordance with IFRS 5.15 is not included in the single line item mandated by IFRS 5.33(a)(ii) and is not classified under discontinued operations Instead, the entity follows the requirements for remeasuring an asset or disposal group that does not constitute a discontinued operation, as outlined in section 3.2.3 – practice aid.

Entities with specified main business activities – an entity’s assessment of specified main business activities

3.7.1 Purpose of specified main business activities requirements

The general classification requirements of IFRS 18 (as explained in sections 3.2 - 3.6) apply when an entity does not have specified main business activities, which are instances when the reporting entity:

X Invests in assets that generate a return individually and largely independently of the entity’s other resources as a main business activity (IFRS 18.55-58); and/or

X Provides financing to customers as a main business activity (IFRS 18.65-66)

Entities whose main business activities include specific designated operations are subject to special accounting considerations, leading to certain income and expenses being classified under operating activities instead of investing or financing categories Additionally, depending on their accounting policies, entities may have options to classify specific income and expenses differently, as outlined in sections 3.9.1 and 3.9.4.

The IASB mandates that specific income and expenses be classified within the operating category for entities with defined main business activities, ensuring that operating profit accurately reflects all income and expenses related to core operations (IFRS 18.BC89(a)) This classification helps avoid misrepresentation by preventing key operating performance measures from being obscured when such income and expenses are categorized under investing or financing activities (IFRS 18.BC90).

Entities that sell goods and services but also offer financing to customers as a main business activity must include interest income and expenses in their financial statements If offering financing is a core activity, the entity can use ‘net financial margin’ as a key profit measure from these activities Without properly classifying finance income and expenses, the operating category would fail to encompass all of the entity’s main business activities, potentially misrepresenting its financial performance.

Under IFRS 18.B37 and BC98, an entity evaluates whether it has defined main business activities at the reporting entity level Consequently, a reporting entity comprising its parent and consolidated subsidiaries conducts this assessment on a group-wide basis For more detailed considerations relevant to groups, refer to section 3.7.7 'Considerations Applicable to Groups.'

For entities preparing separate financial statements, the reporting entity is limited to the legal entity itself, as subsidiaries are not consolidated Such entities must evaluate whether their primary business activity involves investing in specific asset groups, consistent with categories used under IAS 27.10 (IFRS 18.B38) to determine measurement basis Additional considerations regarding investments in unconsolidated subsidiaries as a main business activity are detailed in section 3.7.5.

When determining whether an entity's primary business activity involves investing in assets, this evaluation focuses on individual assets or groups of assets with shared characteristics For financial assets, entities must assess groups of assets that align with the classes identified under IFRS 7.6 (IFRS 18.B40), ensuring alignment with IFRS standards.

Gains and losses on derecognition of an asset or liability, including groups of assets and liabilities, must be classified appropriately to ensure accurate financial reporting Additionally, the remeasurement of assets or disposal groups held for sale, along with any changes in their use, are critical factors in assessing overall financial performance Proper classification and recognition of these gains and losses are essential for compliance with accounting standards and enhance transparency for stakeholders.

BDO comment – grouping of financial assets for assessment of whether an entity invests in assets as a main business activity

IFRS 7.6 requires an entity to prepare disclosures by class of financial instrument, with an entity grouping financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments

An entity can categorize financial assets into classes like equity instruments and debt instruments to improve clarity and compliance When evaluating whether investing in these assets constitutes its primary business activity, the entity may arrive at different conclusions for each class For example, it may determine that investing in debt instruments is its main business activity, while investments in equity instruments are not Proper classification and assessment are crucial for accurate financial reporting and strategic decision-making.

An entity can have multiple main business activities under IFRS 18.B30, including the possibility of multiple specified main business activities It is essential for an entity to evaluate whether it has designated specified main business activities independently for each type This assessment ensures accurate classification and reporting of the entity's core operations, aligning with IFRS guidelines Proper identification of main business activities enhances transparency and compliance in financial statements.

X Invests in assets that generate a return individually and largely independently of the entity’s other resources as a main business activity (IFRS 18.55-58); and/or

X Provides financing to customers as a main business activity (IFRS 18.65-66)

For example, an entity may conclude that it:

1 Invests in assets as a main business activity (e.g real estate), but it does not provide financing to customers as a main business activity;

2 Does not invest in assets as a main business activity, but it provides financing to customers as a main business activity (e.g selling goods with associated financing); or

3 Invests in assets as a main business activity (e.g financial assets) and also provides financing to customers as a main business activity (e.g loans provided to borrowers by a bank).

An entity may determine that its primary business activity involves investing in multiple asset classes, such as real estate and financial assets This approach results in various income and expense items—like fair value gains and losses on investment properties and financial assets—being classified under operating expenses, reflecting the entity's core investment operations.

3.7.4 Evidence to be considered when making assessment

Determining whether an entity has specified main business activities is a factual assessment, not a matter of assertion or accounting policy choice, as outlined in IFRS 18.B33 and BC96 It is mandatory for entities to evaluate whether they have designated main business activities, and upon doing so, they must apply the relevant requirements for such entities This assessment involves professional judgment to ensure accurate identification of main business activities.

IFRS 18 notes two sources of evidence that an entity may use in assessing whether an entity has specified main business activities.

Use of subtotals as an indicator of operating performance, including indicators used outside of financial statements:

If a company relies on a specific type of subtotal as a key indicator of its operating performance, it suggests that investing in assets or offering financing to customers is considered a core business activity, according to IFRS 18.B34 Understanding this relationship helps accurately assess the company's financial statements and performance metrics This guidance ensures that such activities are appropriately classified and reported in accordance with IFRS standards.

These subtotals are comparable to gross profit, encompassing income and expenses that, in the absence of main business activities, would be classified under investing or financing categories Understanding this distinction is essential for accurate financial analysis and reporting.

X Evidence that subtotals similar to gross profit are important indicators of operating performance includes using subtotals to (IFRS 18.B35):

(a) Explain operating performance externally; or

(b) Assess or monitor operating performance internally.

BDO comment – use of subtotals as an indicator of operating performance

IFRS 18.B34-B35 does not include examples of subtotals which if used as an important indicator of operating performance may indicate that an entity invests in assets or provides financing to customers as a main business activity

Additional requirements for entities with specified main business activities

Sections 3.8.1 and 3.8.2 explain how the classification requirements of IFRS 18 differ for entities with specified main business activities If an entity does not have any specified main business activities, these sections are not relevant, and an entity would apply the general classification requirements (see sections 3.1 - 3.6).

3.8.1 Investing in assets as a main business activity

When an entity invests in assets as its primary business activity, the classification requirements under IFRS 18 are adjusted accordingly The applicable classification criteria for assets, along with their related income and expenses, are summarized to reflect these modifications, ensuring accurate financial reporting in line with IFRS standards.

Income and expenses that may be classified in the investing category: Income and expenses classified in the operating category:

Investments in associates, joint ventures and unconsolidated subsidiaries

Is the investment accounted for using the equity method (IFRS 18.55)?

Is investing in the asset a main business Activity (IFRS 18.55-57)?

Other assets that generate a return individually and largely independently of the entity’s other resources

Other assets (e.g trade receivables, inventories, property, plant and equipment, etc.)

This article explains how IFRS 18 classification requirements apply to entities whose main business activity involves investing in assets It covers each of the four asset classes identified in the flowchart, providing guidance on the appropriate accounting treatment Understanding these classifications is essential for ensuring compliance with IFRS 18 and accurately reflecting investment activities in financial statements.

See section 3.9.1 for the requirements applicable to classifying income and expenses relating to cash and cash equivalents

When a company invests in financial assets as its primary business activity, income and expenses related to these assets are classified within the operating category Additionally, under IFRS 18.56(a), any income and expenses from cash and cash equivalents must also be reported as operating items This alignment ensures consistent financial reporting for entities whose main operations involve financial assets.

If the entity provides financing to customers as a main business activity (see section 3.8.2), then the classification requirements are more complex

3.8.1.2 Investments in associates, joint ventures and unconsolidated subsidiaries

According to sections 3.2 and 3.8, entities are not required to evaluate whether investing in associates, joint ventures, and unconsolidated subsidiaries is their main business activity if these investments are accounted for using the equity method This is because, under the equity method, income and expenses related to such investments are always classified within the investing category, regardless of the entity’s primary business activities (IFRS 18.B38; see section 3.2).

If the equity method is not used for certain investments, the entity must evaluate whether investing in these assets constitutes its main business activity, as outlined in section 3.8 When the entity determines that investing in these assets is a primary business activity, it should classify related income and expenses within the operating category.

An investment entity, as defined by IFRS 10, may invest in associates and joint ventures alongside its subsidiaries as part of its main business activity Such investments are measured at fair value through profit or loss, with resulting gains and losses classified within the operating category.

3.8.1.3 Other assets that generate a return individually and largely independently of the entity’s other resources

If an entity invests in assets as a main business activity, it classifies income and expenses relating to those assets in the operating category rather than the investing category (IFRS 18.58).

These types of assets typically include (IFRS 18.B46):

X Debt or equity investments; and

X Investment properties, and receivables for rent generated by those properties.

As noted in section 3.2, these income and expenses are:

Income and expenses (IFRS 18.54) Common examples (IFRS 18.54 and B47)

(a) The income generated by the assets X Interest

(b) The income and expenses that arise from the initial and subsequent measurement of the assets, including on derecognition of the assets

X Impairment losses and reversal of impairment losses

X Fair value gains and losses

(c) The incremental expenses directly attributable to the acquisition and disposal of the assets

X Transaction costs on financial assets classified as fair value through profit or loss

X Costs to sell assets, such as broker commissions on financial instruments

BDO comment – classification of income and expenses from multiple classes of assets

According to section 3.8, an entity can invest in one or more classes of assets as its primary business activity but cannot invest in others Specifically, an entity should classify income and expenses associated with assets it invests in as a main business activity under IFRS 18.54 This ensures proper financial reporting and classification of assets within the entity's core operations.

An entity may primarily invest in real estate as its main business activity rather than financial assets Consequently, income and expenses related to its real estate assets, such as rental income and fair value gains or losses on investment property, are classified under operating activities In contrast, income and expenses associated with financial assets are categorized separately, ensuring clear financial reporting aligned with IFRS standards.

Investing in assets is a nuanced process, as it involves assessing each asset class individually rather than a simple binary classification This detailed evaluation determines the appropriate classification requirements applicable to each asset class separately, ensuring compliance and effective asset management.

For assets that do not generate a return individually and largely independently of the entity’s other resources, associated income and expenses are classified in the operating category See section 3.2.

3.8.2 Providing financing to customers as a main business activity

When an entity's primary business activity involves providing financing to customers, the standard classification requirements under IFRS 9 are modified The classification criteria for liabilities, along with associated income and expenses, are summarized to reflect this重点业务模型，ensuring accurate financial reporting that aligns with the entity's core operations.

Income and expenses associated with liabilities resulting from transactions solely related to raising finance are addressed under IFRS 18.59(a) Conversely, income and expenses originating from liabilities arising from transactions that involve more than just raising funds are covered under IFRS 18.59(b) Proper classification based on the nature of these transactions is essential for accurate financial reporting and compliance with international accounting standards.

(1) Interest income and expenses and (2) income and expenses arising from changes in interest rates from other liabilities (IFRS 18.61)

((1) and (2) apply only if the entity identifies such income and expenses applying IFRS Accounting Standards)

Income and expenses from cash and cash equivalents

Related to providing financing to customers

Not related to providing financing to customers (IFRS 18.65(a)(ii)

Accounting policy choice (see restrictions on accounting policy choice – IFRS 18.65(a)(ii))

3.8.2.1 Liabilities that arise from transactions that involve only the raising of finance

Entities whose primary business involves providing financing to customers must categorize liabilities arising solely from transactions involving the raising of finance into specific sub-categories, in accordance with IFRS 18.65(a), to ensure proper financial reporting and compliance with accounting standards.

(i) Relate to providing financing to customers; and

(ii) Do not relate to providing financing to customers

For ‘pure financing’ liabilities that relate to providing financing to customers, associated income and expense are always classified in the operating category.

BDO comment – classification of income and expenses from ‘pure financing’ liabilities that relate to providing financing to customers

Entities whose primary business activity is providing customer financing should classify income and expenses related to liabilities from financing transactions within the operating category This ensures accurate financial reporting and aligns with accounting standards Proper classification enhances clarity for stakeholders and improves SEO relevance by emphasizing key terms like "customer financing," "income and expenses," and "operating category."

Lending institutions, such as banks, often borrow funds from investors or other lenders and then lend these funds to their customers to earn a margin from the interest rate differential When a lending institution borrows money specifically to finance its customers, this activity is classified as ‘providing financing to customers’ According to IFRS standards, the income and expenses associated with this activity are categorized under operating activities, as outlined in IFRS 18.60 and IFRS 18.65(a)(i).

(a) income and expenses that arise from the initial and subsequent measurement of the liabilities, including on derecognition of the liabilities; and

(b) the incremental expenses directly attributable to the issue and extinguishment of the liabilities—for example, transaction costs.

Determining whether liabilities are related to providing financing to customers may be challenging to determine in practice.

Considerations for specific items of income and expense

This section addresses specific requirements for classification income and expense related to the following assets where the general requirements discussed in section 3.1-3.8 do not apply:

X Cash and cash-equivalent (see section 3.9.1)

X Foreign exchange differences (see section 3.9.3)

Section 3.9.5 addresses the classification requirements of IFRS 18 applicable to specific income and expenses where no specific rules apply, but the application of IFRS 18’s requirements are illustrated

The classification requirements for income and expenses relating to cash and cash equivalents (e.g interest income) are summarised as follows:

When Entity G chooses the financing category for 'pure financing' liabilities unrelated to customer financing, it must classify income and expenses related to cash and cash equivalents under the investing category, ensuring proper financial reporting and compliance with accounting standards.

Does the entity invest in financial assets (IFRS 18.53(c)) as a main business activity?

Does the entity provide financing to customers as a main business activity?

Do the income and expenses specified in IFRS 18.54 from cash and cash equivalents relate to providing financing to customers?

Accounting policy choice: operating category or investing category (IFRS 18.56(b)(ii) (see restrictions on accounting policy choice described below)

An entity that invests in financial assets as its primary business activity must always classify income and expenses related to cash and cash equivalents within the operating category, in accordance with IFRS 18.56(a) This classification remains consistent even if the entity's main activities include both investing in financial assets and providing financing to customers, indicating multiple significant business activities.

Entities that do not primarily invest in financial assets or provide financing to customers must classify income and expenses related to cash and cash equivalents under the investing activities category, according to IFRS 18.56.

When a company’s primary activity is providing financing to customers rather than investing in financial assets, it must assess whether the income and expenses associated with cash and cash equivalents are related to its financing activities, in accordance with IFRS 18.56(b).

• If they do, income and expenses are classified in the operating category (IFRS 18.56(b)(i)).

An accounting policy choice exists to classify income and expenses either in the operating or investing category, provided the specific restrictions outlined in IFRS 18.56(b)(ii) are met.

The accounting policy choice noted above is subject to two restrictions:

1 It must be consistent with the accounting policy choice selected for ‘pure financing’ liabilities that do not relate to providing financing to customers, which is discussed in section 3.8.2, see Example 3.8.2-1.

2 If an entity cannot distinguish between cash and cash equivalents that relate to providing finance to customers and those that do not, an entity is required to classify income and expenses from all cash and cash equivalents in the operating category (IFRS 18.57).

3.9.2 Hybrid contracts containing a host that is a liability

Hybrid contracts containing a host that is a liability may include, for example:

X Convertible notes with conversion options that are not closely related to the host contract;

X Lease liabilities with embedded derivatives not closely related to the host contract; and

X Insurance contract liabilities with embedded derivatives not closely related to the host contract.

Embedded derivatives can either be separated from the host contract or, if specific criteria are satisfied, the entire hybrid instrument can be measured at fair value through profit or loss under IFRS 9 Additionally, if the embedded derivative is deemed closely related to the host contract, it may not be accounted for separately, simplifying financial reporting and analysis.

IFRS 18.B56-B57 set out detailed classification requirements applicable to income and expenses related to hybrid contracts containing a host liability, with the primary distinction being whether the embedded derivative is separated from the host liability or not

Income and expenses from hybrid contracts with host liabilities – embedded derivative is separated from the host liability (entities that do not provide financing to customers as a main business activity)

Liabilities that arise from transactions that involve only the raising of finance

Examples: bank loans, bonds payable, obligation to repurchase equity instruments income and expenses (IFRS 18.60)

Examples: interest income and expenses, incremental expenses to issuing/extinguishing liabilities, gains and losses on derecognition

(1) Interest income and expenses; and (2) Income and expenses from changes in interest rates

((1) and (2) apply only if the entity identifies such income and expenses applying IFRS Accounting Standards) (IFRS 18.61)

Apply requirements applicable to gains and losses on derivatives (see section 3.9.4)

Insurance contracts (IFRS 17) (IFRS 18.52 and 64(b))

All other income and expenses

Liabilities that arise from transactions that do not involve only the raising of finance (IFRS 18.B53)

Examples: payables for goods or services, lease liabilities, contract liabilities

In summary, income and expenses relating to the hybrid instrument are classified separately for the host liability and the separated embedded derivative(s):

IFRS 18 guidelines for classifying income and expenses related to host liabilities are essential for consistent financial reporting A comprehensive flowchart summarizes these requirements, emphasizing that they apply when an entity's primary business activity does not involve providing customer financing However, if an entity’s main activity is customer financing, it must follow the specific requirements outlined in section 3.8.2 for handling host liabilities, ensuring accurate and compliant accounting practices.

X The requirements applicable to derivatives apply to the embedded derivative that is separated from the host liability (see section 3.9.4).

When an embedded derivative is separated from its host contract, both components—the host liability and the embedded derivative—must be accounted for separately, in accordance with established accounting standards Consequently, the classification requirements of IFRS 9 apply individually to each component, ensuring accurate financial reporting.

3.9.2.1 Hybrid contracts containing a host liability – embedded derivative is separated from the host liability (IFRS

The classification of income and expenses related to hybrid contracts with host liabilities, where embedded derivatives are separated, depends on specific criteria, especially when the entity does not primarily provide customer financing These requirements ensure proper accounting treatment and compliance with relevant standards, facilitating accurate revenue recognition and expense reporting for such complex contracts.

Example 3.9.2-1 – classification of income and expenses arising from a convertible note – embedded derivative is separated from the host liability

Entity M issues a convertible note allowing the holder to convert the principal into Entity M’s equity instruments at any time, providing flexibility for investors However, the conversion option does not qualify as a ‘fixed for fixed’ hedge under IFRS because the note's currency differs from Entity M’s functional currency, meaning the settlement amount is not fixed in the company's functional currency Additionally, Entity M has not elected to apply the fair value option according to IFRS 9.4.3.5, impacting how the convertible note is accounted for.

Entity M does not provide financing to customers as a main business activity

Entity M separates the embedded derivative from the host contract at initial recognition because it does not elect the fair value option The host liability is subsequently measured at amortised cost, while the embedded derivative is valued at fair value through profit or loss.

During the reporting period where the convertible note remains outstanding, the host liability and the embedded derivative give rise to the following income and expenses:

Host liability Interest expense accounted for applying the effective interest method (IFRS 9) Embedded derivative (conversion option) Fair value gains and losses (IFRS 9)

Entity M classifies the interest expense related to the host liability based on the established classification flowchart, with the relevant assessment highlighted within red dotted lines for clarity.

Income and expenses from hybrid contracts with host liabilities – embedded derivative is separated from the host liability (entities that do not provide financing to customers as a main business activity)

Principles of aggregation and disaggregation

Totals and subtotals presented in the statement of profit or loss

Effective date and transition requirements

Examples of statements of profit or loss prepared in accordance with IFRS 18