IFRS 18 (i): the new statement of profit or loss, categories and subtotals

For over twenty-five years companies could build their income statement almost any way they liked. One company’s “operating profit” included interest and another’s did not, so two investors could not compare them. International Financial Reporting Standard (IFRS) 18, Presentation and Disclosure in Financial Statements, fixes this.

It gives the statement of profit or loss a fixed structure with five categories and three compulsory subtotals, so “operating profit” finally means the same thing everywhere.

This topic covers why IFRS 18 was issued, when it applies, the five categories, the three subtotals, the special rules for banks and investment companies, and how expenses are shown. It builds on the previous topic on International Accounting Standard (IAS) 1, which IFRS 18 replaces. The next topic covers management-defined performance measures, aggregation, the notes and the effect on the statement of cash flows.

The syllabus asks you to evaluate how IFRS 18 changes the structure of the statements, so expect a classification exercise.

Key terms in plain English

Syllabus check

IFRS 18 is examinable at this level and sits under Syllabus Area F, on the impact of changes in accounting regulations. This topic covers:

• F6 the impact of IFRS 18 on the structure and presentation of the financial statements;
• the rationale for the new structure (part of F7, completed in the next topic with the cash flow link);
• the classification of income and expenses and the three subtotals, which also support Area B, item 1(d), on preparing statements in line with IFRS.

CAMA 2020 and IFRS 18

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS as adopted by the Financial Reporting Council of Nigeria (FRC). Once IFRS 18 is adopted for a period, the law points to it.

Why IFRS 18 was needed

IAS 1 never defined “operating profit”. Companies chose their own subtotals, and many reported unaudited “adjusted” profit measures outside the statements. The result was poor comparability. The IASB’s project on primary financial statements ended with IFRS 18, which replaces much of IAS 1.

Scope, effective date and transition

• Who. All entities that prepare general purpose statements under IFRS. Not-for-profit and cooperative entities may need to adapt labels.
• When. Annual periods beginning on or after 1 January 2027. Early application is allowed and must be disclosed.
• How. Retrospectively under IAS 8. A company with a December year end applying IFRS 18 for 2027 restates its 2026 comparatives, and its opening statement of financial position if required. It does not have to disclose the line-by-line adjustments to 2026 or the effect on earnings per share.
• What is left of IAS 1. Some of its rules move to IAS 8. The statement of cash flows stays under IAS 7, which IFRS 18 amends. Interim reports follow IAS 34, which is covered in a later topic.

In practice a company needs IFRS 18-style comparative figures during 2026, so dual systems and mapping must be ready before the year starts. Expect questions on implementation: mapping income and expenses to the categories, updating systems, deciding any specified main business activity, identifying management measures, and training staff.

The complete set and the primary statements

A complete set has a statement of profit or loss and a statement of comprehensive income (or one combined statement in two sections), a statement of financial position, a statement of changes in equity, a statement of cash flows, notes, comparatives, and a third statement of financial position when a policy or restatement requires it. The first four are the primary financial statements.

Notes are not primary statements. They explain and expand on them. The general rules carry over from IAS 1: material information only, identification of the entity, currency and rounding, at least annual reporting, consistency, comparatives, and no offsetting unless a standard permits it.

The five categories

Every income and expense item in profit or loss goes into one of five categories.

A point to watch. Income and expenses from associates and joint ventures accounted for under the equity method always go in the investing category, even for an entity whose main business is investing. Note: the Pathfinder solution is slightly different from ours here.

The suggested solution of the Institute of Chartered Accountants of Nigeria (ICAN) to one practice question places the share of an associate’s profit in the operating category, but IFRS 18 itself puts it in the investing category, so we follow the standard. In the exam, state the IFRS 18 rule and give your reason. If a question tells you to use a different treatment, follow the question.

The three compulsory subtotals

1. Operating profit or loss = income less expenses in the operating category.
2. Profit or loss before financing and income taxes = operating profit or loss + net investing income and expenses.
3. Profit or loss = profit before financing and income taxes − net financing costs − income tax ± discontinued operations.

The minimum line items on the face are revenue (with interest revenue and insurance revenue separate), operating expenses, the share of profit or loss of associates and joint ventures, income tax, the total for discontinued operations, amounts required by other standards (for example impairment losses on financial assets under IFRS 9), and the split of profit between owners of the parent and non-controlling interests (NCI).

Entities with a specified main business activity

Before classifying, an entity must ask whether its main business is investing in assets (investment property companies, investment funds, some insurers) or providing finance to customers (banks, lessors, manufacturers with financing arms). If so, some items move to operating.

So a manufacturer shows interest expense on a bank loan in financing, while a bank shows interest on deposits in operating.

Showing operating expenses

Operating expenses can be presented:

• by nature: materials, employee costs, depreciation, transport, advertising;
• by function: cost of sales, distribution costs, administrative expenses; or
• on a mixed basis, combining both, where that is more useful.

The choice is not free: the entity must pick the presentation that gives the most useful structured summary. If it shows expenses by function, it must also disclose operating expenses by nature in the notes, so it needs to work out both.

The statement of comprehensive income

It starts with profit or loss and adds other comprehensive income (OCI), split into items that will be reclassified to profit or loss (such as foreign operation translation differences and the effective part of cash flow hedges) and items that will not (such as defined benefit remeasurements and revaluation of property, plant and equipment). It ends with total comprehensive income, split between owners and NCI.

The statement of financial position and the statement of changes in equity are carried over from IAS 1 with little change.

The rules in more depth

Why “operating” is a default

The Board did not try to define operating profit by what it is. It defines it by exclusion: if an item does not belong in investing, financing, income taxes or discontinued operations, it is operating. This stops companies from moving unwelcome costs out of the operating line.

Why investing looks at “individually and independently”

A factory’s machine earns money only together with staff and materials. A share portfolio or a rented building earns a return on its own. That is why the second type goes in investing for ordinary companies.

Why a bank is different

For a bank, lending is the business. Interest on loans is its revenue and interest on deposits is its cost of sales. Putting them in financing would leave the bank with an odd operating profit.

Why the third subtotal exists

Profit before financing and income taxes is useful to compare companies with different debt levels and tax rates. It shows the result of operating and investing before the effect of how the business is financed.

Worked example: classification and subtotals

1. Operating.
   Revenue ₦800m − cost of sales ₦480m − distribution ₦60m − administration ₦90m = operating profit ₦170 million.
2. Investing.
   Dividend income ₦15m + interest on deposits ₦10m + share of profit of associate ₦20m = ₦45 million, because shares, cash and equity-accounted associates earn returns separately from the main business.
3. Profit before financing and income taxes.
   ₦170m + ₦45m = ₦215 million.
4. Financing. Interest on the bank loan: ₦30 million expense.
5. Income taxes. ₦55 million.
6. Profit or loss.
   ₦215m − ₦30m − ₦55m = ₦130 million.
7. Expenses. If Ede shows costs by function (cost of sales, distribution, administration), it must also give the nature analysis in the notes.

How to score full marks

• Classify each item with a reason. Write the category and the one-line test: for example, interest on a bank loan, financing, because it relates to raising finance.
• Ask the main business question first. A bank or investment company changes the answer.
• Show the subtotals in order. Operating, then plus investing, then less financing and tax. Examiners give marks for each subtotal.
• Present income taxes and discontinued operations separately. They are categories of their own.
• Link to the syllabus point. If asked to evaluate the impact, mention comparability, transparency, consistency, system changes and judgement.
• State the dates. 1 January 2027, retrospective, early application allowed.

Common mistakes in the exam

• Putting share of profit of an equity-accounted associate in operating profit.
• Putting interest income on cash in financing. For an ordinary company it is investing.
• Treating a bank’s interest on customer loans as financing.
• Calculating the second subtotal without including investing items.
• Forgetting to restate the comparatives when applying IFRS 18.
• Showing expenses by function without the nature analysis in the notes.
• Using IAS 1 headings in an answer that asks for IFRS 18 presentation.

Quick revision

• IFRS 18: issued April 2024, effective 1 January 2027, retrospective, early use allowed.
• Five categories: operating (default), investing, financing, income taxes, discontinued operations.
• Subtotals: operating profit; profit before financing and income taxes; profit.
• Investing includes equity-accounted associates and joint ventures, cash, and assets earning independently.
• Banks and investing entities: related items go in operating.
• Expenses by nature, function or mixed. Function needs a nature note.
• CAMA 2020: ss. 377, 378, 385, 400.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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