Jose Evans
One of the biggest changes introduced by IFRS 18 is the requirement to classify income and expenses into clearer categories within the statement of profit or loss.
Operating.
Investing.
Financing.
Income taxes.
Discontinued operations.
That sounds straightforward until you try to decide whether a particular asset genuinely generates an investment return or whether it is simply another resource used to run the business.
That distinction matters because it can change operating profit.
IFRS 18 requires certain income and expenses from assets that generate returns individually and largely independently of the entity’s other resources to appear in the investing category. Other income and expenses remain within operating profit.
The difficult part is deciding where the dividing line sits.
That question has already reached the IFRS Interpretations Committee and is particularly relevant to candidates preparing for ACCA SBR.
Anyone working with an ACCA SBR tutor should understand the principle behind the classification rather than trying to memorise a list of assets that always belong in one category.
IFRS 18 is trying to make operating profit more comparable
Before IFRS 18, companies had considerable flexibility over how they presented subtotals within the statement of profit or loss.
One company might present operating profit one way while another used a different structure.
That made comparisons harder.
IFRS 18 introduces required categories and subtotals designed to give investors a more consistent view of performance.
Operating profit is particularly important because users often treat it as a measure of how the company’s main activities are performing.
That means the boundary between operating and investing income matters.
If investment returns are included within operating profit when they should sit separately, the company’s core performance may look stronger.
If genuine operating income is moved into investing, operating performance may appear weaker.
Classification therefore has a communication effect as well as an accounting effect.
The investing category is not simply for anything called an investment
This is where candidates can go wrong.
IFRS 18 does not simply say:
“If management calls something an investment, put the income in investing.”
The standard looks at the nature of the asset and how it generates returns.
Broadly, income and expenses from certain assets are classified within the investing category.
These include investments in associates and joint ventures, cash and cash equivalents and other assets that generate returns individually and largely independently of the entity’s other resources.
That final category is where judgement becomes important.
The wording sounds abstract.
In practice, the question is whether the asset produces its own return or whether its return depends fundamentally on being used together with the rest of the business.
Debt and equity investments normally point towards investing
Debt and equity investments are among the clearest examples.
If a company holds bonds, shares or similar investments, those assets will normally generate a return individually and largely independently of the company’s other resources.
The bond can generate interest.
The shares may generate dividends or changes in value.
Those returns arise from holding the investment itself.
The company does not normally need to combine the asset with its factories, employees, inventory or customer relationships to generate that return.
That is why these investments typically fit within the IFRS 18 investing category.
The recent Interpretations Committee discussion confirmed this general direction.
The fact that an investment fund uses staff, technology and administration to manage a portfolio does not automatically mean the investments stop generating their returns independently.
Some interaction with the rest of the organisation is perfectly normal.
Investment property provides another useful example
Investment property demonstrates why “independent” does not mean completely isolated.
A company may own a property that generates rental income.
That building may need maintenance.
Staff may manage tenants.
The business may pay agents, insurance and repair costs.
The property therefore interacts with other company resources.
However, it can still generate a return individually and largely independently.
The rent is linked to the property itself.
The fact that some supporting resources are needed does not automatically turn the return into operating income.
This is an important judgement point.
Candidates should not interpret “independently” too literally.
Almost every asset requires some degree of administration.
The question is whether the asset itself is a source of return or whether it must be used together with other resources to produce the company’s goods or services.
Property, plant and equipment usually tells a different story
Consider a manufacturing machine.
The machine is essential.
It may be extremely valuable.
It may directly support revenue generation.
But it normally does not generate a return on its own.
The machine works alongside employees, raw materials, buildings, systems and other equipment to manufacture products.
The return arises from the production process as a whole.
That makes the machine fundamentally different from an investment property held to generate rental income.
The manufacturer does not normally earn income simply by holding the machine.
It earns revenue by using the machine together with its other resources.
That is why property, plant and equipment used in normal production would typically sit on the operating side of the distinction.
Trade receivables are also different from investment assets
A receivable can look like a financial asset.
That does not mean the related income automatically belongs in investing.
Suppose a retailer sells goods on credit.
The resulting receivable arose from supplying goods to a customer.
It is part of the operating cycle.
The receivable does not represent a separate investment activity merely because it may technically be a financial asset.
The business produced goods, made a sale and allowed the customer time to pay.
The receivable is connected to that operating activity.
This distinction matters because candidates sometimes classify by accounting label instead of economic function.
IFRS 18 requires more thought than that.
Loans can be operating for some businesses
The answer can change again depending on the entity’s main business activity.
Consider a bank.
A loan to a customer generates interest.
At first glance, that looks like investment income.
But lending money to customers is the bank’s business.
The loan is not a passive investment sitting outside operations.
It is one of the bank’s primary revenue-generating assets.
IFRS 18 recognises this.
An entity that provides financing to customers as a main business activity can classify relevant income and expenses differently from an ordinary trading company.
This prevents operating profit from becoming meaningless for financial institutions.
If a bank classified most interest income as investing income, its operating category would fail to show what the business actually does.
Main business activity can change the answer
This is one of the most important parts of IFRS 18.
Companies need to assess whether investing in particular types of assets or providing financing to customers is one of their main business activities.
That assessment affects classification.
An investment company may hold exactly the same equity securities as an industrial company.
For the industrial company, those securities may represent surplus investments.
For the investment company, managing investments may be the business itself.
The accounting presentation needs to reflect that difference.
IFRS 18 therefore requires companies to look at what they actually do.
The conclusion cannot simply be created by management asserting that investing is a main activity.
There must be evidence.
What evidence shows a main business activity
Management may need to consider how the business is managed, how performance is reported internally and what investors are told externally.
Useful evidence could include:
- how management describes the business model
- which performance measures are reviewed by senior decision-makers
- where revenue and profit are generated
- how assets and resources are allocated
- what activities investors are told drive performance
- whether investment returns are central to the company’s purpose
The conclusion should reflect economic reality.
A manufacturing company cannot normally move investment income into operating simply because management prefers a higher operating profit.
Similarly, an investment business should not pretend that its investment returns are somehow peripheral.
This becomes especially important for mixed businesses
Some groups conduct several substantial activities.
A large financial group may provide customer financing and also manage investment portfolios.
Another group may manufacture products while holding significant property investments.
A conglomerate may operate industrial businesses and investment activities side by side.
IFRS 18 allows an entity to have more than one main business activity.
That makes the analysis more realistic, but it also increases the need for careful judgement.
Finance teams may need to determine which assets relate to which activity and whether the relevant income and expenses belong in operating or investing.
This is not always something that can be solved from the name of the asset alone.
The role the asset plays in the business matters.
Cash and cash equivalents create another complication
Cash may appear simple.
Every business holds it.
However, the classification of income and expenses from cash and cash equivalents can depend on whether the entity has specified main business activities.
For a normal trading business, income from surplus cash will generally fit within the investing category.
For an entity that invests in financial assets as a main business activity, the treatment can be different.
IFRS 18 contains specific rules because cash can serve very different purposes across organisations.
A retailer holds cash to manage payments and working capital.
An investment business may hold cash as part of managing its portfolio.
A bank may hold cash partly because of its financing activities and regulatory requirements.
Once again, economic context matters.
Classification affects the operating profit story
Imagine two companies each earn £10 million from financial investments.
Company A manufactures industrial equipment.
The investments represent surplus funds that management has placed in bonds.
Company B is an investment business whose main activity is generating returns from financial assets.
The same type of investment income may tell a very different story about each company.
For Company A, investors may want to separate the bond income from the performance of the manufacturing operation.
For Company B, excluding investment returns from operating profit could remove the very activity users are trying to assess.
That is why IFRS 18 cannot simply classify income according to the legal form of the asset.
Presentation has to reflect the business model.
Judgement should be documented
Where the classification is obvious, there may be little controversy.
Where an entity has mixed activities or unusual assets, documentation becomes more important.
Management should be able to explain why an asset generates a return individually and largely independently.
It should also be able to demonstrate why investing in that type of asset is, or is not, a main business activity.
This analysis should be based on facts.
Auditors are likely to challenge classifications that materially affect operating profit.
Audit committees should also understand significant judgements because operating profit may be closely watched by investors, lenders and remuneration committees.
A classification that appears technical can therefore have wider governance consequences.
Management incentives cannot be ignored
IFRS 18 creates clearer subtotals.
That can create incentives around those subtotals.
Management bonuses may depend on operating profit.
Analyst expectations may focus on operating margins.
Loan agreements may use performance measures connected to operating results.
A classification decision could therefore affect more than presentation.
If management has an incentive to move expenses out of operating or bring income into it, professional scepticism becomes important.
A strong reporting process should ask whether the proposed classification follows IFRS 18 rather than whether it produces the most attractive subtotal.
That is a useful ethics and governance angle for an SBR answer.
How this could appear in an SBR scenario
Imagine a diversified group with three assets.
It owns an office building rented to third parties.
It also holds a portfolio of corporate bonds purchased with surplus cash.
Finally, it operates manufacturing equipment used in producing goods.
Management proposes classifying all income connected with the three assets within operating profit because staff are involved in managing each one.
That would be too simplistic.
The investment property can generate rental returns individually and largely independently, even though employees arrange maintenance and manage tenants.
The bonds also typically generate returns individually and largely independently through interest and changes in value.
The manufacturing equipment is different.
Its return depends on being used with employees, materials and other resources to produce goods.
The candidate should then consider whether investing in property or financial assets is itself a main business activity of the entity because that assessment may change the final classification.
That is the type of layered analysis IFRS 18 requires.
Avoid treating the investing category like the cash flow statement
Another potential mistake is assuming the IFRS 18 investing category works exactly like investing activities in the statement of cash flows.
The terminology is similar.
The purpose and rules are not identical.
Candidates should not automatically transfer IAS 7 classifications into the IFRS 18 statement of profit or loss.
Each standard has its own requirements.
This is precisely the kind of trap that can catch someone who remembers labels without understanding measurement and presentation objectives.
Always identify which statement you are dealing with before deciding the classification.
The Interpretations Committee has not proposed a new rule
The current discussion is also a useful lesson in reading accounting developments accurately.
The IFRS Interpretations Committee received a question about how the existing requirement should be applied.
Its tentative conclusion is that IFRS 18 already provides an adequate basis for companies to make the assessment.
It has therefore not proposed a new standard-setting project on this issue.
The tentative agenda decision remains open for comment until 30 November 2026.
That matters for SBR candidates.
Do not write that IFRS 18 has been amended because of this issue.
It has not.
The discussion clarifies how the existing wording should be understood.
Accurate language around current issues is part of professional communication.
What candidates should remember
The key question is not whether an asset interacts with anything else in the organisation.
Some interaction is normal.
The question is whether the asset itself generates a return individually and largely independently or whether it has to be used in combination with other resources to produce goods or services.
Debt and equity investments will typically fall on one side.
Investment property will commonly fall there too.
Production assets and operating receivables normally fall on the other side.
Then ask a second question.
Is investing in that type of asset one of the entity’s main business activities?
That can change the presentation again.
Candidates following a structured ACCA SBR course should practise these questions through scenarios because the difficult marks will come from applying the distinction rather than reproducing the wording of IFRS 18.
What to do next
IFRS 18 is designed to improve comparability.
That does not mean every classification decision becomes automatic.
The investing category depends on understanding what an asset actually does within the business.
A bond held as a surplus investment is different from a customer loan made by a bank.
An investment property is different from a factory.
A trade receivable is different from a portfolio investment.
The accounting begins with the asset.
The final presentation depends on the business.
That is why investing income under IFRS 18 is harder to identify than it first sounds.
And it is exactly the kind of judgement SBR candidates need to become comfortable making.
