IFRS 18 in practice: classifying income and expenses across five categories

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IFRS 18, effective for annual reporting periods beginning on or after 1 January 2027, replaces IAS 1 for presentation and disclosure. Although that may seem distant, it requires significant lead time, cross‑functional coordination, and system/process changes, especially in more complex groups. Retrospective application means 2026 comparatives will need to be restated; a 2026 dry run is strongly recommended. In our first article and one-pager we outlined the main changes and introduced BDO’s transition roadmap. 

In this second article, we deep‑dive into one of the biggest shifts: defined categories in the statement of profit or loss, with mandatory subtotals designed to improve comparability across companies and industries. 
 

The 5 income and expense categories and why they matter 

IFRS 18 requires entities to classify each income and expense item into one of 5 categories. Investing and Financing are defined categories; Operating is the residual category for all other P&L items. The structure of the statement of profit or loss is then based upon how items of income and expense are classified. 
1. Investing

Income and expenses related to certain assets (i.e. specified assets): 

  • Investments in associates, joint ventures and unconsolidated subsidiaries 
  • Cash and cash equivalents 
  • Other assets if they generate a return individually and largely independently of the entity’s other resources 
  • Income and expenses from investments that generate returns (such as interest, dividends, rental income or fair value gains/losses) largely independently of other resources used in the entity’s operations 
  • Common examples include: 
Specified assets Examples
Income generated by the assets
  • Dividends
  • Interest
  • Rental income
Income and expenses that arise from the initial and subsequent measurement of the assets including on derecognition of the assets
  • Depreciation
  • Impairment losses and reversal of impairment losses
  • Fair value gains and losses
Incremental expenses directly attributable to the acquisition and disposal of the assets
  • Transaction costs on financial assets classified at fair value through profit or loss
  • Costs to sell assets, such as broker commission on financial instruments
2. Financing
  • Income and expenses are classified in the financing category when they relate to certain liabilities. 
Classification depends on whether: Examples
Liabilities arise from transactions that involve only the raising of finance
  • Interest expenses (e.g., on debt instruments, borrowings and other liabilities arising from financing activities)
  • Fair value gains and losses (e.g., on a liability designated at fair value through profit or loss)
  • Effects directly related to financing instruments (for example, some foreign exchange differences on borrowings, where applicable)
  • Dividends on issued shares classified as liabilities
  • Income and expenses from the derecognition of the liability
Liabilities arise from transactions that do not involve only the raising of finance
  • Interest expenses on a contract liability with a significant financing component as specified by IFRS 15
  • Interest expenses on a lease liability, applying IFRS 16
3. Operating
  • Is the residual category in IFRS 18, meaning that unless income and expenses are classified in another category, they must be classified in the operating category. Applying the requirements of IFRS 18 should result in an entity classifying in the operating category income and expenses from its main business activities.  
    • Typical items include revenue from contracts with customers, cost of sales, selling and administrative expenses, impairment of operating assets, gains/losses on disposal of operating assets, and most provisions related to operations. 
4. Income taxes 
  • Income tax expense and income arising from the application of IAS 12 Income Taxes and any related foreign exchange differences are classified in the income tax category. 
5. Discontinued operations
  • Income and expenses from discontinued operations arising from the application of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are classified in the discontinued operations category. 

How the 5 categories link to the mandatory subtotals

The classification of items of income and expense into the five categories drives the required subtotals.  

For an entity without specified main business activities, a simplified statement of profit or loss (using a mixed presentation of operating expenses, where appropriate) could look like: 

Line item Classification
Revenue Operating
Cost of sales
Gross profit
Other operating income
Selling expenses
Research and development
General and administrative
Operating profit New specified subtotal
Fair value gains on investments in equity instruments Investing
Share of profit from joint venture
Profit before financing and income taxes New specified subtotal
Interest expense on borrowings and lease liabilities Financing
Profit before income taxes Additional subtotal
Income tax expense Income taxes
Profit from continuing operations Additional subtotal
Loss from discontinued operations Discontinued operations
Profit or loss Pre-existing mandatory total
Practical classification guidance 
  • Determine your main business activities: IFRS 18 contains exceptions to the general classification requirements for entities that have specified main business activities. For such entities (for example investment entities), certain items of income and expense that would otherwise be classified in the investing and/or financing categories are classified in the operating category because they relate to the entity’s primary business activities. Follow our upcoming publications where we will cover this topic in more detail. 
  • Classify defined categories first: identify items that meet the Investing and Financing definitions; then assign the residual to Operating. 
  • Apply and document judgement: apply your classifications consistently. Where significant judgements are made, explain them and ensure they support a useful, structured summary of performance. 
  • Check presentation and disaggregation: IFRS 18 strengthens aggregation/disaggregation principles (group items with shared characteristics and present dissimilar material items separately). Present by function, by nature, or a mixed approach where this provides more useful information and disaggregation requirements are met.

IFRS 18 implementation: a strategic priority

As a reminder, organisations assessing IFRS 18 now will be better placed to manage the transition smoothly. The standard is applied retrospectively, requiring restated comparatives. 

At BDO, we help you navigate IFRS 18 implementation with a clear, structured approach, so you can focus on managing your business: 

  • 2026 Q3: Design/build (chart of account and reporting, systems, draft notes, governance) 
  • 2026 Q4: Dry run and optimise (rehearsal on 2026 data; covenant/bonus checks; audit preclearance) 
  • 2027: Go-live and sustain (report with restated comparatives; enhancements)

Wherever you are in your IFRS 18 preparation, our team is ready to help.

Get in touch to scope your impacts and plan your 2026 dry run.

Evy Borry, Audit Partner, IFRS Country Leader evy.borry@bdo.be 

Christophe Pelzer, Audit Partner christophe.pelzer@bdo.be