IFRS 18 Operating, Investing and Financing Categories: How to Classify Every P&L Line

If your team is working through IFRS 18 adoption, the classification question is where most of the real work lives. The standard introduces five categories for the statement of profit or loss, and getting the operating, investing, and financing split right is not as straightforward as the names suggest.

This is a practitioner walkthrough of the classification logic: the waterfall, the edge cases, the IAS 7 trap, and the items that will catch teams off guard before the mandatory 1 January 2027 effective date. For a broader overview of the standard's disclosure requirements, see our IFRS 18 presentation and disclosure practical guide.

Key takeaway: The operating category is a residual. You classify investing and financing first. Whatever is left is operating. Most misclassification errors happen because teams work in the wrong order.

What Are the Five IFRS 18 Categories?

IFRS 18 requires every item of income and expense in the statement of profit or loss to be assigned to exactly one of five categories: operating, investing, financing, income taxes, and discontinued operations. The IFRS Foundation published the standard in April 2024, replacing IAS 1, with mandatory application for annual periods beginning on or after 1 January 2027.

The income taxes and discontinued operations categories are largely self-defining. The analytical engine of the standard is the operating, investing, and financing trio, and that is where classification judgment is concentrated.

Before IFRS 18, IAS 1 required no specific subtotals between revenue and profit before tax. Now there are two mandatory ones, and the category classification drives them directly.

The Classification Waterfall: Investing First, Then Financing, Then Operating

The correct sequence is to test investing classification first, then financing, and treat operating as the residual. This is the single most important process point. Teams that start by asking "is this operating?" will make errors.

Here is the decision logic in order:

1. Is this item income taxes or discontinued operations? If yes, classify there and stop.
2. Does this income or expense arise from an asset that generates returns individually and largely independently of the entity's other resources? If yes, it is investing.
3. Does this income or expense arise from a financial liability (or from the cost of obtaining financial capital)? If yes, it is financing.
4. Does the entity have a main business activity in investing or financing? If yes, apply the exception (see below).
5. Everything else is operating.

The IASB deliberately designed the investing and financing categories with specific defined criteria, and operating as the catch-all. This was a conscious choice to reduce preparer discretion and improve comparability across entities, as explained in the Basis for Conclusions on IFRS 18.

What Goes in the Investing Category?

The investing category captures income and expenses from assets that generate returns individually and largely independently of the entity's main business activities. This is an asset-based test, not an income-type test.

Items that land in investing for a typical non-financial entity:

• Interest income on debt instruments held as investments
• Dividend income from equity investments
• Rental income from investment properties
• Depreciation and impairment of investment properties
• Gains and losses on disposal of investment properties
• Income and expenses from investments in associates and joint ventures accounted for under the equity method (with one important nuance below)
• Interest income on cash and cash equivalents (bank deposits)
• Fair value movements on financial assets measured at fair value through profit or loss

The equity-method income nuance. Income from associates and joint ventures goes in investing if the investment generates returns largely independently of the entity's main business activities. It goes in operating if the associate or JV is integral to the entity's main business activities. A consumer goods company whose associate is a logistics provider it relies on operationally would put that equity-method income in operating. A conglomerate holding a minority stake in an unrelated business would put it in investing. This requires genuine judgment and documentation.

PP&E disposal gains and losses. For most entities, property, plant and equipment is used in main business activities, so disposal gains and losses go in operating. If the PP&E was held as an investment asset generating returns independently (think: a manufacturer that also holds surplus land as an investment), disposal gains could go in investing. The EY Closer Look at IFRS 18 (July 2025) flags this as a practical edge case requiring fact-specific analysis.

What Goes in the Financing Category?

The financing category captures the cost of obtaining financial capital: income and expenses arising from financial liabilities and from equity instruments issued by the entity.

Items that land in financing:

• Interest expense on bank borrowings and bonds
• Fair value gains and losses on financial liabilities designated at fair value through profit or loss
• Dividends on shares classified as financial liabilities
• Foreign exchange gains and losses on financial liabilities
• Net interest on defined benefit liabilities or assets (IAS 19)
• Unwinding of discount on provisions (IAS 37)
• Interest on lease liabilities (IFRS 16)

The IFRS 16 point is worth flagging explicitly. Interest on lease liabilities is financing under IFRS 18. Depreciation of right-of-use assets, by contrast, goes in operating for most entities. Teams that have been presenting both items together in a single finance cost line will need to split them.

Defined benefit pension costs also split across categories. Current and past service costs go in operating. The net interest component on the defined benefit liability or asset goes in financing. This is a change from how many entities currently present these items.

The Critical Difference Between IFRS 18 and IAS 7 Categories

This is the most common source of preparer confusion, and it is worth being direct about it.

"The operating, investing and financing categories in IFRS 18 have different meanings to those in IAS 7." -- EY, A Closer Look at IFRS 18, July 2025

The categories share names but are defined differently. Do not assume your IAS 7 cash flow classification maps to your IFRS 18 P&L classification. Here is a side-by-side comparison of common items:

The practical implication: your treasury and financial reporting teams need to run a fresh classification exercise against IFRS 18's own definitions. Copying the IAS 7 treatment is not a valid shortcut.

The Main Business Activities Test: Banks, Insurers, and Asset Managers

If an entity's main business activities involve investing in assets or providing financing to customers, IFRS 18 permits certain items to be classified in operating rather than investing or financing.

As PwC's IFRS 18 guidance for financial services companies puts it: "IFRS 18 requires entities to assess whether their main business activities involve investing or financing -- a determination that fundamentally changes where items like interest income are classified."

Here is how the test plays out across sectors:

One firm rule even for financial entities: income and expenses from associates and joint ventures accounted for under the equity method always go in investing, regardless of whether investing is a main business activity. This is an explicit carve-out in the standard.

Insurers face an additional layer of complexity. IFRS 18 classification must be considered alongside IFRS 17 (Insurance Contracts), which already prescribes specific presentation requirements for insurance revenue and insurance service expenses. The interaction between the two standards is a live implementation challenge. Finance teams at insurance groups should not attempt to resolve this without dedicated technical accounting support.

How Foreign Exchange Gains and Losses Are Classified

FX classification under IFRS 18 follows the underlying item. The rule: classify FX gains and losses in the same category as the income and expenses from the items that gave rise to them.

• FX on trade receivables and payables: operating
• FX on financial liabilities (borrowings): financing
• FX on investment assets: investing

The practical problem is that many entities currently present all FX differences in a single line item. Disaggregating by category requires system-level changes to track FX at the transaction or account level. The EY Closer Look notes that the "undue cost or effort" exemption for FX classification has a high threshold. Defaulting everything to operating because system changes are needed is not acceptable.

For entities with significant multi-currency operations, complex intercompany loans, or centralised cash pooling, this is a material systems project, not a disclosure tweak.

The Two New Mandatory Subtotals and Why They Matter

The category structure feeds two subtotals that are now mandatory for all entities under IFRS 18:

1. Operating profit or loss = operating category items only
2. Profit or loss before financing and income taxes = operating + investing category items

Before IFRS 18, IAS 1 required no specific subtotals between revenue and profit before tax. Many entities presented a voluntary "operating profit" line, but its definition varied widely. IFRS 18 locks in a single, comparable definition.

This will change analyst models. A company that currently includes equity-method income from associates above its voluntary "operating profit" line will see that item move to investing under IFRS 18, and therefore out of operating profit. Analysts who benchmark on operating profit will be working with a different number. IR teams should be preparing to explain these reclassifications to the market before the first IFRS 18 financial statements land.

The subtotals also anchor the MPM reconciliation requirement. Any management-defined performance measure (adjusted EBITDA, adjusted operating profit, and similar non-GAAP metrics) that appears in public communications outside the financial statements must be reconciled to the most directly comparable IFRS subtotal in a single dedicated note. For most entities, that anchor will be operating profit or loss. For a deeper look at the implementation roadmap, see our IFRS 18 phased roadmap guide.

What Finance Teams Need to Do in 2026

The mandatory date is 1 January 2027. IFRS 18 requires retrospective application, which means comparative periods must be restated. For a 31 December year-end entity, the 2026 P&L must be restated under the new category structure when the 2027 financial statements are prepared. That data capture starts now.

Here is a practical sequencing for the remainder of 2026:

1. Map every existing P&L line item to the classification waterfall. Test investing first, then financing, then operating. Document the rationale for each judgment call, especially equity-method income, FX items, and pension costs.
2. Apply the main business activities test. Determine whether your entity (or any subsidiary) qualifies as having investing or financing as a main business activity. This is a binary determination that changes the classification of significant income streams.
3. Identify FX disaggregation requirements. Assess whether your systems can split FX gains and losses by the category of the underlying item. If not, scope the system change now.
4. Redesign the face of the income statement. The two mandatory subtotals must appear. Draft the new P&L structure and get it reviewed by your auditors before year-end.
5. Identify MPMs. Review all performance measures used in investor presentations, earnings releases, and management commentary. Any subtotal of income and expenses used in public communications that is not an IFRS-defined measure is an MPM requiring a reconciliation note.
6. Capture 2026 comparative data in the new category structure. This is the most urgent action item. Systems and chart-of-accounts changes needed to capture category-level data for 2026 must be operational before 31 December 2026.
7. Brief your IR team and auditors. Reclassifications will change headline subtotals. Analysts and investors will need context. Auditors will need to review the classification judgments.

For a full phased implementation checklist, see our IFRS 18 implementation guide.

FAQ

Is interest income always classified in the investing category under IFRS 18? For most non-financial entities, yes: interest income on debt instruments and bank deposits goes in investing. For entities whose main business activity involves investing in assets or providing financing to customers (banks, investment funds, real estate companies), interest income goes in operating instead.

Does IFRS 18 change how net profit is calculated? No. The IFRS Foundation confirms that IFRS 18 changes only the presentation and classification of income and expenses, not their recognition or measurement. Net profit, EPS, and total comprehensive income are unaffected. What changes is the structure of subtotals above the net profit line.

Where does equity-method income from associates go? In the investing category, unless the associate or JV is integral to the entity's main business activities, in which case it goes in operating. Critically, even if investing is a main business activity for the entity, equity-method income still goes in investing. This is an explicit rule in the standard with no exception.

How does IFRS 18 interact with IAS 7 for cash flow classification? The categories share names but have different definitions. Your IAS 7 accounting policy choices (for example, classifying interest paid as operating in the cash flow statement) do not determine your IFRS 18 P&L category. Run a separate classification exercise against IFRS 18's definitions.

Do we need to restate 2026 comparatives? Yes. IFRS 18 requires retrospective application. For a 31 December 2027 year-end, the 2026 comparative P&L must be restated to show the new category structure and mandatory subtotals. Systems to capture category-level data for 2026 must be in place before the end of 2026.

When does IFRS 18 apply and who does it affect? IFRS 18 is mandatory for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. It applies to all entities preparing financial statements under IFRS Accounting Standards, covering companies in more than 140 jurisdictions. It does not apply to entities using US GAAP.