Example IFRS 18 Statement of Profit or Loss, where the entity’s main business activity is providing financing to customers
IFRS 18 Presentation and Disclosure in Financial Statements is a new financial statement presentation standard that replaces IAS 1 Presentation of Financial Statements. It is effective for annual periods beginning on or after 1 January 2027 and will result in entities having to classify income and expenses in the statement of profit or loss in one of five categories, with special rules for the investing and financing category of entities with specified main business activities.
Our previous article illustrates what a Statement of Profit or Loss could look like for an entity that invests in assets as a main business activity. This month, we provide examples of Statements of Profit or Loss for an entity that provides financing to customers as a main business activity.
Why start your IFRS 18 implementation now?
Extensive work may be required to adapt your chart of accounts to accurately categories tag income and expenses into the five categories. In addition, comparatives must be restated when IFRS 18 is adopted, so entities must be prepared as early as 1 January 2026 for the new presentation requirements in the Statement of Profit or Loss.
Types of entities providing financing to customers
Examples of entities that might provide financing to customers as a main business activity include:
- Banks and other lending institutions
- Entities that provide financing to customers to enable those customers to buy the entity’s products
- Lessors that provide financing to customers in finance leases.
Another example of an entity that may be assessed as providing financing to customers is a wholesaler or retailer of goods that provides significant financing terms for the sale of its goods. For example, a company that sells heavy machinery may:
- Lease equipment to customers under a finance lease, or
- Legally transfer title to the equipment to the customer with a corresponding loan agreement to pay the selling entity over time through instalments of principal and interest.
Examples
For entities providing financing to customers as a main business activity, the example Statements of Profit or Loss below show how and why common income and expense items will be classified when IFRS 18 becomes effective.
The classification of income and expenses outlined below shows how these amounts will generally be classified applying the requirements of IFRS 18; however, this guidance should be taken as broad guidance only. The classification of particular income and expenses will depend on the specific facts and circumstances.
Example 1 – Banks and other lending institutions
Bank A provides home loans to customers, secured by mortgages over the respective properties. It also accepts deposits from customers.
Bank A is regulated by the Australian Prudential Regulation Authority (APRA). Bank A has loan facilities and customer deposits, which it uses to provide financing to customers as a main business activity. These are considered liabilities from a transaction that involves only the raising of finance (‘pure financing liability’). Bank A also has a separate loan facility to fund its working capital.
Bank A has two bank accounts:
- Account ABC is used for funds received from the financiers and deposit holders for providing financing to customers. Mortgage repayments are processed through this bank account
- Account DEF is used for other operating income and expenses.
One of Bank A’s subsidiaries also has an interest in Joint Venture Company XYZ, which was established as a stepping stone to enter the Asian markets, and is accounted for using the equity method.
|
Line item |
Classification |
Why |
|
Interest income on financial assets (mortgaged home loans) measured at amortised cost |
Operating category |
The entity provides loan financing to customers as a main business activity, which does not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(c), IFRS 18.B49(b) |
|
Interest income from surplus funds held in Bank Account ABC (financing to customers) |
Operating category |
The entity does not invest in financial assets as a main business activity, but does provide financing to customers as a main business activity. IFRS 18.56(a), IFRS 18.56(b) This bank account is used to provide financing to customers. IFRS 18.56(b)(i) |
|
Interest expense on loan facilities (financing to customers) |
Operating category |
The loans arise from transactions that involve only the raising of finance, and the interest expense arises from the subsequent measurement of the liability. The entity provides financing to customers as a main business activity. IFRS 18.59(a), IFRS 18.60(a), IFRS 18.65(a)(i) |
|
Net interest margin |
Additional subtotal |
|
|
Expected credit losses on loans receivable (IFRS 9) |
Operating category |
The entity provides loan financing to customers as a main business activity, which does not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(c), IFRS 18.B49(d) |
|
Operating profit |
Mandatory sub-total |
Sum of the operating category |
|
Interest income from surplus funds held in Bank Account DEF (other operating income and expenses) |
Investing category |
The entity does not invest in financial assets as a main business activity, but it does provide financing to customers as a main business activity. This bank account is not used to provide financing to customers, and Bank A’s accounting policy choice is to classify interest income in the investing category. IFRS 18.56(b)(ii) |
|
Income from equity accounted Joint Venture Company XYZ (Bank A has not elected to apply the venture capital, mutual fund, unit trust option to measure these at fair value through profit or loss under IAS 28.18) |
Investing category |
Income from investments accounted for using the equity method is always shown in the investing category. IFRS 18.55(a) |
|
Profit before financing and income taxes |
Mandatory subtotal |
Sum of the operating and investing categories |
|
Interest expense on working capital loan facility |
Financing category |
As this loan facility is not used to provide financing to customers, the classification of interest expense on the loan facility depends on Bank A’s accounting policy choice regarding interest income arising from Bank Account DEF. IFRS 18.56(b)(ii), IFRS 18.65(a)(ii) Note: Because Bank A chose to classify interest income arising from Bank Account DEF in the investing category – see above – the entity must adopt a consistent accounting policy choice with respect to interest expense arising from liabilities not used to provide finance to customers and classify interest expense in the financing category. |
|
Profit before tax |
Additional subtotal |
|
|
Income tax expense (current and deferred) |
Income taxes category |
Income and expenses within the scope of IAS 12 |
|
Profit |
Mandatory total |
Sum of all categories |
Example 2 – Entities that provide financing to customers to enable those customers to buy the entity’s products
Entity B imports expensive earth-moving equipment for sale to mining entities.
Entity B also provides financing, whereby customers can repay the purchase price of the equipment, plus interest, over a two-year period (the useful life of the equipment is five years). These financing arrangements are not considered leases under IFRS 16 Leases.
Approximately 75 per cent of Entity B’s sales are subject to these financing arrangements.
In the current financial year:
- Gross profit from equipment sales is $2,000,000
- Net interest margin from financing arrangements is $5,000,000.
In this example, Entity B has determined it has two main business activities (equipment sales and providing financing to customers), but it only has one specified main business activity, which is providing financing to customers.
Entity B has two loan facilities: one to finance equipment loans and another for working capital needs.
Entity B operates only one business bank account, which was in surplus for the entire financial year. It is unable to distinguish how much of the interest income/expense on the cash balances relates to providing financing to customers and how much relates to other transactions.
|
Line item |
Classification |
Why |
|
Interest income on financial assets (equipment loans) measured at amortised cost (IFRS 9) |
Operating category |
The entity provides loan financing to customers as a main business activity, which does not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(c), IFRS 18.B49(b) |
|
Interest expense relating to equipment loan facilities (IFRS 9) |
Operating category |
The loans arise from transactions that involve only the raising of finance (pure financing liabilities), and the interest expense arises from the subsequent measurement of the liability. The loan facility relates only to providing financing to customers as a main business activity. IFRS 18.59(a), IFRS 18.60(a), IFRS 18.65(a)(i) |
|
Interest income on cash balances |
Operating category |
The entity operates only one business bank account and is unable to distinguish how much of the cash balance relates to providing financing to customers and how much relates to other transactions. The entity is, therefore, required to classify all income from cash balances in the operating category. IFRS 18.57 |
|
Interest expense relating to working capital loan facilities (IFRS 9) |
Operating category |
The loans arise from transactions that involve only the raising of finance (pure financing liabilities), and the interest expense arises from the subsequent measurement of the liability. IFRS 18.59(a), IFRS 18.60(a) The entity provides financing to customers as a main business activity, but the liability does not relate to providing financing to customers. The entity classifies the interest expense in the operating category because it has classified interest income in the operating category – see above. IFRS 18.65(a)(ii) |
|
Net interest margin |
Additional subtotal |
|
|
Revenue from contracts with customers (IFRS 15) |
Operating category |
Income from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48, IFRS 18.B49(a) and (b) |
|
Finance income on contract assets (IFRS 15) |
Operating category |
|
|
Inventories expensed, including cost of sales and write-downs to net realisable value (IAS 2) |
Operating category |
Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(b), IFRS 18.B49(e) |
|
Gross margin on product sales |
Additional subtotal |
|
|
Depreciation of property, plant and equipment (PPE) (IAS 16) |
Operating category |
Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(a), IFRS 18.B49(c) |
|
Impairment of PPE and reversals of impairment |
Operating category |
Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(a), IFRS 18.B49(d) |
|
Loss on sale of PPE (IAS 16) |
Operating category |
Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(a), IFRS 18.B49(e) |
|
Expected credit losses on financing loans to customers |
Operating category |
Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(c), IFRS 18.B49(d) |
|
Operating category |
Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(b), IFRS 18.B49(d) |
|
|
Operating profit |
Mandatory sub-total |
Sum of the operating category |
|
Dividends received on shares |
Investing category |
Shares are assets that generate a return individually and largely independently of the entity’s other resources. The entity does not invest in shares as a main business activity. IFRS 18.53(c), IFRS 18.54(a), IFRS 18.B46(a) |
|
Profit before financing and income taxes |
Mandatory subtotal |
Sum of the operating and investing categories |
|
Note: Entity B has no financing expenses |
|
|
|
Profit before income taxes |
Additional subtotal |
|
|
Income tax expense (current and deferred) |
Income taxes category |
Income and expenses within the scope of IAS 12 |
|
Profit |
Mandatory total |
Sum of all categories |
Example 3 - Lessors providing financing to customers in finance leases
Entity C is a leasing company and provides financing to customers in the form of finance leases. A finance lease is a type of lease that transfers substantially all the risks and rewards associated with ownership of an underlying asset.
Entity C has no other revenue streams. It therefore has a specified main business activity of providing financing to customers.
Entity C has one major loan facility that enables it to provide financing to customers and one bank account, which is usually in surplus. It is unable to distinguish how much of the cash balances relate to net investments in leases (providing financing to customers) and how much relates to other transactions.
|
Line item |
Classification |
Why |
|
Finance income on finance leases (IFRS 16) |
Operating category |
The entity is a leasing company and invests in net investment in leases as a main business activity. IFRS 18.55(b), IFRS 18.58 |
|
Interest expense relating to loan facility (IFRS 9) |
Operating category |
The loans arise from transactions that involve only the raising of finance, and the interest expense arises from the subsequent measurement of the liability. The liability also relates to providing financing to customers as a main business activity. IFRS 18.59, IFRS 18.60(a), IFRS 18.65(a)(i) |
|
Interest income on cash balances |
Operating category |
The entity operates only one business bank account and is unable to distinguish how much of the cash balances relate to net investment in leases and how much relates to other transactions. The entity is, therefore, required to classify all income from cash balances in the operating category. |
|
Net interest margin |
Additional subtotal |
|
|
Expected credit losses on net investment in leases (lease receivables) (IFRS 9) |
Operating category |
Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. IFRS 18.B48(c), IFRS 18.B49(d) |
|
Operating profit |
Mandatory sub-total |
Sum of the operating category |
|
Note: Entity C has no investing income or expenses |
|
|
|
Profit before financing and income taxes |
Mandatory subtotal |
Sum of the operating and investing categories |
|
Note: Entity C has no financing expenses |
|
|
|
Profit before income taxes |
Additional subtotal |
|
|
Income tax expense (current and deferred) |
Income taxes category |
Income and expenses within the scope of IAS 12 |
|
Profit |
Mandatory total |
Sum of all categories |
More information
To find out more and start preparing for IFRS 18, check out our new IFRS 18 web page, publication, and webinar.
Need help
Our recent IFRS 18 articles demonstrate the complexity of applying IFRS 18 in practice. Your chart of accounts will need to change in many ways to accurately categorise income and expenses into the five categories, and transition dates start from 1 January 2026. It’s crucial that entities start preparing now. Contact our team for help with understanding the latest requirements in IFRS 18.