Accounting Updates: Income Statement Financing Category
According to IFRS 18, an entity shall classify income and expenses in the statement of profit or loss into one of these five categories: operating, investing, financing, income tax, and discontinued operations.
To designate the category, the entity must assess if it has a specific primary business activity in asset investment or customer financing. These activities have a different classification of income and expenses.
Considering a company that does not have a specific primary business activity in asset investment or customer financing, the income and expenses of the following should be classified under financing:
A) Liabilities arising from transactions solely involving obtaining financing, such as bank loans.
– B) Liabilities arising from transactions that do not solely involve obtaining finance, such as trade payables and lease liabilities.
In this category, we will classify interest expenses, fair value gains or losses, among others.
IFRS 18 effective from January 1, 2027 and it requires a reconciliation for each line item of the 2026 statement of profit or loss in accordance with IAS 1 and IFRS 18.
We recommend that accountants develop a work plan to carry out the modifications to the chart of accounts, processes, and systems.
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The Interest expense on a contract liability with a significant financing component is classified under Operating Activities.
A contract liability is a liability that arises from transactions that do not solely involve obtaining financing, as it not only involves obtaining financing but also relates to the sale of goods or provision of services.
Interest expenses of this type of liability are classified in the financing category.
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