Key points
- AASB 18 introduces new presentation and disclosure requirements for for-profit entities from 1 January 2027.
- Entities investing in assets must classify certain income and expenses in the operating category.
- Classification of income and expenses depends on the entity’s main business activity
AASB 18 Presentation and Disclosure in Financial Statements first applies to for-profit entities that prepare Tier 1 general purpose financial statements, other than superannuation entities, for annual reporting periods beginning on or after 1 January 2027.
The key new requirements in this standard are outlined in our Financial reporting guide: AASB 18 Presentation and disclosure in financial statements dated June 2024. This guide also illustrates the new statement of profit or loss presentation for a general corporate entity (which did not have a main business activity of either investing in assets or providing financing to customers).
However, if one of the entity’s main business activities is investing in particular types of assets – profit or loss items may be classified differently in the new statement of profit or loss, when compared to a general corporate entity. These entities will be required to classify some of their income and expenses in the operating category that would otherwise have been included in the investing category for a general corporate entity.
These types of entities could include registered managed investment schemes, listed investment companies, ‘investment entities’ (as defined in AASB 10 Consolidated Financial Statements) and property investment companies.
Assessing main business activity
The assessment as to whether an entity has a main business activity of investing in assets is a matter of fact, which in some cases will be straightforward but in other cases may involve the entity needing to use judgement to make its assessment based on evidence.
Evidence that an entity may use to help make this assessment includes:
- Whether the entity uses a subtotal as an indicator of operating performance (used internally or externally), such as gross profit or similar; or
- Information about segments, if the entity applies AASB 8 Operating Segments.
The assessment of whether an entity has a specified main business activity (of investing in assets) is made at the reporting entity level. Therefore, assessments may differ when assessing an individual subsidiary within a group versus the consolidated financial statements. This could result in significant consolidation adjustments when a subsidiary is consolidated with other entities within the group.
Summary of classification requirements
A summary of the requirements are as follows for an entity that has a specified main business activity of investing in assets:
- Interest income from cash and cash equivalents will always be classified within the operating category.
- The classification of investments in associates, joint ventures and unconsolidated subsidiaries will depend on whether these investments are accounted for using the equity method. If they are accounted for using the equity method, the income/expense will be classified in the investing category. If not, AND investing in the asset is a main business activity the income/expense will be classified in the operating category (see * below)
- For other assets held by the entity that generate a return individually and largely independently of the entity’s other resources (for example debt or equity investments, or investment properties or rent receivables for these properties) – this income/expenses will be categorised in the operating category IF investment in these assets is a main business activity.
- For income/expenses from other assets not in items 1-3 above (like trade receivables, inventories, property, plant and equipment, etc) these will be included within the operating category.
*AASB 18 includes transitional requirements that allow eligible entities (for example, venture capital organisations, mutual funds and some insurers) to change their election for measuring investments in associates and joint ventures, from the equity method to fair value through profit or loss, when they first apply the new standard. If an entity makes this change, it must apply the change retrospectively under AASB 108 Basis of Preparation of Financial Statements (previously AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors). Therefore, if this transitional requirement is adopted, it will allow those entities that invest in assets as a main business activity, to classify the fair value movements relating to investments in associates and joint ventures in the operating category.
Comparison table
The table below shows how the classification of income and expenses might change depending on whether an entity has specified main business activities. It compares the situation where an entity may have no specified main business activities (the retailer), with a retailer that has a specified main business activity of providing finance to customers, with three different types of entities that have a specified main business activity of investing in assets.
| Retailer | Retailer | Investment property entity | Investment entity | Investment entity | |
| Main business activities | Importer and sale of goods | Importer and sale of goods and providing finance to customers | Investing in non-financial assets | Investing in financial assets
|
Investing in financial assets which include subsidiaries, associates/joint ventures |
| Sales revenue/rental income | Operating | Operating | Operating | N/A | N/A |
| Cost of goods sold | Operating | Operating | N/A | N/A | N/A |
| Interest income on cash and cash equivalents | Investing | Operating/ Investing [1] | Investing | Operating | Operating |
| Interest/ dividends on investments |
Investing | Investing/operating [2] | Investing | Operating | Operating |
| Fair value gains/losses on debt/equity instruments | Investing | Investing | Investing | Operating | Operating |
| Gains/losses on investment property | Investing | Investing | Operating | Investing | Investing |
| Share of equity-accounted investees | Investing | Investing | Investing | Investing | N/A[3] |
| Gains/losses on subsidiaries/ associates/ joint ventures at fair value | Investing | Investing | Investing | Investing/ operating[4] | Operating |
| Interest expense on borrowings | Financing | Financing/operating [5] | Financing | Financing | Financing |
| Interest expense on leases | Financing | Financing | Financing | Financing | Financing |
| Employee expenses/ management fees | Operating | Operating | Operating | Operating | Operating |
[1] Entities that provide financing to customers (but do not invest in financial assets) as a main business activity can choose to classify income and expenses from cash equivalents that do not relate to providing financing to customers in the investing category rather than the operating category.
[2] Where interest relates to the provision of financing to customers which has been identified as a main business activity, this should be classified in the operating category, otherwise the investing category is appropriate.
[3] This is N/A since gains/losses on investments in subsidiaries/associates/joint ventures are accounted for at fair value through profit or loss and not equity accounted.
[4] Investment entities may invest not only in financial assets but also in associates, joint ventures or unconsolidated subsidiaries. If they invest in these assets as a main business activity, then the income and expenses from those assets are classified in the operating category, otherwise it will be part of the investing category.
[5] Entities that provide financing to customers as a main business activity can choose to classify income and expenses from borrowings that do not relate to providing financing to customers in the financing category instead of in the operating category.
