IFRS 18 In Practice: How To Reclassify Your Income Statement?
In our earlier article, we introduced IFRS 18 — the new standard replacing IAS 1 that reshapes how every company presents its statement of profit or loss from 1 January 2027. This piece goes one level deeper. If you’re a finance manager or CFO who now has to actually do the classification exercise, this is written for you.
We’ll walk through the classification logic step by step, then apply it to two very different Qatar-based businesses so you can see how the same standard produces different answers depending on what a company actually does.
The Classification Test
Every income and expense item an entity recognizes has to pass through a sequence of questions before it lands in a category:
- Is it specifically required elsewhere? Some items are pinned to a category regardless of the entity’s business—for example, insurance finance income and expenses under IFRS 17 always sit in Operating.
- Does it relate to a main business activity? If investing in assets or providing financing to customers is genuinely a core activity of the entity—not just something it happens to do with spare cash—related income may sit in operating even though it looks investment-like.
- Does it arise from an asset that generates a return largely on its own? Associates, joint ventures, investment property, and equity or debt securities held outside the core business typically land in investing.
- Does it relate to financing the entity itself? Interest on borrowings and on lease liabilities is classified as financing.
- None of the above? Default to Operating. This is deliberately the catch-all category.
The order matters. You don’t get to pick whichever category looks best — you work through the test in sequence for every material line item.
Worked Example 1: A Trading & Distribution Company
Consider a Qatar-based company trading vehicles and industrial equipment. Its main business activity is buying and selling—not investing and not lending. Here’s how a sample of its income statement lines reclassifies:
| Income / Expense Item | Old Placement (IAS 1) | New Category (IFRS 18) | Why? |
| Vehicle & spare-parts sales | Revenue | Operating | Core trading activity |
| Bank interest on operating cash | Finance income | Investing | Surplus cash sitting in a bank account is not the core business |
| Interest expense — working-capital loan | Finance cost | Financing | Raises finance for the entity itself |
| FX gain/(loss) on trade payables | Other income/(expense) | Operating | Arises from an operating balance |
| Share of profit — after-sales joint venture | Share of associate profit (separate line) | Investing | Return from an equity-method investment |
| Dealership incentive income | Other income | Operating | Directly tied to the core trading activity |
Notice that the bank interest—something many finance teams instinctively bundle with “other income” near the top of the statement—moves down into Investing, below Operating Profit. For a trading company, this is one of the most common adjustments we’re seeing in client impact assessments.
Worked Example 2: A Holding / Investment Company
Now consider a very different entity: a family holding company whose entire purpose is to hold stakes in operating subsidiaries, manage a securities portfolio, and occasionally lend to portfolio companies. For this entity, investing is the main business activity — and that changes the answer to Step 2 of the classification test for almost every line:
| Income / Expense Item | Trading Company (for comparison) | This Holding Company | Driver |
| Dividend income from subsidiaries | Investing | Operating | Investing is the main business activity |
| Fair value gains on securities | Investing | Operating | Portfolio management is a core activity |
| Interest on loans to portfolio companies | Investing | Operating | Financing customers is a core activity |
| Interest on the entity’s own bank borrowings | Financing | Financing | Always Financing—funds the entity itself, regardless of business model |
| Head-office payroll & admin costs | Operating | Operating | Unaffected by the business-activity test |
The lesson here: the same line item can land in a different category for two different companies, and the deciding factor is not the nature of the transaction in isolation—it’s whether investing or financing activity is core to that specific entity. One test, applied consistently, produces different results depending on the business model. This is exactly the kind of judgement that needs to be documented and agreed with your auditors early, not discovered at year-end.
Reconciling A Management-Defined Performance Measure
Say the holding company above reports “Adjusted EBITDA” in its investor communications. Under IFRS 18, that figure becomes an MPM, and it needs a formal reconciliation note:
| QAR ‘000 | Amount |
| Operating Profit (IFRS 18-defined subtotal) | 18,420 |
| Add back: Depreciation & amortisation | 3,150 |
| Add back: One-off restructuring costs | 1,080 |
| Add back: Impairment of trade receivables (non-recurring) | 640 |
| Adjusted EBITDA (Management-Defined Performance Measure) | 23,290 |
That table alone isn’t sufficient. The note accompanying it must also explain:
- Why management believes Adjusted EBITDA is a useful measure of performance?
- How each reconciling item was calculated?
- The income tax effect of each adjustment
- Confirmation the measure isn’t misleading and is applied consistently period to period
- Whether the definition changed from the prior period, and why?
Because this reconciliation now sits inside the audited financial statements, your auditors will test the inputs the same way they test any other disclosure — which means the underlying workpapers need to be as robust as those supporting your revenue or receivables balances.
Practical Tips From The Field
A few observations from the impact assessments we’ve been running with clients:
- Start with your top 20 income statement lines by value, not every account code. Classification decisions cluster—once you’ve decided how to treat “interest income on surplus cash,” the same logic usually applies across similar accounts.
- Document the main-business-activity conclusion in writing, even if it seems obvious. Auditors and, eventually, regulators will expect to see the reasoning, not just the result.
- Loop in whoever owns your investor and lender communications early. If a ratio used in a loan covenant becomes an MPM, your lender relationship team needs to know before the auditors flag it.
- Don’t wait for the chart-of-accounts update to be “perfect.” A manual mapping spreadsheet for your FY2026 shadow statement is a reasonable interim solution while systems catch up.
Where To Start?
If you haven’t yet performed a line-by-line classification exercise, FY2026 is the year to do it—the figures you close this year become the comparative that gets restated and audited under IFRS 18 in FY2027. The earlier you have a shadow statement in hand, the more time your team has to resolve judgement calls before they become audit findings.
MBG Corporate Services helps Qatar businesses run structured IFRS 18 impact assessments, build shadow financial statements, and prepare MPM reconciliation frameworks ahead of the 2027 effective date. Reach out to our Audit, ICV & Accounting/CFO Advisory team at Al Jazeera Tower, West Bay, Doha to schedule a working session with your finance team
