Statements and analysis

IFRS 18 · Presenting the statement of profit or loss

Operating profit first, then investing, then financing, then tax.

Draft: not yet reviewed by a teacher

Why it exists

Companies used to define "operating profit" in their own ways, which made them hard to compare. IFRS 18 sets the same categories and subtotals for everyone, so a bank or an investor sees what the business earned from its main activity, what its investments earned and what its financing cost.

Key rules

The operating category holds everything that is not in another category: revenue, cost of sales, distribution and administrative expenses, depreciation, irrecoverable debts, gains and losses on disposals of PPE.
The investing category (for a typical trading company): income from investments, such as dividends and interest received, and the share of profit of associates.
The financing category: finance costs, such as interest on loans and loan notes, and the "dividends" on redeemable preference shares.
The subtotals in order: operating profit → profit before financing and income taxes → profit before income taxes (shown in the FA layout, not required by IFRS 18) → income tax expense → profit for the year.
A revaluation gain on PPE is not profit: it goes to other comprehensive income (OCI) and into total comprehensive income.
Dividends paid are not an expense: they are shown in the statement of changes in equity (SOCE).

Examples

Revenue 500,000; cost of sales 300,000; distribution costs 40,000; administrative expenses 60,000; dividends received 5,000; loan interest 8,000; income tax 20,000; a land revaluation gain of 30,000.

Operating profit: 500,000 − 300,000 − 40,000 − 60,000 = 100,000
Profit before financing and income taxes: 100,000 + 5,000 = 105,000
Profit before income taxes: 105,000 − 8,000 = 97,000
Profit for the year: 97,000 − 20,000 = 77,000
Total comprehensive income: 77,000 + 30,000 = 107,000

The subtotals, step by step

Where each item goes:

a loss on selling a van: operating;
dividends received on shares in another company: investing;
the share of an associate's profit: investing;
interest on loan notes: financing;
last year's tax under-provision: income taxes.

The categories

How it works

The statement runs from the main business down to what is left for owners and lenders. Operating profit is the result of the business. Add the income from investments to reach profit before financing and income taxes: what the business earned before paying its lenders. Finance costs are the price of borrowed money; income tax is the state's share.

The statement of financial position is linked to it through retained earnings: profit for the year less dividends increases equity, and a revaluation gain increases the revaluation surplus.

Traps

Taught in the course

Key rules

The operating category holds everything that is not in another category: revenue, cost of sales, distribution and administrative expenses, depreciation, irrecoverable debts, gains and losses on disposals of PPE.

The investing category (for a typical trading company): income from investments, such as dividends and interest received, and the share of profit of associates.

The financing category: finance costs, such as interest on loans and loan notes, and the "dividends" on redeemable preference shares.

The subtotals in order: operating profit → profit before financing and income taxes → profit before income taxes (shown in the FA layout, not required by IFRS 18) → income tax expense → profit for the year.

A revaluation gain on PPE is not profit: it goes to other comprehensive income (OCI) and into total comprehensive income.

Dividends paid are not an expense: they are shown in the statement of changes in equity (SOCE).