IFRS 18 gives the income statement a defined structure for the first time. Income and expenses are classified into operating, investing and financing categories, with required subtotals. Operating is the largest of the three, and it is defined by exclusion — it is what remains once investing and financing have taken what belongs to them.
Operating is the residual category
This is the point that changes how you should think about it. IFRS 18 does not describe what operating income and expenses are. It defines investing and financing, then says everything else is operating.
The practical effect is that you cannot classify something as operating by arguing it relates to your main business. You classify by asking whether it meets the definition of investing or financing. If it does not, it is operating — whether or not it feels operational.
That reverses how most preparers instinctively approach the question. The work is not in justifying what goes into operating; it is in correctly identifying what has to come out.
What ends up in operating
- Revenue from contracts with customers
- Cost of sales, and inventory write-downs — see inventory valuation
- Employee costs, including the end of service gratuity service cost
- Depreciation and amortisation of assets used in the business — see the fixed asset register
- Impairment losses on operating assets, including trade receivables
- Foreign exchange differences on operating items
- Gains and losses on disposal of property, plant and equipment used in operations
- Litigation and restructuring costs
Two of those deserve comment. Gains on disposal of operating assets land in operating, not investing — the asset was used in the business, so its disposal result belongs there. And foreign exchange differences follow the item they relate to, which means a single year’s FX movements can be split across all three categories rather than sitting on one line.
Operating profit becomes a defined number
Under IAS 1, operating profit meant whatever each preparer decided. Two similar businesses could present genuinely non-comparable figures, and analysts spent real effort normalising them.
IFRS 18 requires an operating profit subtotal computed on a defined basis. Comparability improves. But for individual companies it means a number people already rely on may move, without anything changing in the business.
Check what depends on it
- Bank covenants. If a facility tests an operating profit or EBITDA figure defined by reference to your financial statements, confirm whether the new subtotal changes it. Talk to the bank before the number moves, not after.
- Management bonuses tied to operating profit.
- Earn-outs and shareholder agreements referencing a subtotal in the accounts.
- Valuation multiples applied by investors or in a sale process.
Main business activities change the answer
For some entities, income that would normally be investing or financing is operating — because investing or financing is the main business activity. A bank’s interest income is operating. A property investment company’s rental income and fair value movements are operating.
In the UAE this matters for real estate holding companies, investment vehicles and financing entities within groups. The assessment is about your main business activities, so the same transaction can be operating in one entity and investing in another within the same group — which has to be resolved consistently on consolidation.
The UAE angle nobody is writing about
UAE corporate tax starts from accounting profit. Restructuring the income statement therefore changes the starting point of the tax computation, even where the underlying economics are identical.
Three consequences worth planning for:
- Your tax computation working papers reconcile from a figure that is about to be defined differently. The reconciliation needs rebuilding, not just re-running.
- Adjustments for disallowable items must be mapped to the new categories, so the audit trail from accounting profit to taxable income stays clear.
- Free zone entities splitting qualifying and non-qualifying income need that split to survive the recategorisation.
None of this changes the tax you owe. It changes the paperwork that proves it — and the year to fix that is 2026, because comparatives mean the restated figures are already being generated.
Frequently asked questions
What is the operating category under IFRS 18?
The residual category. Income and expenses that do not meet the definition of investing or financing are classified as operating.
Is operating profit now a defined subtotal?
Yes. IFRS 18 requires it on a defined basis, replacing the wide discretion preparers had under IAS 1.
Where do gains on selling equipment go?
In operating, where the asset was used in the business. The disposal result follows the asset’s use.
Where do foreign exchange differences go?
They follow the item they relate to, so FX can appear in operating, investing or financing depending on the underlying transaction.
Can interest income be operating?
Yes, where investing or financing is a main business activity — banks and certain investment entities being the clear cases.
Will my operating profit figure change?
It may, without the business changing. Check anything that references it — covenants, bonuses, earn-outs and valuation multiples.
Does this change my UAE corporate tax?
Not the amount owed, but it changes the starting point of the computation and the working papers that reconcile to taxable income.