Is operating profit a residual under IFRS 18?
Yes. Operating is the only category defined by what is left over, and that has real consequences for what ends up in your operating profit subtotal.
Yes. Under IFRS 18, operating is the only one of the three categories defined residually. Income and expenses are classified as investing or financing by meeting a description, and everything not caught by either is operating by default.
If you have arrived here because something odd is sitting in your operating profit subtotal and you are wondering whether you have made a mistake, the likeliest answer is that you have not. The standard put it there.
How the definitions actually work
The investing category takes income and expenses from assets that generate a return individually and largely independently of the entity's other resources. The financing category takes income and expenses on liabilities arising from financing transactions, and on cash and cash equivalents. Operating takes what remains.
IFRS 18 then requires an operating profit subtotal, which IAS 1 never did (IFRS Foundation). So the standard has created a required, prominent, comparable subtotal and defined its contents as a remainder.
That is the criticism, and it has been made in public by people who work with this for a living: defining operating profit as a residual leaves a wide opening for income and expenses with no relationship to operations (IFRS Consulting). It is a fair point, and pretending otherwise does nobody preparing a set of accounts any good.
What lands in operating because nothing else claimed it
These are the ones that surprise people:
Government grant income. Not a return on an asset held independently, not income on a financing liability. Operating.
Commitment fees on an undrawn facility. Arguably a cost of finance in every ordinary sense. Whether it meets the financing description depends on the arrangement, and where it does not, it is operating.
Costs of running investment property, for an entity whose main business activity is not investing in assets. The rental income may be investing while some associated costs are not.
Restructuring and redundancy costs. IFRS 18 has no category for exceptional or one-off items, so lines presented that way today have to go somewhere, and for most entities that is operating.
Foreign exchange differences, which follow the item they arose on. A single net figure in your accounts today may need splitting across categories.
None of that is an error. It is the residual definition working as drafted.
Why the Board did it this way
The alternative is worse in a specific way. A positive definition of operating would have to enumerate what operations are, across every industry that reports under IFRS Accounting Standards. Any list would be wrong for somebody, and anything not on the list would have nowhere to go at all.
Making operating the residual guarantees completeness: every item of income and expense has exactly one home, and no item can fall between the categories. That is a real design benefit and it is the reason the criticism, while fair, is not obviously right.
The trade is comparability of composition for comparability of coverage. Two entities' operating profit subtotals both include everything not investing or financing, which is not quite the same as both including the same kinds of thing.
What to do about it
The residual definition changes how you should review your own statement. Rather than asking "is this operating?", which the standard does not answer directly, work the other way:
- Identify everything that meets the investing description. Returns on assets earning independently of your operations.
- Identify everything that meets the financing description. Income and expenses on liabilities from financing transactions.
- Everything else is operating. Then read that list and ask whether the resulting subtotal is one you would be content to explain.
Step three is the one that matters and it is not a compliance step. If something lands in operating that you would not describe as operating in a results presentation, you have found either a disaggregation question or a management performance measure, and both have consequences.
Two things follow. Where a material item sits in operating and is dissimilar to the rest, IFRS 18's aggregation requirements may mean it should be presented separately rather than buried. And where you intend to publish an adjusted subtotal that strips it out, that adjusted measure is likely to be a management performance measure with a required reconciliation.
Our free chart of accounts mapper runs steps one and two against your own account names and shows you what falls through to operating, which is the list worth reading. It marks what the standard leaves to management judgement rather than deciding it.
The related question you may actually be asking
People search this question for two different reasons. One is the definitional one answered above. The other is "is our operating profit going to look different, and will we have to explain why", and that is a question about the categories rather than about the residual. If that is nearer your concern, where interest income goes and how to determine your main business activity are the two that decide most of it.
One limit worth stating
This does not tell you whether a specific item in your operating category ought to be there. That depends on whether it meets the investing or financing descriptions on your facts, and for the awkward cases, commitment fees and grant-funded costs among them, reasonable preparers reach different answers. Take those to your auditor with your reasoning written down rather than waiting to be asked.
If you want to see what falls into each category on your own statement rather than an illustrative one, join the waitlist.