Where does interest income go under IFRS 18?

For most entities, interest received on cash and deposits is classified in the investing category under IFRS 18. Interest paid on borrowings stays in financing. So the single line that most statements present today as "finance income and costs" separates into two entries in two different categories.

That is the short answer, and for an ordinary trading company it is the whole answer. The rest of this matters because of the exception, which is not an edge case: it reverses the result completely, and whether it applies to you is a judgement you have to make and record.

Why the finance line splits

IFRS 18 replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027 (IFRS Foundation). It requires income and expenses to be classified into three categories, operating, investing and financing, and it requires an operating profit subtotal that IAS 1 did not.

The investing category holds income and expenses from assets that generate a return individually and largely independently of the entity's other resources. Cash on deposit is the clearest example there is. It earns its return by sitting in a bank account, not by being combined with the entity's people, premises or inventory.

The financing category holds income and expenses on liabilities that arise from financing transactions. A bank loan is one, so the interest on it is financing.

Both statements are unremarkable on their own. Put together, they pull apart a line that has sat as a single net figure in most statements for years. That is why this is the question preparers ask first, and it is a good instinct: the finance section of your current statement is the section most worth reviewing line by line.

The exception, which is the actual question

IFRS 18 treats some entities differently. It asks whether an entity has, as a main business activity, either of two things:

1. investing in assets that generate a return individually and largely independently of the entity's other resources, or
2. providing financing to customers.

An entity with one of those specified main business activities classifies the income and expenses of that activity in operating instead. For a bank, or an investment property group, interest and dividends are the business. Putting them below operating profit would produce an operating profit subtotal that omitted the entity's actual operations.

Assessing this is a new requirement and it needs judgement (KPMG). It is also the gate. Nothing about interest or dividends can be settled before it is settled, which is why we wrote about how to determine your main business activity separately.

The trap is the word "main". Holding assets is not enough. A treasury function holding surplus cash on deposit is not an entity whose main business activity is investing in assets, and concluding otherwise because there are deposits on the balance sheet is the most common way to get this wrong.

What this does to a statement in practice

Take a conventional presentation with a finance section reading:

Line	Today
Interest income on cash deposits	Finance income and costs
Interest expense on borrowings	Finance income and costs
Interest expense on lease liabilities	Finance income and costs
Dividend income from equity investments	Other income
Share of profit of associates	Other income

Under IFRS 18, for an entity with no specified main business activity:

Line	IFRS 18
Interest income on cash deposits	Investing
Interest expense on borrowings	Financing
Interest expense on lease liabilities	Financing, and required rather than chosen
Dividend income from equity investments	Investing
Share of profit of associates	Investing

Two things are worth noticing. The first is that four of those five lines move, and the fifth is only stationary in the sense that "finance income and costs" no longer exists as a heading. The second is that none of them is a judgement call. Every one is determined by the standard once you know whether you have a specified main business activity.

What is determined, and what is not

It is worth being precise about this, because there is a temptation to present IFRS 18 as turning every line into a debate. It does not, and a controller can tell when a tool is overstating the difficulty.

Determined by the standard, not chosen:

• Interest expense on a lease liability is financing. IFRS 18 catches interest on liabilities that do not arise only from raising finance, and a lease liability is precisely that. Depreciation of the right-of-use asset stays in operating.
• Net interest on a net defined benefit liability or asset is financing, for the same reason. Service cost stays in operating, so a combined pension line has to be split.
• A gain on disposal of property, plant and equipment used in operations is operating. The classification follows the category in which the asset generated income and expenses.

Genuinely left to judgement:

• Whether you have a specified main business activity, which decides the first three rows of the table above.
• Whether a particular asset generates a return largely independently of your other resources. Cash pledged against a customer contract is arguable; a current account is not.
• How to allocate a composite line, most often net foreign exchange differences, to the items that gave rise to it.

The second list is where the work is. It is shorter than people expect, and that is the useful news: the effort is concentrated rather than spread across every line.

What to do this week

1. Print the finance and other income sections of your last statement. Those two sections hold almost everything that moves.
2. Settle the main business activity question first, and write down the answer. Every classification below depends on it.
3. Work down the list above and record a reason for each, not just a category.
4. Check the effect on the cash flow statement. The starting point becomes operating profit, and the classification options for interest and dividends paid are removed (KPMG), so a decision made for the income statement moves a figure in the cash flow statement too, and the two have to agree.

You can do step three against your own account names with our free chart of accounts mapper, which flags the judgement lines rather than pretending to decide them.

One limit worth stating

Nothing here settles a case where the asset earning the interest is genuinely entwined with operations. Cash held as working capital for a business with a long production cycle, or deposits pledged against a customer contract, are arguable, and the standard's test of whether a return is earned "largely independently" is where the argument happens. If that is your situation, the classification is a judgement, and this article is not a substitute for taking it to your auditor early rather than at year end.

If you want the answer for your own statement rather than an illustrative one, join the waitlist and we will read it and show you the reclassification, line by line, with the paragraph behind each answer.