NZ IFRS 18 application area: Statement of Profit or Loss where the entity’s specified main business activity is asset investment

NZ IFRS 18 Presentation and Disclosure in Financial Statements is a new financial statements presentation standard that replaces NZ IAS 1 Presentation of Financial Statements.

Under NZ IFRS 18, all entities will have to change the way they classify expenses in the statement of profit or loss, allocating them to one of five categories: investing, financing, income taxes, discontinued operations and operating (click here for our initial March 2025 article for further information).

In our previous articles in our NZ IFRS 18 series we have looked at application areas related to the concept of specified main business activities (SMBA) that NZ IFRS 18 introduces, including:

What is meant by SMBA, and how entities will need to approach making this first, critical determination in applying NZ IFRS 18 (click here).
How the new investing category in profit or loss of an entity with a SMBA differs from entities with that have no SMBA (click here).
How the new financing category in profit or loss of an entity with a SMBA of providing financing to customers differs from other entities (click here).
How foreign exchange gains or losses will need to be disaggregated between the three new categories to be presented in an entity’s Statement of Profit or Loss (i.e., operating, investing, financing) (click here).
Example of how the Statement of Profit or Loss could look like for a typical retail, wholesale, manufacturer, or service business with no SMBA (click here).

In this month’s article, we illustrate what a Statement of Profit or Loss could look like an entity whose SMBA is to invest in assets, including:

Example 1: Entity that invests in investment properties as a SMBA
Example 2: Entity that invests in shares (equity instruments) as a SMBA.
Example 3: Entity that provides mortgage funding to customers as a SMBA.

Types of entities investing in assets

Examples of entities that might invest in assets as a main business activity include:
- Investment entities (as defined by NZ IFRS 10 Consolidated Financial Statements).
- Investment property companies.
- Insurers.
This may involve investing in a wide variety of assets, including shares, debt instruments, investment property, etc.

Examples

For entities investing in assets as a SMBA, the example Statements of Profit or Loss below illustrates HOW and WHY common income and expense items will be classified when NZ IFRS 18 becomes effective.

The classification of income and expenses set out below illustrates how these amounts will generally be classified applying the requirements of NZ IFRS 18; however, this guidance should be taken as broad guidance only.

The classification of particular income and expenses will depend on facts and circumstances.

Example 1: Entity that invests in investment properties as a SMBA

Relevant facts:

Entity A holds investment properties as a SMBA.
It does not have any other SMBA (i.e., including providing financing to customers).
It rents out the properties under operating leases (NZ IFRS 16 Leases).
Originally, Entity A entered into a loan to finance part of the purchase price of the investment properties – the loan here is considered to be a liability from a transaction that involves only the raising of finance (‘pure financing liability’).
There are no discontinued operations (NZ IFRS 5).

Line item	Classification	Why
Rental income from investment property (NZ IFRS 16)	Operating category	The entity invests in investment property as a SMBA. Investment properties are other assets that generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.53(c), NZ IFRS 18.54(a), NZ IFRS 18.58
Fair value gains and losses on investment property that is measured using the fair value model (NZ IAS 40)	Operating category	The entity invests in investment property as a SMBA. Investment properties are other assets that generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.53(c), NZ IFRS 18.54(a), NZ IFRS 18.58
Direct operating expenses relating to investment properties (e.g. repairs and maintenance, cleaning, security, valuations costs, etc.)	Operating category	The entity invests in investment property as a SMBA. Investment properties are other assets that generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.53(c), NZ IFRS 18.54(a), NZ IFRS 18.58
Depreciation of investment property (cost model) (NZ IAS 40)	Operating category	The entity invests in investment property as a SMBA. Investment properties are other assets that generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.53(c), NZ IFRS 18.54(b), NZ IFRS 18.58
Impairment (reversals) of investment property (cost model) (NZ IAS 36)	Operating category	The entity invests in investment property as a SMBA. Investment properties are other assets that generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.53(c), NZ IFRS 18.54(b), NZ IFRS 18.58
Gain (loss) on disposal of investment property (NZ IAS 40)	Operating category	The entity invests in investment property as a SMBA. Investment properties are other assets that generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.53(c), NZ IFRS 18.54(c), NZ IFRS 18.58
Depreciation of property, plant and equipment (NZ IAS 16)	Operating category	Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.B48(a)
Expected credit losses on trade receivables (NZ IFRS 9)	Operating category	Expenses from assets that do not generate a return individually and largely independently of the entity’s other resources. NZ IFRS 18.B48
Operating profit (Loss)	Mandatory sub-total	Sum of the operating category
Interest income (Cash and cash equivalents) (NZ IFRS 9)	Investing category	The entity does not invest in financial assets as a main business activity. NZ IFRS 18.56
Profit (Loss) before financing and income taxes	Mandatory subtotal	Sum of the operating and investing categories
Interest expense (Loan facility) (NZ IFRS 9)	Financing category	Interest expense relating to a loan transaction that involves only the raising of finance. NZ IFRS 18.B52(a)
Profit (Loss) before income taxes	Additional subtotal	Sum of the operating, investing, and financing categories
Income tax expense (current and deferred) (NZ IAS 12)	Income taxes category	Income and expenses within the scope of NZ IAS 12
Profit (Loss)	Mandatory total	Sum of all categories

Example 2: Entity that invests in shares (equity instruments) as a SMBA

Relevant facts:

Entity B is a managed investment scheme.
It holds a portfolio of shares as a SMBA.
It does not have any other SMBA (i.e., including providing financing to customers). The shares in other entities it hold comprise investments in:
- Entities it ‘controls’ (i.e., subsidiaries per NZ IFRS 10)
- Entities it has ‘joint control’ over (i.e., joint arrangements classified as joint ventures per NZ IFRS 11)
- Entities it has ‘significant influence over (i.e., associates per NZ IAS 28)
- Entities it has a ‘passive interest’ in (i.e., none of the above, NZ IFRS 9)
With respect to some (but not all) of the above ‘passive interests’, Entity B has irrevocably designated per NZ IFRS 9 that these are to be measured at fair value through other comprehensive income (FVTOCI), rather than fair value through profit or loss (FVTPL).
Entity B is partially funded by both:
- Unitholders’ equity, and also
- A loan facility to take advantage of new investment opportunities - the loan here is considered to be a liability from a transaction that involves only the raising of finance (‘pure financing liability’).
There are no discontinued operations (NZ IFRS 5).

Line item	Classification	Why
Dividends and distributions: ‘Passive interests’ (NZ IFRS 9)	Operating category	The entity invests in these assets as a SMBA. ‘Passive’ equity investments are other assets that generate a return individually and largely independently of the entity’s other resources. IFRS 18.53(c), IFRS 18.54(b), IFRS 18.58
Fair value gains and losses: ‘Passive interests’ at FVTPL only (NZ IFRS 9) Note: ‘Passive interests’ at FVTOCI have their fair value gains and losses going through OCI – i.e. “below” the five profit and loss categories)	Operating category	The entity invests in these assets as a SMBA. ‘Passive’ equity investments are other assets that generate a return individually and largely independently of the entity’s other resources. IFRS 18.53(c), IFRS 18.54(b), IFRS 18.58
Fair value gains and losses: ‘Associates’ and ‘Joint ventures’ If, and only if, Entity B has elected to apply the FVTPL treatment per NZ IAS 28 para 18 (i.e., the venture capital, mutual fund, unit trust option) (NZ IAS 28)	Operating category	The entity invests in these assets as a SMBA, and has elected not to account for them using the equity method. IFRS 18.54(a), IFRS 18.55(b), IFRS 18.B43(b)
Fair value gains and losses: ‘Subsidiaries’ If, and only if, Entity B meets the definition of an Investment Entity per NZ IFRS 10 para 27. (i.e., FVTPL treatment mandated rather than consolidation)	Operating category	The entity invests in these assets as a main business activity. IFRS 18.54(a), IFRS 18.55(b), IFRS 18.B44(b)
Interest income (Cash and cash equivalents) (NZ IFRS 9)	Operating category	The entity invests in financial assets as a main business activity. Therefore, NZ IFRS 18 requires that interest income on Cash and cash equivalents in operating. IFRS 18.56(a)
Operating profit (Loss)	Mandatory sub-total	Sum of the operating category
Share of profit from equity accounted ‘joint ventures’ and associates’ If, and only if, Entity B has elected NOT to apply the FVTPL treatment per NZ IAS 28 para 18 i.e., the venture capital, mutual fund, unit trust option) (NZ IAS 28)	Investing category	Despite investing in associates as a main business activity, income from investments accounted for using the equity method is always shown in the investing category. IFRS 18.54(a), IFRS 18.55(a), IFRS 18.B43(a)
Profit (Loss) before financing and income taxes	Mandatory subtotal	Sum of the operating and investing categories
Interest expense (Loan facility) (NZ IFRS 9)	Financing category	Interest expense relating to a loan transaction that involves only the raising of finance. IFRS 18.B52(a)
Profit (Loss) before income taxes	Additional subtotal	Sum of the operating, investing, and financing categories
Income tax expense (current and deferred) (NZ IAS 12)	Income taxes category	Income and expenses within the scope of IAS 12
Profit (Loss)	Mandatory total	Sum of all categories

Example 3: Entity that provides mortgage funding to customers as a SMBA

Entity C is a mortgage fund that provides home loans to customers, secured by mortgages over the respective properties.
Investing in mortgage financial assets is therefore a SMBA.
Entity B is partially funded by both:
- Unitholders’ equity, and also
- A loan facility to take advantage of new investment opportunities - the loan here is considered to be a liability from a transaction that involves only the raising of finance (‘pure financing liability’).

Line item	Classification	Why
Interest income: Financial assets measured at amortised cost (Mortgage loans) (NZ IFRS 9)	Operating category	The entity invests in these assets as a SMBA. Mortgage loans are other assets that generate a return individually and largely independently of the entity’s other resources. IFRS 18.53(c), IFRS 18.54(a), IFRS 18.58
Interest income (Cash and cash equivalents) (NZ IFRS 9)	Operating category	In this example, the entity invests in financial assets as a main business activity. Therefore, NZ IFRS 18 requires that interest income on Cash and cash equivalents in operating. IFRS 18.56(a)
Interest expense (Loan facility) (NZ IFRS 9)	Operating category	The loans arise from transactions that involve only the raising of finance, and the interest expense arises from the subsequent measurement of the liability. Here, as the entity provides financing to customers as a SMBA it concludes that the income and expenses are classified in the operating category. IFRS 18.65(a)(i), IFRS 18.B52(a)
Net interest margin	Additional subtotal
Expected credit losses: Mortgage loans receivable (NZ IFRS 9)	Operating category	Financial assets such as mortgage loans generate a return individually and largely independently of the entity’s other resources. The entity invests in mortgage loans as a SMBA; therefore, income and expenses are classified in the operating category. IFRS 18.53(c), IFRS 18.54(b), IFRS 18.58
Operating profit (loss)	Mandatory sub-total	Sum of the operating category
Note: Entity C has no investing income or expenses
Profit (loss) before financing and income taxes	Mandatory subtotal	Sum of the operating and investing categories
Note: Entity C has no financing expenses
Profit (loss) before tax	Additional subtotal	Sum of the operating, investing, and financing categories
Income tax expense (current and deferred) (NZ IAS 12)	Income taxes category	Income and expenses within the scope of NZ IAS 12
Profit (loss)	Mandatory total	Sum of all categories

More information

Stay tuned for future Financial Reporting Insights during 2025 as we continue our deep dive into NZ IFRS 18 to demystify some of its complexities.

You can find more articles about NZ IFRS 18 challenges on our NZ IFRS 18 topic page, and our publication will also help you on your NZ IFRS 18 implementation journey.

Why do you need to consider NZ IFRS 18 now?

Transitioning your financial statement presentation from NZ IAS 1 to NZ IFRS 18 is not a simple exercise.

NZ IFRS 18 is not just about reclassifying line items.

While this may be the result, how and why an entity gets to those reclassifications is challenging because NZ IFRS 18 is a long and complex standard.

Addressing the how and why involves entities making judgements regarding specified main business activities and income and expense categories.

These judgements must be documented, supportable and evidenced.

In addition, system changes will be required to appropriately tag expenses to the five new categories.

Entities should, therefore, start their NZ IFRS 18 implementation projects now in order to be ready to retrospectively restate comparatives from 1 January 2026.

Our comprehensive In Practice publication will help you on your NZ IFRS 18 implementation journey.

For more details, including our "Six steps to a successful adoption of NZ IFRS 18," please refer to our Adopting NZ IFRS 18 page.

Need help

Please contact our Financial Reporting Advisory team for assistance in your entity’s adoption journey of NZ IFRS 18.

For more on the above, please contact your local BDO representative.

This article has been based on an article that originally appeared on BDO Australia, read the original article here.