NZ IFRS 18: Financing category differences for entities with specified main business activities

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). 

Under NZ IFRS 18, classification may differ, depending on whether the entity has specified main business activities (SMBA), as these entities will have different, special rules.

  • In our previous April article (click here) we looked what is meant by SMBA, and how entities will need to approach making this first, critical determination in applying NZ IFRS 18.
  • In our most recent May article (click here), we looked at how the investing category in profit or loss of an entity with a SMBA differs from entities with that have no SMBA. 

In this month’s article, we look at the financing category in profit or loss of an entity with a SMBA of providing financing to customers, including for example: 

  • Banks and other lenders.
  • Lessors that provide finance leases.
  • Entities that provide financing to customers to enable those customers to buy the entity's products (i.e., provide formal loans, or extended payment terms).
 

Why are special rules needed for classifying income and expenses in the statement of profit or loss?

Income and expenses are generally classified into one of the five categories based on the characteristic of the expense (i.e. the type of asset or liability to which the income or expense relates). 

Without special rules for classifying the income and expenses of entities with SMBA, operating profit would not include all items of income and expenses related to the entity’s main business activities, e.g. for banks and financial institutions. 

NZ IFRS 18, therefore, contains exceptions so that entities with SMBA will classify some income and expense items in the operating category that would otherwise have been classified in the investing and/or financing categories.
 

Financing category – entities without SMBA

Our initial article in March 2025 (click here) detailed how income and expenses relating to liabilities are to be classified in profit or loss where the entity has no SMBA. 

For these entities, classification depends on the type of liability, i.e. those that:
 

Type Common examples Treatment of income and expense
“Pure financing” liabilities
(i.e., liabilities that arise only via the raising of finance)
  • Loans, Mortgages, Debentures/Bonds/Notes issued. (i.e., Debt instrument that will be settled in cash)
  • Liability under a supplier finance arrangement when the payable for goods or services is derecognised. (i.e., a financial liability for the goods or services is discharged and the entity will return cash in exchange)
  • Bond to be settled through delivery of an entity’s shares. (i.e., where an entity receives cash and will return its own equity instruments in exchange)
  • Obligation for an entity to purchase its own equity instruments. (i.e., where an entity receives its own equity instruments and will return cash in exchange)
 All income and expenses related to those liabilities are classified in the financing category, e.g.:
  • Interest expenses.
  • Fair value gains and losses.
  • Dividends (i.e., on preference shares classified as liabilities)
  • Impacts from the modification and/or derecognition of the liability
All other liabilities
(i.e., these liabilities arise from “dual purpose” transactions.

Here, there is a financing element to the transaction when a financial liability is recognised.

However, the transaction goes beyond simply raising finance and settling the debt at a later date, with the entity also usually receiving goods and services.)
  • Trade payables.
  • Lease liabilities.
  • Provisions (i.e., make-good, litigation, onerous contracts, product returns, etc.)
  • Contract liabilities (i.e., revenue received in advance)
  • Employee benefit liabilities (incl. Defined benefit pension liabilities).
 Only the interest portion of income and expenses is classified as financing, as well as income and expenses arising from changes in interest rates.

(Note: but only if the entity identifies such income and expenses for the purpose of applying other requirements in NZ IFRS).

 

Financing category – entities with specified main business activities that provide financing to customers as a main business activity

Compared to the above, things change somewhat for entities with a SMBA of providing financing to customers.


 

Liabilities that do not involve only the raising of finance (“dual purpose” transactions)

Regardless of whether the entity provides financing to customers as a main business activity, interest income and expenses from liabilities that do not involve only the raising of finance (i.e., “dual purpose” transactions, above) are classified in the financing category.

‘Pure financing’ liabilities

However, the rules may differ for “pure financing” liabilities if an entity provides financing to customers as a SMBA. 

Income and expenses relating to “pure financing” liabilities will be classified in the operating category instead of the financing category if the liability is incurred in order to provide financing to customers. This is shown in the diagram above.

However, it should be noted that “Pure financing” liabilities must be further sub-categorised into:

  1. Liabilities that specifically relate to providing financing to customers (income and expenses are always classified in the operating category), and
  2. Liabilities that do not relate to providing finance to customers (here, there is an accounting policy choice to classify income and expenses in either the operating or financing category, but there are two restrictions on this policy choice – discussed in more detail below).

 

Example
Bank A borrows money from Lender B in order to (on)lend those funds to its customers.

Bank A’s goal is to earn a margin on the interest rate differential between the loans payable to Lender B and the loans receivable from its customers.

As Bank A has borrowed money from Lender B in order to lend the proceeds to its customers, that borrowing would be “related to providing financing to customers”. 

Accordingly, the associated income and expenses would therefore be required to be classified in the operating category.

 

Restrictions on accounting policy choice where “pure financing” liabilities do not relate to providing financing to customers

In practice, it may be challenging to determine whether “pure financing” liabilities are related to providing financing to customers, or whether they have a dual purpose. 

As detailed above, where “pure financing” liabilities do not specifically relate to providing financing to customers, entities have an accounting policy choice to classify the related income and expenses in either the operating category or the financing category. 

However, there are two restrictions on this accounting policy choice:

  1. If the entity cannot distinguish between the liabilities that relate to providing financing to customers and those that don’t, it must classify income and expenses from all these liabilities in the operating category.
  2. It must be consistent with the accounting policy that the entity has chosen for classifying income and expenses related to cash and cash equivalents, which do not relate to providing finance to customers (see below).

 

Cash and cash equivalents

For entities with SMBA, the classification requirements for income and expenses relating to cash and cash equivalents (e.g. interest income) are summarised in the decision tree below:



Where an entity does not invest in financial assets as a main business activity, but does provide financing to customers as a main business activity, it must determine if the income and expenses from cash and cash equivalents relate to providing financing to customers (NZ IFRS 18.56(b)):

If they do, income and expenses are classified in the operating category (this is consistent with the treatment of the income and expenses related to “pure financing” liabilities shown in the diagram above).

If they don’t, there is an accounting policy choice to classify income and expenses either in the operating or the investing category, subject to two restrictions (see below).

The accounting policy choice noted above for classifying income and expenses related to cash and cash equivalents is subject to two restrictions:

  1. It must be consistent with the accounting policy choice selected for “pure financing” liabilities that do not relate to providing financing to customers (see above), and
  2. If an entity cannot distinguish between cash and cash equivalents that relate to providing financing to customers and those that do not, it must classify income and expenses from all cash and cash equivalents in the operating category.

To summarise

The following diagram provides a snapshot of what happens when entities whose SMBA is to provide financing to customers.


 

Examples
  1. If the borrowing is a “pure financing” liability entered into only for the purpose of providing financing to customers (i.e., on-lending), interest accrued on the borrowing will be classified in the operating category.
  2. Similarly, interest earned on cash balances held only for the purpose of lending money to customers will also be classified in the operating category.
  3. If the entity has general borrowings and only one bank account, and is therefore unable to distinguish what relates to customer financing and what doesn’t, all interest income and expenses will be classified in the operating category. 
  4. If the entity enters into a separate “pure financing” loan arrangement to meet its general working capital needs (i.e. not for the purpose of providing financing to customers), it can choose to either classify interest expenses as: (i) financing; or, (ii) operating (provided that it makes a similar choice for general cash and cash equivalent balances above).

 

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. 

 

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.