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).
  • Illustrative examples: Entities that have a SMBA is asset investment (click here).

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

  • Example 1: Banks, Finance companies, and other lending institutions
  • Example 2: Entities that provide financing to customers to enable those customers to buy the entity’s products as a SMBA.
  • Example 3: Lessors of leases classified as finance leases.


Types of entities providing financing to customers

Examples of entities that might provide financing to customers as a main business activity include:

  • Banks, Finance companies, and other lending institutions
  • Entities that provide financing to customers to enable those customers to buy the entity’s products 
  • Lessors of leases classified as finance leases 

Another example may be a wholesaler/retailer of goods where the entity provides significant financing terms for the sale of its goods. 

For example, a company that ordinarily sells heavy machinery may also:

  • Lease equipment to customers under a finance lease, or
  • Legally transfer title to the equipment to the customer with a corresponding loan agreement to pay the selling entity over time through instalments of principal and interest.

Examples

For entities providing finance to customers 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: Banks, Finance companies, and other lending institutions

Relevant facts:

  • Bank A provides home loans to customers, secured by mortgages over the respective properties. It also accepts deposits from customers.
  • Bank A is regulated by the Reserve Bank of New Zealand (RBNZ). 
  • Bank A has loan facilities and customer deposits, which it uses to provide financing to customers as a main business activity (these are considered liabilities from a transaction that involves only the raising of finance (‘pure financing liability’)). 
  • Bank A also has a separate loan facility to fund its working capital.
  • Bank A has two bank accounts:
    1. Account ABC is used for funds received from the financiers and deposit holders for providing financing to customers. Mortgage repayments are processed through this bank account
    2.  Account DEF is used for other operating income and expenses.
  • One of Bank A’s subsidiaries also has an interest in Joint Venture Company XYZ, which was established as a stepping stone to enter the Asian markets, and is accounted for using the equity method.
  • There are no discontinued operations (NZ IFRS 5).

Line item

Classification

Why

Interest income 

  • Mortgaged home loans measured at amortised cost 

(NZ IFRS 9)

Operating category

The entity provides loan financing to customers as a main business activity, which does not generate a return individually and largely independently of the entity’s other resources.

NZ IFRS 18.B48(c), NZ IFRS 18.B49(b)

Interest income 

  • Surplus funds held in Bank Account ABC (financing to customers)

(NZ IFRS 9)

Operating category

The entity does not invest in financial assets as a main business activity, but does provide financing to customers as a main business activity. 

NZ IFRS 18.56(a), NZ IFRS 18.56(b) 

This bank account is used to provide financing to customers.

NZ IFRS 18.56(b)(i)

Interest expense

  • Loan facilities (financing to customers)

(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. 

The entity provides financing to customers as a main business activity. 

NZ IFRS 18.59(a), NZ IFRS 18.60(a), 

NZ IFRS 18.65(a)(i)

Net interest margin

Additional subtotal

Sum of interest-related income and expenses on SMBA

Expected credit losses on loans receivable 

(NZ IFRS 9)

Operating category

The entity provides loan financing to customers as a main business activity, which does not generate a return individually and largely independently of the entity’s other resources.

NZ IFRS 18.B48(c), NZ IFRS 18.B49(d)

Operating profit

Mandatory sub-total

Sum of the operating category

Interest income

  • Surplus funds held in Bank Account DEF (other operating income and expenses)

(NZ IFRS 9)

Investing category

The entity does not invest in financial assets as a main business activity, but it does provide financing to customers as a main business activity. 

NZ IFRS 18.56(a), NZ IFRS 18.56(b) 

This bank account is not used to provide financing to customers, and Bank A’s accounting policy choice is to classify interest income in the investing category.

NZ IFRS 18.56(b)(ii)

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

Income from investments accounted for using the equity method is always shown in the investing category.

NZ IFRS 18.55(a)

Profit before financing and income taxes

Mandatory subtotal

Sum of the operating and investing categories

Interest expense

  • Working capital loan facility

(NZ IFRS 9)

Financing category

As this loan facility is not used to provide financing to customers, the classification of interest expense on the loan facility depends on Bank A’s accounting policy choice regarding interest income arising from Bank Account DEF.

NZ IFRS 18.56(b)(ii), 

NZ IFRS 18.65(a)(ii)

Note: Because Bank A chose to classify interest income arising from Bank Account DEF in the investing category (see above) the entity must adopt a consistent accounting policy choice with respect to interest expense arising from liabilities not used to provide finance to customers and classify interest expense in the financing category.

NZ IFRS 18.65(a)(ii)

Profit 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

Mandatory total

Sum of all categories

Example 2: Entities that provide financing to customers to enable those customers to buy the entity’s products

Relevant facts:

  • Entity B imports expensive earth-moving equipment for sale to mining entities. 
  • Entity B also provides financing, whereby customers can repay the purchase price of the equipment, plus interest, over a two-year period (the useful life of the equipment is five years) note, in this example,  assume that these financing arrangements are not considered leases under NZ IFRS 16 Leases).
  • Approximately 75% of Entity B’s sales are subject to these financing arrangements.
  • In the current financial year:
    1. Gross profit from equipment sales is $2,000,000.
    2. Net interest margin from financing arrangements is $5,000,000.
  • In this example, Entity B has determined it has two main business activities (equipment sales and providing financing to customers), but it only has one SMBA, which is providing financing to customers.
  • Entity B has two loan facilities:
    1. One to finance equipment loans
    2. One for working capital needs.
  • Entity B operates only one business bank account, which was in surplus for the entire financial year. It is unable to distinguish how much of the interest income/expense on the cash balances relates to providing financing to customers and how much relates to other transactions. 
  • There are no discontinued operations (NZ IFRS 5).

 

Line item

Classification

Why

Interest income

  • Equipment loans measured at amortised cost 

(NZ IFRS 9)

 

Operating category 

The entity provides loan financing to customers as a main business activity, which does not generate a return individually and largely independently of the entity’s other resources.

NZ IFRS 18.B48(c), NZ IFRS 18.B49(b)

Interest expense

  • Equipment loan facilities 

(NZ IFRS 9)

Operating category

The loans arise from transactions that involve only the raising of finance (pure financing liabilities), and the interest expense arises from the subsequent measurement of the liability. 

The loan facility relates only to providing financing to customers as a main business activity. 

NZ IFRS 18.59(a), NZ IFRS 18.60(a), NZ IFRS 18.65(a)(i)

Interest income

  • Cash balances

(NZ IFRS 9)

Operating category

The entity operates only one business bank account and is unable to distinguish how much of the cash balance relates to providing financing to customers and how much relates to other transactions. 

The entity is, therefore, required to classify all income from cash balances in the operating category.

NZ IFRS 18.57

Interest expense relating to working capital loan facilities 

(NZ IFRS 9)

Operating category

The loans arise from transactions that involve only the raising of finance (pure financing liabilities), and the interest expense arises from the subsequent measurement of the liability.

NZ IFRS 18.59(a), NZ IFRS 18.60(a)

The entity provides financing to customers as a main business activity, but the liability does not relate to providing financing to customers. 

The entity classifies the interest expense in the operating category because it has classified interest income in the operating category (see above). 

NZ IFRS 18.65(a)(ii)

Net interest margin

Additional subtotal

Sum of interest-related income and expenses (SMBA)

Revenue from contracts with customers 

(NZ IFRS 15)

Operating category

Income from assets that do not generate a return individually and largely independently of the entity’s other resources.

NZ IFRS 18.B48, 

NZ IFRS 18.B49(a) and (b)

Finance income on contract assets 

(NZ IFRS 15)

Operating category

Inventories expensed, including cost of sales and write-downs to net realisable value 

(NZ IAS 2)

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(b), NZ IFRS 18.B49(e)

Gross margin on product sales

Additional subtotal

Sum of sales-of-goods-related income and expenses (not-SMBA)

Depreciation of property, plant and equipment (PPE) 

(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), NZ IFRS 18.B49(c)

Impairment of PPE and reversals of impairment

(NZ IAS 36)

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), NZ IFRS 18.B49(d)

Loss on sale of PPE 

(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), NZ IFRS 18.B49(e) 

Expected credit losses on financing loans to customers

(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(c), NZ IFRS 18.B49(d) 

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(b), NZ IFRS 18.B49(d) 

Operating profit

Mandatory sub-total

Sum of the operating category

Dividends received on shares

(NZ IFRS 9)

Investing category

Shares are assets that generate a return individually and largely independently of the entity’s other resources. The entity does not invest in shares as a main business activity.

NZ IFRS 18.53(c), NZ IFRS 18.54(a), 

NZ IFRS 18.B46(a)

Profit before financing and income taxes

Mandatory subtotal

Sum of the operating and investing categories

Note: Entity B has no financing expenses

 

 

Profit 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

Mandatory total

Sum of all categories

Example 3: Lessors of leases classified as finance leases

Relevant facts:

  • Entity C is a leasing company and provides financing to customers in the form of finance leases (i.e., a lease that transfers substantially all the risks and rewards associated with ownership of an underlying asset, per NZ IFRS 16).
  • Entity C has no other revenue streams. 
  • It therefore has a SMBA of providing financing to customers.
  • Entity C has one major loan facility that enables it to provide financing to customers and one bank account, which is usually in surplus. 
  • It is unable to distinguish how much of the cash balances relate to net investments in leases (providing financing to customers) and how much relates to other transactions.
  • There are no discontinued operations (NZ IFRS 5).

 

Line item

Classification

Why

Finance income on finance leases

(NZ IFRS 16)

Operating category

The entity is a leasing company and invests in net investment in leases as a main business activity.

NZ IFRS 18.55(b), NZ IFRS 18.58

Interest expense relating to 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. 

The liability also relates to providing financing to customers as a main business activity. 

NZ IFRS 18.59, NZ IFRS 18.60(a), NZ IFRS 18.65(a)(i)

Interest income on cash balances

(NZ IFRS 9)

Operating category

The entity operates only one business bank account and is unable to distinguish how much of the cash balances relate to net investment in leases and how much relates to other transactions. 

The entity is, therefore, required to classify all income from cash balances in the operating category.

NZ IFRS 18.57

Net interest margin

Additional subtotal

Sum of interest-related income and expenses (SMBA)

Expected credit losses on net investment in leases (lease 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(c), NZ IFRS 18.B49(d) 

Operating profit

Mandatory sub-total

Sum of the operating category

Note: Entity C has no investing income or expenses

 

 

Profit before financing and income taxes

Mandatory subtotal

Sum of the operating and investing categories

Note: Entity C has no financing expenses

 

 

Profit 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

Mandatory total

Sum of all categories

More information

Stay tuned for future Financial Reporting Insights during 2026 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.