Key Points
- Every item of income and expense recognised in a period must appear either in profit or loss or in other comprehensive income, with no third option.
- IFRS 18 replaces IAS 1 from 1 January 2027, requiring defined categories (operating, investing, financing, income taxes, discontinued operations) and two new mandatory subtotals.
- Auditors who rely on the income statement for analytical procedures typically run their expectations at the line-item level, not at the net profit level alone.
- Misclassification between operating and non-operating items is one of the most common presentation errors flagged by European regulators.
What is Statement of Profit or Loss?
IAS 1.81A requires an entity to present a statement of profit or loss as a separate statement (or as the first section of a statement of profit or loss and other comprehensive income). The statement captures all income and expenses recognised in the period unless another IFRS requires recognition in other comprehensive income. IAS 1.85 prohibits presenting any items as "extraordinary," which means every gain and loss flows through the same structure regardless of how unusual it is.
Line-item presentation follows IAS 1.99–105. The entity must present, at a minimum, revenue, finance costs, share of profit of associates under the equity method, tax expense, and a single amount for discontinued operations. IAS 1.97 permits additional line items when their size or nature is relevant to understanding performance. The entity classifies expenses by nature (raw materials, employee benefits, depreciation, other expenses) or by function (cost of sales, distribution costs, administrative expenses, other operating expenses), selecting whichever classification is more relevant under IAS 1.99.
IFRS 18 replaces IAS 1 for periods beginning on or after 1 January 2027. It restructures the statement around five defined categories (operating, investing, financing, income taxes, discontinued operations) and requires two new subtotals that IAS 1 never mandated: operating profit and profit before financing and income taxes (IFRS 18.47). Entities apply IFRS 18 retrospectively, restating comparatives.
Worked example: Henriksen Shipping A/S
Client: Danish maritime logistics company, FY2025, revenue €140M, IFRS reporter. The engagement team performs substantive analytical procedures on the statement of profit or loss.
Step 1 — Obtain the draft income statement
Henriksen presents expenses by function. Revenue is €140M, cost of sales is €98M (gross margin 30%), distribution costs are €14.2M, administrative expenses are €11.8M, other operating income is €1.5M (gain on sale of a harbour crane), finance costs are €4.9M, and tax expense is €3.8M.
Documentation note: record the draft line items per the trial balance extraction. Cross-reference revenue to the IFRS 15 revenue disaggregation schedule. Note the functional classification choice and its consistency with prior year under IAS 1.99.
Step 2 — Build expectations for analytical procedures
Cost of sales should track at approximately 70% of revenue based on the prior two years and the current fuel price index. The team expects distribution costs to rise by 4% given the new Rotterdam terminal, while administrative expenses should remain flat after adjusting for a one-off €0.6M legal settlement in FY2024.
Documentation note: record each expectation, its data source (prior-year actuals, fuel price index, management's terminal cost forecast, internal budget), and the acceptable range per ISA 520.5.
Step 3 — Investigate deviations
Cost of sales is 70% of revenue, consistent with expectation. Administrative expenses of €11.8M exceed expectation by €1.1M. The team traces the variance to a €1.2M restructuring charge for the closure of the Aarhus office, classified within administrative expenses. The entity has not presented this separately. IAS 1.97 requires additional line items when their size or nature makes separate presentation relevant to understanding financial performance.
Documentation note: record the variance analysis and the restructuring charge identified. Document the discussion with management about whether separate presentation is required under IAS 1.97 and cross-reference to the restructuring provision working paper.
Step 4 — Evaluate the IFRS 18 transition impact
Henriksen plans to early-adopt IFRS 18 in FY2026. The €1.5M crane sale gain, currently in "other operating income," moves to the investing category under IFRS 18.53. Operating profit under IFRS 18 would be €17.5M rather than the €19.0M that included the crane gain.
Documentation note: record the reclassification of the crane disposal gain from operating to investing and the restated subtotals. Flag for comparative restatement in FY2026.
Conclusion: the analytical procedures surfaced a restructuring charge requiring separate presentation consideration, and the IFRS 18 mapping confirmed that operating profit drops by €1.5M once the crane gain moves to investing.
Why it matters in practice
The FRC's 2023/24 Annual Review of Corporate Reporting flagged that entities frequently fail to present additional line items when items are material by size or nature, as IAS 1.97 requires. Restructuring charges and litigation settlements were buried within standard functional lines without separate disclosure. ISA 700.13 requires the auditor to evaluate whether the financial statements achieve fair presentation, including line-item disaggregation.
Teams preparing for IFRS 18 adoption often underestimate the reclassification work required for the investing and financing categories. Items previously labelled "other operating income" (such as gains on disposal of non-current assets or dividend income from non-associate investments) move out of operating profit under IFRS 18.53. Failing to map these items early risks misstatement of the new defined subtotals.
Statement of profit or loss vs. statement of comprehensive income
| Dimension | Statement of profit or loss | Statement of comprehensive income |
|---|---|---|
| Scope | Income and expenses recognised in profit or loss for the period | Profit or loss plus items recognised in OCI (e.g., revaluation gains, translation differences, hedge reserves) |
| Presentation options | May be a standalone statement or the first section of a combined statement (IAS 1.81A) | May be combined with profit or loss in one statement or presented as a separate second statement |
| Bottom line | Profit or loss attributable to equity holders | Total comprehensive income attributable to equity holders |
| IFRS 18 impact | New mandatory subtotals (operating profit, profit before financing and income taxes) from 2027 | OCI presentation rules carry forward from IAS 1 with minor amendments |
| Audit focus | Revenue completeness, expense classification, analytical procedures on line items | Recycling of OCI items to profit or loss, completeness of OCI components |
The distinction matters because covenant calculations and analyst models reference profit or loss, not total comprehensive income. Auditors must verify that OCI items are correctly classified and that recycling to profit or loss occurs at the right trigger (for example, disposal of a foreign operation reclassifies the cumulative translation reserve).
Related terms
Frequently asked questions
Do I have to present expenses by nature or by function in the statement of profit or loss?
IAS 1.99 lets the entity choose whichever classification is more relevant and reliable. Most European industrial companies use function. If the entity presents by function, IAS 1.104 still requires disclosure of depreciation, amortisation, employee benefits, and other specified expenses by nature in the notes. IFRS 18 retains this choice but layers its five defined categories on top.
When does IFRS 18 replace IAS 1 for the statement of profit or loss?
IFRS 18 applies to annual periods beginning on or after 1 January 2027, with early adoption permitted. The entity applies it retrospectively and restates comparatives. For a December year-end, the first IFRS 18 statements will be FY2027 with FY2026 comparatives restated. Audit teams should assess the transition impact during the FY2026 engagement at the latest.
Can an entity present items as "extraordinary" in the statement of profit or loss?
No. IAS 1.87 explicitly prohibits the presentation of any items of income or expense as extraordinary, whether on the face of the statement or in the notes. This prohibition carries forward into IFRS 18. Every item, regardless of how unusual or infrequent, flows through the standard line-item structure.