An IFRS Interpretations Committee staff paper provides further evidence of potential inconsistency arising from the requirement under IFRS 18 to always classify in the investing category the share of profit or loss of investments accounted for using the equity method. This unequivocal requirement in IFRS 18 has left the staff with no choice but to extend the distortion into the separate financial statements, prepared in accordance with IAS 27. The staff analysis illustrates how the choice of measurement basis for investments in subsidiaries under IAS 27 may lead to different classification in the separate statement of profit or loss in the operating or investing categories. While the equity method provides more relevant information in the statement of financial position compared with the cost model, it effectively results in less relevance in the statement of profit or loss, as the share of profit or loss is classified in the investing category even where the investments are held as a main business activity.
In July 2025 we published an article that focused on an inherent distortion in IFRS 18, arising from the requirement to always classify the share of the profit or loss of investments accounted for using the equity method within the investing category in the statement of profit or loss. This requirement could distort the operating results of companies whose main business activity includes investing in associates and joint ventures accounted for using the equity method and could lead to inconsistency in the classification into categories in the statement of profit or loss in accordance with IFRS 18.
Additional evidence of the potential inconsistency arising from this requirement can be found in the IFRS Interpretations Committee staff paper on the assessment of a specified main business activity for the purposes of the separate financial statements of a parent (November 2025), which includes the staff’s recommendation that the Committee publish a tentative agenda decision.
The staff paper analyses a scenario regarding the separate financial statements, prepared in accordance with IAS 27, of a parent entity whose sole activities are holding investments in subsidiaries, making decisions on the management, acquisition and disposal of those subsidiaries, and distributing returns on those investments to shareholders. The parent has no substantive business activities other than holding and managing investments in subsidiaries and distributing returns from those investments. In its separate financial statements, the parent accounts for its investments in subsidiaries at cost, as permitted by IAS 27.
Main Business Activity: Different Views Between Separate and Consolidated Financial Statements
When an entity prepares separate financial statements, the basic assumption is that no control exists over subsidiaries. Hence, the parent has an accounting policy choice to measure subsidiaries (and certain other investees) at cost, at fair value or using the equity method. In addition, the assessment of whether there is a specified main business activity for the purposes of the consolidated financial statements may lead to a different conclusion compared to the assessment for its separate financial statements, prepared in accordance with IAS 27.
In the circumstances described in the staff paper, for the group’s consolidated financial statements, no specified main business activity is identified. However, the staff analysis concludes that in the separate financial statements the parent does have a main business activity of investing in unconsolidated subsidiaries. As a result, income and expenses from investments in unconsolidated subsidiaries are classified in the operating category in the separate statement of profit or loss.
When an investment in a subsidiary is measured in the separate financial statements at cost, dividends from the subsidiary are recognised in profit or loss in the separate financial statements when the entity’s right to receive the dividend is established. In the circumstances described in the staff paper, this dividend income would be classified within the operating category in the separate statement of profit or loss in accordance with IFRS 18.
Equity Method vs. Cost Model: the Measurement Basis Distortion
This highlights a significant inconsistency – if the same parent had elected to account for its unconsolidated subsidiaries using the equity method (as also permitted by IAS 27), it would be required to classify the share of profit or loss of these investments in the investing rather than the operating category. In our view, allowing the choice of measurement basis under IAS 27 to effectively determine the category in which the effects of such investments are presented in the separate statement of profit or loss leads to a classification outcome that is conceptually problematic.
Note that this issue regarding separate financial statements is relevant only to entities that prepare separate financial statements in accordance with IAS 27. However, this issue clearly illustrates the potential inconsistency that may arise under the requirements of IFRS 18. The equity method provides more relevant information in the statement of financial position compared with the cost model, because the investments are measured at current amounts that reflect the investor’s share in the investee.
However, the election of more relevance for the statement of financial position may regrettably result in less relevance for the statement of profit or loss. This is because the results of investments held as a main business activity will be classified in the investing category, potentially leaving the operating category without income or revenues. This dilemma regarding which statement should be relevant could be easily solved if the share of profit or loss from investments accounted for using the equity method that constitute a main business activity were classified in the operating category.
(*) This paper was co-authored by Shlomi Shuv and Guy Algranti, Senior Manager, PWC Israel CRS