In Part 1 of this series, we covered what FRS 118 is, why it was introduced, and the key dates your business needs to work towards. If you haven’t read that yet, it’s worth starting there for context.
In this article, we’re getting into the technical core of FRS 118: how you actually classify income and expenses into the new mandatory categories. This is the part of the standard that will take the most hands-on work from your finance team, so we’re going to walk through it step by step, with practical examples along the way.
A Quick Recap: The Three Categories
FRS 118 requires every income and expense item on your statement of profit or loss to be classified into one of three categories operating, investing, or financing alongside the existing income tax and discontinued operations categories, which remain largely unchanged.
Let’s take each one in turn, in more depth than we covered in Part 1.
Operating Category: Your Default Home
The operating category serves two purposes under FRS 118:
- It captures income and expenses arising from your main business activities
- It acts as the default or residual category meaning if an item doesn’t clearly belong in investing or financing, it belongs in operating
For the vast majority of Singapore SMEs F&B operators, retailers, trading companies, consultancies, agencies, e-commerce businesses this is where most of your income statement will continue to live. Revenue, cost of sales, staff costs, rent, marketing spend, and general administrative expenses all typically sit here, much as they do today.
This “default category” design is deliberate. The standard-setters didn’t want to burden ordinary trading businesses with excessive complexity, so if you’re not sure where something goes and it clearly relates to your core operations, operating is usually the right call.
Investing Category: Returns From Assets Held Independently
The investing category captures income and expenses arising from:
- Investments in associates, joint ventures, and unconsolidated subsidiaries accounted for using the equity method
- Cash and cash equivalents
- Assets that generate a return individually and largely independently of the entity’s other resources think investment properties, or a portfolio of debt or equity securities held purely for yield
If your company is a typical trading business, this category might only contain a small amount of interest income from your bank deposits. But if you’re a holding company, a property investment vehicle, or a business that holds meaningful investment assets, this category becomes much more significant and importantly, it interacts with a special concept we’ll explain shortly: specified main business activities.
Financing Category: The Cost of Raising Money
The financing category captures:
- Income and expenses from liabilities related to raising finance only
- Interest income or expense, and the effects of interest rate changes, from liabilities arising from transactions that don’t involve purely raising finance
In practice, this typically includes interest expense on business loans, lease liability interest, and similar financing costs. One detail worth flagging early: this also affects how you treat foreign exchange differences on borrowings something many businesses currently lump into a general “other income” line, but which now needs to be separated out and classified into financing.
Income Tax and Discontinued Operations
These two categories are essentially unchanged from current practice. Income tax expense remains its own distinct category, as do the results of any discontinued operations, kept separate from your ongoing core business performance.
Step 1: Determine Your “Specified Main Business Activities”
Here’s where FRS 118 introduces genuine complexity for certain types of businesses, and it’s worth understanding even if you think it might not apply to you because the answer isn’t always obvious.
Under FRS 118, if your company’s main business activities include investing in assets and/or providing financing to customers, you’re required to reclassify certain income and expense items that would normally sit in investing or financing into the operating category instead.
What Counts as “Investing in Assets” as a Main Business Activity?
Examples include entities that invest in:
- Associates, joint ventures, and subsidiaries accounted for at cost (e.g., in standalone company financial statements)
- Associates, joint ventures, and subsidiaries measured at fair value for example, investment holding entities
- Debt or equity investments held as a core activity
- Investment properties for example, REITs or property investment companies
What Counts as “Providing Financing to Customers” as a Main Business Activity?
Common examples include:
- Banks and other lending institutions
- Car manufacturers or dealers that provide financing directly to customers
- Finance lessors
How Do You Actually Assess This?
The assessment of “main business activity” is judgemental, and FRS 118 expects it to be supported by evidence, not just asserted. Useful evidence to support your conclusion includes:
- Whether you use a subtotal similar to gross profit (for example, “net property income”) to explain performance externally to shareholders, or internally to management
- Whether the activity is identified as a single reportable segment in your segment disclosures under FRS 108
- Whether it forms an operating segment whose performance is an important indicator of your overall business performance
A practical example: Imagine a company that earns rental income from investment properties. If it uses “net property income” to explain performance both to shareholders and internally to its board, and the investment property portfolio is identified as its own reportable segment, the company would likely conclude that investing in assets is indeed a specified main business activity meaning related income and expenses shift into the operating category rather than investing.
Group Structures Add Another Layer
Here’s something that trips up a lot of holding company structures: “main business activity” is assessed from the perspective of each individual reporting entity which means the answer can genuinely differ between a subsidiary, its parent, and the consolidated group.
Consider a group structure like this:
- Subsidiary A (a special purpose vehicle holding an investment property) → Specified main business activity: investing in assets
- Subsidiary B (a financial institution) → Specified main business activity: providing financing to customers
- Subsidiary C (a manufacturer) → No specified main business activity
- Subsidiary D (an investment holding company for joint ventures and associates) → Specified main business activity: investing in assets
- Subsidiary E (holds non-controlling equity investments for returns) → Specified main business activity: investing in assets
At the consolidated group level, the parent company needs to make its own separate assessment based on the group’s overall facts and circumstances and it may well reach a different conclusion than any individual subsidiary. This means reclassification adjustments during consolidation may become a standard part of your group’s year-end close process, particularly where subsidiaries and the parent land on different classifications.
If your business operates through multiple entities with different activities, this is a conversation worth having with your finance team well ahead of your FRS 118 transition date.
Step 2: Classifying Income and Expenses Getting Into the Detail
Once you know whether your business has a specified main business activity, the next step is working through your actual trial balance and classifying each income and expense item.
General Requirements
For entities with a specified main business activity as investing in assets or providing financing to customers, certain items that would normally be investing or financing income get reclassified into operating. For example:
- An entity whose specified main business activity is investing in unconsolidated subsidiaries would classify dividends from those subsidiaries as operating income, not investing income.
- An entity whose specified main business activity is providing financing to customers would classify interest expense on borrowings related to that financing activity as an operating expense, not a financing expense.
For entities without a specified main business activity, the general classification rules described earlier apply as-is.
Specific Requirements for Trickier Items
Certain types of income and expenses have their own specific classification rules under FRS 118, because they don’t fit neatly into the general framework:
- Foreign exchange differences these need to be classified according to the underlying item that gave rise to them (more on this below)
- Derivatives and hedging instruments classification depends on the nature of the hedged item or the purpose of the derivative
- Hybrid contracts instruments with both debt and equity-like features require careful analysis
- Derecognition of assets and liabilities gains or losses on derecognition follow the classification of the underlying asset or liability
- Reclassification of assets and liabilities for example, when an asset changes classification on the balance sheet
Worked Example: Classifying From Your Trial Balance
Let’s walk through a simplified example for a company without a specified main business activity:
| Trial Balance Item | Old Presentation | Arises From | FRS 118 Classification |
|---|---|---|---|
| Revenue from sale of goods | Revenue | Inventories | Operating |
| Interest expense on term loan | Finance cost | Loans and borrowings | Financing |
| Dividends from subsidiaries | Other income | Investment in subsidiaries | Investing |
| Foreign exchange differences | Other income | Trade receivables, trade payables, and borrowings | Needs disaggregation see below |
| Fair value changes on investment properties | Other income | Investment properties | Investing |
Notice the foreign exchange line under the old standard, this might have simply been reported as a single “other income” figure. Under FRS 118, it can’t be, because part of it relates to trade receivables and payables (which should be classified as operating) while another part relates to borrowings (which should be classified as financing).
Why Your Chart of Accounts Might Need an Upgrade
This is exactly the kind of situation where businesses discover their chart of accounts isn’t disaggregated enough to make the required classification. The fix is usually to break a single trial balance account into more granular sub-accounts, for example:
- Foreign exchange differences on trade payables → Operating
- Foreign exchange differences on trade receivables → Operating
- Foreign exchange differences on borrowings → Financing
Once you’ve disaggregated to this level, you can map each item to the correct income statement caption. Multiply this exercise across every “catch-all” line item in your current financial statements, and you start to see why an early start matters this kind of restructuring takes real time to implement properly, test, and get comfortable with before your comparative year begins.
Putting It All Together: A Simple Before-and-After View
To bring this to life, imagine a straightforward income statement currently presented as:
Before FRS 118: Revenue → Cost of sales → Gross profit → Other income → Selling, distribution, and admin expenses → Finance costs → Profit before tax
After FRS 118, that “other income” line gets pulled apart and redistributed:
- Net foreign exchange difference on trade receivables → Operating
- Net foreign exchange difference on trade payables → Operating
- Dividends from subsidiaries → Investing
- Gain on fair value changes of investment properties → Investing
- Share of profit from an associate → Investing
- Net foreign exchange difference on borrowings → Financing
You can already see how this creates a much clearer income statement instead of one vague “other income” figure, a reader can now see exactly how much of your performance came from your core operations, how much came from investments, and how much relates to financing arrangements.
Coming Up in Part 3
In the final part of this series, we’ll cover the two new mandatory subtotals FRS 118 introduces, the rules around management-defined performance measures (which come with a genuine audit requirement), the principles behind aggregation and disaggregation, and a practical, step-by-step readiness checklist you can start working through with your finance team right away.
Need Help Mapping Your Own Income Statement?
Classification is genuinely the most detailed, hands-on part of the FRS 118 transition and it’s exactly where having an experienced pair of eyes makes the biggest difference. Getting it wrong doesn’t just create restatement headaches later; it can also mean the story your financial statements tell doesn’t accurately reflect how your business really performs.
At Accounting Solutions Singapore, we help SMEs and startups work through exactly this kind of detailed reclassification exercise practically, without the technical overwhelm. Get in touch with our team to speak with our Singapore FRS specialists about mapping your own trial balance to FRS 118’s new categories.
Continue to Part 3: Subtotals, MPMs, and Your FRS 118 Readiness Checklist →