In Part 1 of this series, we covered the basics of FRS 118 and the key implementation timeline. In Part 2, we went deep into how to classify income and expenses into the operating, investing, and financing categories.
In this final instalment, we’re covering three things every Singapore SME and startup needs on their radar: the new mandatory subtotals, the rules around management-defined performance measures (a genuine surprise for many businesses), the principles behind aggregation and disaggregation, and most importantly a practical checklist to help your finance team actually get started.
The Two New Mandatory Subtotals
One of the clearest, most tangible changes under FRS 118 is the introduction of two subtotals that must now appear on every income statement, regardless of industry or company size.
Subtotal 1: Operating Profit or Loss
This subtotal totals everything sitting in your operating category essentially, the performance of your core, day-to-day business activities, stripped of financing costs, investment returns, and tax.
For most Singapore SMEs, this is genuinely good news. It gives you, your board, your lenders, and your investors a much cleaner read on how the actual business is performing, separate from how it’s funded or where its cash happens to be parked. If you’ve ever had a lender ask, “but what’s the business actually earning, ignoring the loan interest?” this subtotal answers that question directly, every single reporting period, without anyone needing to build a custom schedule.
Subtotal 2: Profit or Loss Before Financing and Income Tax
This second subtotal combines your operating category results with your investing category results giving a fuller picture of your business’s overall economic performance before you factor in how it’s financed and before tax.
Together, these two subtotals create a much more structured, comparable income statement than most SMEs are used to. Rather than “profit before tax” being the first meaningful subtotal a reader encounters (after gross profit), there are now two additional checkpoints that break performance down more usefully.
Why This Actually Helps Small and Growing Businesses
We know new regulatory requirements can sound like extra admin, but this particular change tends to work in favour of SMEs and startups, especially those looking to raise financing or attract investors. A clean, standardised operating profit figure makes it much easier to have a credible, comparable conversation with a bank or investor you’re not asking them to trust a company-specific, unaudited “adjusted” number; the standardised subtotal is right there in your audited financial statements.
Management-Defined Performance Measures (MPMs): The Part That Surprises Most Businesses
If your company has ever used terms like “adjusted EBITDA,” “core operating profit,” “underlying net profit,” or any other bespoke metric in an annual report, investor deck, press release, or even a detailed board pack this section is especially relevant to you.
What Exactly Is an MPM?
A management-defined performance measure is essentially any subtotal of income and expenses that your company uses in public communications to describe its financial performance, but which isn’t a subtotal specifically required or defined by accounting standards.
Historically, these measures often lived a comfortable life outside the audited financial statements mentioned in a press release here, referenced in an investor call there, generally not subject to the same scrutiny as the statutory numbers. FRS 118 changes that significantly.
What FRS 118 Now Requires for MPMs
If your business publicly communicates an MPM, you’re now required to:
- Disclose it clearly within the notes to your financial statements
- Reconcile it back to the closest equivalent subtotal specified by accounting standards (for example, reconciling your “adjusted operating profit” back to statutory operating profit)
- Explain why the measure is useful to users of the financial statements, and describe how it’s calculated
- Ensure it is subject to audit, just like every other number in your financial statements
Why This Matters More Than It Might Seem
This is a genuine shift in how much scrutiny “adjusted” numbers receive. If your business is preparing for a fundraising round, a bank refinancing, or eventual public listing ambitions, and you’ve been using adjusted metrics in investor communications, it’s worth having an early conversation with your finance team (and us, if helpful) about which of those metrics will now need formal reconciliation and audit sign-off.
For many SMEs, this might also be a good moment to simply ask: do we actually need this adjusted metric, or does the new standardised operating profit subtotal already tell the story we need? Sometimes the simplest answer is the best one.
Aggregation and Disaggregation: Getting the Right Level of Detail
Beyond classification and subtotals, FRS 118 introduces clearer principles around how information should be grouped together (aggregated) or broken apart (disaggregated) within your financial statements.
The underlying logic is straightforward: don’t bundle genuinely dissimilar items together in a way that obscures useful information from readers, but also don’t fragment similar items into such granular detail that the statement becomes cluttered and harder to read.
What This Looks Like in Practice
Remember the foreign exchange example from Part 2? A single, catch-all “foreign exchange differences” line often needs to be broken apart because different components of it belong in different categories some in operating, some in financing. That’s disaggregation in action.
On the flip side, if your business has a dozen minor administrative expense line items that are all genuinely similar in nature and none individually significant, aggregating them into a sensible combined line (with detail in the notes, if needed) is the right call under these same principles.
The Practical Implication: Your Chart of Accounts
This is where the theory meets your actual accounting system. If your current chart of accounts and transaction recording processes weren’t built with FRS 118’s classification needs in mind, you may need to:
- Add new sub-accounts to separate items that need different classifications (like our foreign exchange example)
- Review how your team codes transactions day-to-day, to ensure the right level of detail is captured at the point of entry, not reconstructed after the fact
- Consider whether your accounting software can support the additional tagging or categorisation FRS 118 requires
Choosing How to Present Operating Expenses
We touched on this briefly in earlier parts of this series, but it’s worth expanding on here: FRS 118 preserves your choice to present operating expenses by function, by nature, or on a mixed basis but this shouldn’t be treated as an arbitrary or purely historical choice.
The standard expects you to choose whichever method provides the most useful structured summary of your expenses, considering factors like:
- What genuinely drives your company’s profitability
- How your management team actually reviews and reports on performance internally
- What’s standard or expected practice within your industry
- Whether allocating a particular cost to a “function” would be arbitrary or potentially misleading a classic example being a goodwill impairment, which often doesn’t sit naturally within any single functional category
If your business has always presented “by function” simply because that’s what was set up years ago, this transition is a natural moment to revisit whether that’s still the most useful presentation or whether “by nature” or a mixed approach would actually tell a clearer story to your readers.
What Does This Mean for Your Reporting Systems and Controls?
Pulling everything from this three-part series together, here are the practical questions every Singapore SME and startup finance team should be asking right now:
- Systems: Does your accounting software support the level of disaggregation FRS 118 requires, or will you need additional coding, sub-accounts, or configuration changes?
- Chart of accounts: Is it granular enough to classify items like foreign exchange differences, interest, and investment income correctly across categories?
- Consolidation process: If you operate through multiple entities, have you assessed “specified main business activities” at each entity level, and planned for any reclassification adjustments on consolidation?
- Internal controls: Are your current review and approval processes sufficient to catch classification errors before they reach your final financial statements?
- MPM governance: Have you identified every non-standard performance measure your business currently communicates publicly, and does someone own the reconciliation and audit process for each one?
- Mock-up financial statements: Have you started preparing draft FRS 118-format financial statements including comparatives to stress-test your systems and processes before it’s mandatory?
A Practical FRS 118 Readiness Checklist for SMEs and Startups
If you only take one thing away from this series, let it be this checklist. It’s designed to be realistic for lean finance teams, not an exhaustive corporate compliance project.
- Map your current income statement against the three new categories to identify grey areas early (foreign exchange, interest, and “other income” lines are the usual suspects).
- Assess whether your business has a specified main business activity involving investing in assets or providing financing to customers this materially changes your classification approach.
- Review your chart of accounts and identify which accounts need to be split into more granular sub-accounts to support correct classification.
- List every management-defined performance measure your business currently uses publicly, and plan for reconciliation and audit requirements.
- Decide on your operating expense presentation method (function, nature, or mixed) based on what genuinely best explains your business, not just historical habit.
- Prepare a mock-up FRS 118 income statement using your most recent year’s actual figures, as a practical dry run.
- Set a realistic internal timeline, working backwards from your 2026 comparative period requirement, not the 2027 effective date.
- Loop in your auditors and any external stakeholders lenders, investors, board members early, so everyone understands what’s changing and why.
Final Thoughts: This Is a Good Problem to Have
It’s easy to see FRS 118 as one more compliance requirement landing on an already-full plate. But we’d encourage you to see it a little differently: this is a rare, structured opportunity to clean up how your business presents its financial performance, standardise your reporting for easier comparison with lenders and investors, and build a more insightful income statement one that actually helps you and your team make better decisions.
Businesses that start this process early, with proper planning and the right support, tend to find the transition far smoother than those who leave it until the year before the deadline.
Ready to Start Your FRS 118 Transition?
You’ve now got the full picture from the basics and timeline in Part 1, through detailed classification rules in Part 2, to subtotals, performance measures, and a practical action plan here in Part 3. The next step is turning this into a plan tailored to your specific business.
We support SMEs and startups across Singapore through exactly this kind of transition, with practical, jargon-free guidance every step of the way. Get in touch with our team today to speak with our Singapore FRS specialists and build a clear, confident roadmap towards FRS 118 compliance well ahead of the 2027 deadline.