For a manufacturer or a retailer, IFRS 18 is largely a presentation exercise. The income statement gets three new categories and two mandatory subtotals, the general ledger gets a mapping, and the adjusted measures in the results announcement get a reconciliation note. Demanding, but mechanical once the decisions are made.
For a bank the decisions come first, and they are not mechanical. The shape of the income statement is not known until the bank has settled what its main business activities are, chosen an accounting policy for interest on its own funding, and traced every derivative and every foreign exchange difference back to the item it relates to. Only then can the mapping start. This article sets out those judgements, what they do to the numbers a bank is used to publishing, and what a GCC bank should be doing about them in the last quarter of the comparative year.
It rests on the standard as issued by the IASB on 9 April 2024, effective for annual periods beginning on or after 1 January 2027 and applied retrospectively, and on KPMG’s talkbook for banks of May 2026, which includes a survey of current bank reporting practice that we quote where it is useful. The earlier Riskweise article, IFRS 18: the comparative year is 2026, covers the standard as it applies to every entity. This one assumes that and goes to where the bank-specific difficulty sits.
Two specified main business activities
IFRS 18 starts from a default. Income and expenses from investments, meaning assets that generate a return individually and largely independently of the entity’s other resources, go to the investing category. Income and expenses from liabilities that arise from transactions involving only the raising of finance go to the financing category. Everything else is operating, which is defined as the residual.
The standard then overrides that default for two activities. Where an entity invests in assets as a main business activity, the income and expenses from those assets are operating, not investing. Where an entity provides financing to customers as a main business activity, the income and expenses from the liabilities that fund that activity are operating, not financing. KPMG’s term for these is the specified main business activities, and the phrase is useful because the assessment is the single most consequential decision in a bank’s transition.
Practically every bank provides financing to customers as a main business activity. That conclusion is rarely contested and it is what keeps interest on customer deposits in operating profit.
Whether a bank also invests in assets as a main business activity is a genuine judgement, and the answer is not the same for an investment bank and a retail bank with a treasury portfolio held for liquidity.
The assessment is one of fact rather than choice. The standard directs the entity to evidence: how it manages the activity, how it measures the activity’s performance and how it communicates that performance to the market. A bank whose results announcement leads with net interest income and cost-to-income is describing a lending business. A bank that reports on assets under management and portfolio returns is describing something else. The evidence needs to be documented in a memorandum that will be read by the auditor and, in time, by a supervisor.
The conclusion drives three classifications:
- If the bank has a specified main business activity of investing in assets, all income and expenses from those assets, including cash and cash equivalents, are operating.
- If it does not, income and expenses from cash and cash equivalents may still be operating where they relate to providing financing to customers. Where they do not, the classification depends on the policy selected, and returns on other investments sit in investing.
- Investments in associates and joint ventures that are equity-accounted are always investing. The main business activity question only arises for a bank where such investments are not equity-accounted.
There is a nuance that helps a bank with a liquidity portfolio. Debt or equity instruments whose returns are not generated individually and largely independently of the bank’s other resources, which is the position of a treasury book held to meet liquidity requirements and fund the lending business, may still be classified in operating without the bank needing to conclude that it invests in assets as a main business activity. That argument has to be made and evidenced, but it is available.
Interest on liabilities: one line becomes three
Most banks present a single net interest income subtotal today, with every interest-bearing liability inside it. KPMG’s survey found only 39 percent of banks disclosing detailed information in the notes on the source of interest on other liabilities such as leases and pensions. That single line does not survive transition intact.
Under IFRS 18, interest on liabilities is classified by the nature of the liability, and for a bank that provides financing to customers the outcome falls into three groups.
Financing liabilities that relate to providing financing to customers. Customer deposits are the clearest case. Interest on these is operating. No choice.
Financing liabilities that do not relate to providing financing to customers. Wholesale funding, own debt securities and similar instruments raised for purposes other than customer financing. Here the bank must make an accounting policy choice: classify the interest in operating alongside the customer-financing liabilities, or classify it in financing. The choice applies to the whole population. If the bank cannot distinguish the financing liabilities that relate to customer financing from those that do not, all related interest is classified as operating.
Other liabilities. Lease liabilities, defined-benefit pension obligations, provisions unwound at a discount rate and similar. Interest on these is classified as financing, with no policy choice available. This is the group that moves out of net interest income for every bank regardless of the policy adopted.
The policy choice has a second consequence that should be part of the decision rather than discovered afterwards. IFRS 18 requires every entity to present operating profit and profit or loss. An entity that provides financing to customers as a main business activity and chooses to classify all financing-liability interest in operating is not required to present the profit before financing and income taxes subtotal, because for such an entity the subtotal would carry little meaning. A bank that takes the other route, classifying non-customer funding costs in financing, presents all three.
Either way, net interest income as reported in the 2026 statements and net interest income as it will appear in the restated 2026 comparatives are different numbers. Every internal target, analyst model, covenant and remuneration scheme that references it is affected.
Derivatives and foreign exchange follow the item they relate to
The rule for derivatives is that gains and losses on a derivative that manages a risk are classified in the same category as the income or expense affected by the hedged risk. Trading derivatives are operating. Economic hedges follow the same logic as designated accounting hedges unless doing so involves undue cost or effort.
For a bank this is a tagging exercise more than an accounting one. KPMG’s survey lists the most common hedged items among banks as customer deposits and securities (88 percent), customer loans (84 percent), own debt instruments (84 percent), and foreign exchange transactions and investments in foreign operations (52 percent). The first two follow into operating. The third follows whatever policy the bank has chosen for interest on its own debt. The fourth may land outside operating altogether. So the same swap book contains instruments that classify differently by purpose, and the purpose has to be recorded at inception in a form the reporting system can read.
Foreign exchange differences follow the same principle: they are classified in the category of the income or expense that gave rise to them. A bank that presents a single FX gains and losses caption, which the survey found 39 percent of banks doing, will need to split it. The awkward case is FX on other liabilities, where the interest is financing but other effects of the underlying transaction may be operating, and IFRS 18 requires the FX difference to be classified in a single category. For FX on intra-group balances there is a policy choice, to classify all of it as operating or to follow the category of the related item before elimination.
Which bank KPIs become audited measures
A management-defined performance measure, an MPM, is a subtotal of income and expenses that the entity uses in public communications outside the financial statements to communicate management’s view of financial performance, and that is not a subtotal specified by IFRS. An MPM must be disclosed in a single note, with a description, the reason management considers it useful, a reconciliation to the most directly comparable IFRS subtotal, and the tax and non-controlling interest effect of each reconciling item. The note is audited.
The definition matters for banks because many of the measures they lead with are not subtotals of income and expenses at all. KPMG’s survey of the KPIs banks use most often, and its reading of each against the definition, is the clearest map available:
| KPI | Used by | KPMG’s assessment |
|---|---|---|
| CET1 ratio | 100% | Not an MPM. It is a capital measure, not a subtotal of income and expenses. Capital disclosure requirements continue to apply |
| Cost-to-income ratio | 72% | Requires further assessment. A ratio is not a subtotal, but its denominator may be an MPM |
| Deposits to customer accounts | 64% | Not an MPM. A balance sheet measure |
| Adjusted net profit | 60% | Likely to be an MPM |
| Adjusted net interest income | 56% | Likely to be an MPM |
| Adjusted total income | 48% | Requires further assessment |
The consequence is uncomfortable for the results-announcement process as most banks run it. The survey found 56 percent of banks providing a reconciliation of non-GAAP measures outside the financial statements. Of those, 29 percent include tax effects and 21 percent provide a clear description of the adjusting items. The standard requires all of that inside the financial statements, and ESMA’s public statement on IFRS 18 of February 2026 makes clear that at least one group of enforcers will be reading the MPM note closely. A bank that publishes an adjusted figure in a results presentation, and then finds it has no reconciliation that survives audit, has a problem that surfaces in the year-end close.
The practical step is an inventory. Take the last four results announcements, the investor presentation and the annual report, list every performance figure that is not a line on the face of the statements, and test each against the three limbs of the definition. Then establish a process so that no new adjusted measure reaches a public communication before it has been assessed.
Aggregation, and the word “other”
IFRS 18 replaces the IAS 1 principles on aggregation with a more demanding set. Items are grouped on the basis of shared characteristics, and where items are aggregated the label has to describe them as precisely as possible. The word “other” is permitted only where no more informative label exists, and where an “other” caption is material enough that a user might reasonably ask what is in it, further information is required.
Banks aggregate heavily. KPMG’s survey found 44 percent of banks disclosing a breakdown of other revenue in the notes and 60 percent a breakdown of other expenses. The rest will need to. This is a chart of accounts question as much as a disclosure one: if the ledger cannot produce the disaggregation, the note cannot either.
The GCC position in the last quarter of 2026
As at September 2026, no IFRS 18 specific guidance had been located from the Central Bank of the UAE, the Securities and Commodities Authority or the DFSA, and no local transitional relief. The planning assumption is that the standard applies as issued by the IASB. Absence of guidance is not absence of interest: the supervisor reads the financial statements, and the first set prepared on the new basis will be compared against the prudential returns and Pillar 3 disclosures that draw from them.
Three things do not change. Regulatory capital and the CET1 ratio are defined by the prudential framework, not by presentation. The IFRS 9 expected credit loss charge is measured exactly as before, and sits in operating. The statement of financial position is untouched in substance.
Everything that references the income statement does change. Net interest income, operating profit, cost-to-income and any adjusted measure will be defined differently after transition, and every covenant, remuneration scheme, regulatory return template, internal budget and analyst model that cites one of them has to be traced and re-based. KPMG’s readiness path puts it accurately: this is a change programme with a reporting deliverable, not a reporting update.
Three quarters of the comparative year are booked. In the time that remains, the sequence that works is:
- Decide the specified main business activities, and write the evidence memorandum now, because the auditor will want to see it before the restated comparatives are prepared rather than after.
- Select the two policies, on interest from non-customer financing liabilities and on intra-group FX, and record the consequence for the profit before financing and income taxes subtotal.
- Tag at source. Liabilities by relationship to customer financing, derivatives by purpose, FX differences by originating item. Where the source system cannot carry the tag, the mapping has to be maintained outside it and controlled.
- Build the MPM inventory from the last four results announcements and test each measure against the definition.
- Run 2026 in parallel on the new basis, so the restated comparatives are produced from captured data rather than reconstructed from a ledger that was never designed to answer the question.