Tax is rarely the easiest part of a set of financial statements to understand. A company may report a strong operating profit, a complicated effective tax rate, several tax-related charges and an adjusted profit figure that tells a slightly different story again.
IFRS 18 is intended to make financial performance easier to compare by introducing defined categories and required subtotals in the statement of profit or loss. However, a current debate about where certain tax-like charges should appear shows why presentation is not always straightforward.
The issue is not simply whether an amount is called a tax. The real question is whether it is an income tax, a cost of operating the business, a financing item, or a government charge that effectively replaces an income tax.
That distinction matters because presentation changes the story told by operating profit, profit before financing and income taxes, adjusted profit and the effective tax rate.
For SBR ACCA candidates, this is a useful current issue because it combines technical knowledge, professional judgement and investor communication. It also provides an opportunity to explain why clear subtotals matter rather than simply repeating rules.
Candidates who want to develop this kind of applied exam technique can use support from an ACCA SBR tutor alongside regular current-issues practice.
What IFRS 18 is trying to improve
IFRS 18 Presentation and Disclosure in Financial Statements applies for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted.
It replaces IAS 1, although many existing presentation principles continue. Its most visible change is the introduction of a more structured statement of profit or loss.
Income and expenses will generally be classified into five categories:
- operating
- investing
- financing
- income taxes
- discontinued operations
IFRS 18 also requires defined subtotals, including operating profit and profit before financing and income taxes.
These subtotals are designed to improve comparability. Under previous presentation practices, companies could use different structures and labels, making it difficult for investors to compare performance across businesses.
A clearly defined operating profit should make it easier to understand the results generated by the company’s main business activities. Profit before financing and income taxes should then help users separate operating and investment performance from the effects of financing and tax.
The difficulty begins when a charge does not fit neatly into one category.
A tax is not always an income tax
The word tax can describe many different government charges.
Corporation tax based on taxable profits is an income tax. However, companies may also pay payroll taxes, property taxes, sales taxes, digital services taxes, production levies, banking levies, environmental charges or taxes based on revenue rather than profit.
These charges may be imposed by governments, but that does not automatically make them income taxes for financial reporting purposes.
IAS 12 applies to taxes based on taxable profits. IFRS 18 then requires tax expense or income recognised under IAS 12 to be classified in the income taxes category.
Other government charges usually need to be classified according to their nature and the requirements of IFRS 18. In many cases, that may place them within operating expenses rather than below the profit before financing and income taxes subtotal.
This can create a difficult result when a government charge is described as a non-income tax but is economically intended to replace a conventional corporate income tax.
The current tax presentation debate
The IFRS Interpretations Committee considered whether taxes or other charges that fall outside the scope of IAS 12 could nevertheless appear within the income taxes category under IFRS 18.
The initial conclusion was restrictive. If a charge is not tax expense or income recognised under IAS 12, it should not be presented as part of the required income tax expense line or within the income taxes category simply because management considers it tax-like.
That approach protects consistency. It prevents companies from moving operating charges below key subtotals by attaching a tax label to them.
However, it also created concerns about certain charges arising under international tax arrangements.
Some government charges may not technically satisfy the IAS 12 definition of an income tax, but they may operate as a direct substitute for one. Presenting those charges as operating expenses could reduce operating profit even though a conventional income tax on the same profits would appear in the income taxes category.
That could make similar tax burdens look different purely because of the legal design adopted by a particular jurisdiction.
The IASB’s latest proposed direction
In July 2026, the International Accounting Standards Board tentatively decided to propose a narrow amendment to IFRS 18.
The proposed amendment would require a tax charge imposed by a government to be classified in the income taxes category when it acts as a direct substitute for an income tax.
An exposure draft is expected later in 2026. The proposal is therefore not yet a final amendment and may change following consultation.
The narrow scope matters. The IASB is not suggesting that every government levy, contribution or charge should be moved into the income taxes category.
The focus is on charges that directly substitute for income taxes. That means the substance of the charge will matter, not simply its name.
For an SBR answer, this distinction is important. A strong candidate should not write that all tax-related payments belong below profit before tax. The candidate should explain that classification depends on the applicable accounting requirements and the economic nature of the charge.
Why operating profit is at the centre of the issue
Operating profit is one of the most important new subtotals required by IFRS 18.
Investors may use it to assess the profitability of the company’s core activities before financing and tax. Management may use it when discussing performance, setting budgets, measuring bonuses or communicating with lenders.
If a government imposes a charge that is economically similar to an income tax but it is classified as an operating expense, operating profit falls.
If an economically similar charge in another country qualifies as an income tax, it appears below the profit before financing and income taxes subtotal.
Two businesses with similar underlying operations and similar government tax burdens could therefore report different operating margins.
The accounting does not change the total amount of profit after tax. It changes where the cost appears and which subtotal it affects.
That is why presentation matters.
Users often focus on subtotals rather than every individual line in the financial statements. A classification decision can influence the story investors take from the accounts, even where the final profit figure is unchanged.
The importance of profit before financing and income taxes
Profit before financing and income taxes is intended to provide a consistent point in the income statement before the effects of financing and income taxation.
It should help investors analyse operating and investment performance without those results being distorted by differences in capital structure or tax environment.
However, that objective is weakened if economically similar tax burdens appear on different sides of the subtotal.
A direct-substitute tax classified within operating expenses would reduce profit before financing and income taxes. A conventional income tax would not.
The IASB’s proposed amendment appears designed to reduce this mismatch for a narrow group of charges.
In an SBR answer, candidates should connect the technical point to comparability. The issue is not just the location of a number. It is whether the subtotals provide users with a consistent view of business performance.
Why simply moving every tax charge would be dangerous
There is also a strong reason for keeping the income taxes category narrow.
If companies were allowed to classify any tax, levy or government charge as income tax, management could move significant business costs below operating profit.
A property tax is still normally a cost associated with using property. An employer payroll tax is still connected to employing staff. A production levy may be directly connected to the company’s operating activity.
Moving these costs below operating profit could make the business appear more profitable at the operating level without changing its economic performance.
This would weaken comparability rather than improve it.
The correct approach therefore requires balance.
The income taxes category should contain actual IAS 12 income taxes and any additional charges that a final amendment specifically requires to be treated as direct substitutes. Other taxes and levies should remain classified according to their underlying nature.
The role of judgement
The phrase direct substitute sounds clear, but applying it may require judgement.
Management may need to consider why the government introduced the charge, how the amount is calculated, what taxpayers are subject to it and how it interacts with the conventional income tax system.
A charge should not qualify merely because it is calculated by reference to revenue, assets or another measure. Management would need evidence that it directly replaces an income tax rather than operating alongside it as an additional government levy.
This judgement should be documented carefully.
A good governance process would involve the finance team, tax specialists, auditors and the audit committee. The company may also need to explain the judgement in the notes where it has a material effect on presentation.
For SBR candidates, this creates an opportunity to earn professional marks. A board-ready answer would not stop after stating the proposed rule. It would recommend that management investigate the legal and economic substance of the charge, document the basis for classification and ensure that the presentation is applied consistently.
Clear subtotals need clear explanations
A subtotal is only useful when users understand what sits above and below it.
Companies should avoid assuming that investors will automatically understand why a particular government charge has been classified as operating or income tax.
Where the amount is material, the notes may need to explain:
- the nature of the charge
- the basis on which it is calculated
- why it has been classified in a particular category
- which subtotals are affected
- whether the treatment has changed from the previous period
- whether future standard-setting could change the presentation
That is the only bullet list needed for the analysis. The broader principle is simple: classification should not hide the economic effect of the charge.
Clear disclosure becomes especially important during the transition to IFRS 18 because users will be adjusting to new categories, subtotals and reconciliations.
Management-defined performance measures add another layer
IFRS 18 also introduces disclosure requirements for management-defined performance measures.
These are subtotals of income and expenses used in public communications outside the financial statements to communicate management’s view of financial performance.
Examples may include adjusted operating profit, underlying profit or adjusted profit from continuing operations.
Where a measure qualifies as a management-defined performance measure, the company must provide information including a reconciliation to the most directly comparable IFRS subtotal.
The reconciliation must also explain the income tax effect and non-controlling interest effect of each reconciling item.
This creates another reason why tax presentation needs to be clear.
Suppose management excludes a government charge from adjusted operating profit because it considers the charge unusual. Users need to understand where the amount appears under IFRS 18, why management has adjusted for it and how the related tax effect has been calculated.
A company should not use an adjusted measure to quietly reverse an unfavourable classification result.
The measure needs a clear label, a consistent calculation and a credible explanation of why it provides useful information.
The danger of an adjusted profit story that does not reconcile
Problems arise when the financial statements, investor presentation and tax note tell different stories.
The statement of profit or loss might classify a charge as operating. Management may then exclude it from adjusted operating profit. The tax note might describe it as part of the group’s tax burden, while the annual report discusses it as a regulatory cost.
Each statement might be technically defensible in isolation, but the combined reporting could be confusing.
The board should therefore consider the report as a connected document.
The presentation in the primary financial statements should align with the accounting policy. The tax note should explain the effective tax rate clearly. Management-defined performance measures should reconcile transparently. The strategic report should avoid language that contradicts the accounting treatment.
This is the kind of connectivity that SBR candidates should mention. High-quality reporting is not achieved by preparing each section separately. The different parts of the annual report need to tell a consistent story.
How the issue could appear in an SBR scenario
An exam scenario could describe a group operating in several countries.
One government imposes a conventional corporation tax based on taxable profit. Another imposes a separate charge described as a minimum contribution, calculated using a different base. Management wants to present both amounts as income tax because it believes they represent the group’s total tax burden.
The requirement might ask candidates to discuss the proposed presentation and advise the audit committee.
A weak answer would say that both amounts are taxes and should therefore appear in the tax line.
A stronger answer would separate recognition from presentation.
It would explain that the conventional corporation tax falls within IAS 12 and is classified in the income taxes category. The second charge must be assessed based on the applicable requirements and its economic substance.
If it is not an IAS 12 income tax, it cannot automatically be included in the income tax line. The candidate could then refer to the current IASB proposal for charges that act as direct substitutes for income taxes, while making clear that the proposal is not yet final.
The answer should conclude with a recommendation.
Management should analyse the charge, document its judgement, monitor the exposure draft and explain any material classification decision clearly to users.
A useful paragraph structure for the exam
Candidates can approach this type of requirement using Issue – Rule – Apply – Conclude.
Issue: determine whether the government charge belongs in the income taxes category or another IFRS 18 category.
Rule: IFRS 18 classifies IAS 12 tax expense or income within the income taxes category. Other charges are classified according to the relevant requirements and their nature, subject to any future amendment for direct-substitute taxes.
Apply: examine how the charge is calculated, whether it replaces a conventional income tax, how it interacts with the local tax regime and which subtotals would be affected.
Conclude: present the charge in the category supported by the current requirements, disclose material judgement and monitor the IASB’s proposed amendment.
This structure keeps the answer technical, applied and decisive.
What finance teams should be doing before 2027
The effective date of IFRS 18 may sound distant, but comparative information makes implementation an earlier project.
Companies need to consider whether their ledgers and consolidation systems can assign income and expenses to the new categories. They also need to identify which subtotals are used in public communications and whether these could qualify as management-defined performance measures.
Tax-related charges deserve specific attention.
Finance teams should catalogue material taxes and government levies across the group. They should determine which amounts fall within IAS 12, which are operating charges and which may be affected by the proposed direct-substitute tax amendment.
Waiting until the year-end reporting process would create unnecessary risk.
The classification may affect operating profit, segment discussions, adjusted performance measures, budgeting, bonus arrangements, loan covenant calculations and investor guidance.
What this teaches candidates about current issues
Current issues answers should not become news summaries.
The marker does not need a history of every IASB meeting. The candidate should identify the development, explain why it matters and apply it to the scenario.
For this topic, the useful points are:
IFRS 18 creates clearer categories and required subtotals. Only IAS 12 income taxes are automatically classified in the income taxes category. A debate has arisen over charges that are not technically income taxes but may directly substitute for them. The IASB has tentatively proposed a narrow amendment, but the proposal is not yet final. Classification matters because it affects operating profit and comparability.
That is enough current context. The marks then come from applying those ideas to the company in the scenario.
How to prepare this topic efficiently
Candidates do not need pages of notes on this issue.
A concise revision card could contain four lines:
IFRS 18 effective from 1 January 2027.
Required subtotals include operating profit and profit before financing and income taxes.
Non-income tax charges do not automatically belong in the income taxes category.
A July 2026 tentative proposal addresses government charges that directly substitute for income taxes.
The next step should be writing.
Practise a 15-minute requirement advising an audit committee about a tax-like charge. Explain the classification issue, connect it to the subtotals and provide a recommendation.
A structured ACCA SBR course can also help candidates turn technical updates into concise, scenario-based answers rather than collecting current-issues notes they never practise using.
Why clear subtotals matter
Subtotals shape how users understand performance.
Operating profit influences how investors view the strength of the core business. Profit before financing and income taxes helps separate business performance from financing and taxation. Adjusted measures influence the story told by management.
A tax charge placed above or below one of these subtotals can change that story without changing total profit after tax.
That does not mean one classification is automatically more favourable or more truthful. It means the classification must follow the applicable requirements, reflect the nature of the charge and be explained clearly.
The current debate shows that presentation is not a cosmetic part of accounting. It influences comparability, accountability and the decisions users make.
What to do next
Learn the difference between an income tax and a tax-like operating charge.
Understand the purpose of the new IFRS 18 categories and subtotals. Remember that the IASB’s direct-substitute tax proposal remains tentative. Then practise explaining the issue in a short audit committee response.
A good SBR answer will not simply state where the charge goes.
It will explain why the classification matters, which subtotal is affected, what judgement management must make and what users need to understand.
