The fund that never makes a profit
Under IFRS 18, when a fund's units are classified as liabilities, where does the change in net assets attributable to unitholders go: operating, financing, or somewhere else?
Walk into any Dublin fund administrator and you will find shelves of IFRS accounts with almost nothing in equity. An ICAV with a euro class, a hedged sterling class and a cheaper institutional class rarely meets the narrow IAS 32 exception for puttable instruments, so its redeemable participating shares are financial liabilities. Every euro the fund earns is owed to the people who hold them.
Under IAS 1 that gave a familiar layout: income, expenses, and a bottom line labelled "increase in net assets attributable to holders of redeemable participating shares". IFRS 18 now makes every entity sort each item of income and expense into one of five categories, chiefly operating, investing and financing, and present operating profit and profit before financing and income taxes. For a fund, the investments are the easy half. The unitholders' share is not. IFRS 18 mentions mutual funds once, in its scope section, and the paragraph that looks most like it was written for them points somewhere you probably do not want to go.
Why the units are liabilities in the first place
A puttable instrument is a financial liability unless it meets every condition in IAS 32.16A–16B. Among them, it must sit in the class of instruments subordinate to all others, and every instrument in that class must have identical features (IAS 32.16A(c)). Different management fees, currency-hedged classes, and distributing and accumulating classes side by side are the usual reasons a fund fails. Once the participating shares are liabilities, all that is left in equity may be a nominal amount of subscriber or management shares.
The easy half: the fund's investments
A fund invests in assets as a main business activity; investment entities are the first example IFRS 18 gives (IFRS 18.B31(a)). So the income and expenses from its investments, which would otherwise be investing, go into the operating category (IFRS 18.58). Because it invests in financial assets as a main business activity, interest on its cash is operating too (IFRS 18.56(a)), and fair value changes on unconsolidated subsidiaries that an investment entity holds as investments follow the same route (IFRS 18.55(b)). The fund must disclose that investing in assets is a main business activity (IFRS 18.51(a)).
For most funds the investing category is therefore empty, and operating profit and profit before financing and income taxes are the same number. The question is what sits below that line.
Three readings of the unitholders' line
IFRS 18 offers three candidate answers, and each has a paragraph behind it.
Financing, as a liability that raises finance. A fund receives cash when it issues units and returns cash when it redeems them. That is exactly how IFRS 18 describes a transaction that involves only the raising of finance (IFRS 18.B50). Income and expenses from the initial and subsequent measurement of such a liability are financing (IFRS 18.60(a)), and IFRS 18 gives dividends on shares classified as liabilities as an example (IFRS 18.B52(c)). Read literally, remeasuring the units to their redemption amount is a financing expense equal to the whole result, and profit or loss is nil.
The bottom line, relabelled. The IAS 32 illustrative example for an entity with no equity (Example 7) deducts distributions as finance costs and labels the final figure as the change in net assets attributable to unitholders, instead of showing the remeasurement as an expense. IFRS 18.7 expressly lets entities without equity, giving some mutual funds as its example, adapt the presentation of unitholders' interests, and IFRS 18.43 requires totals to be labelled in a way that faithfully represents them. IAS 32.18(b) itself permits the descriptions "net asset value attributable to unitholders" and "change in net asset value attributable to unitholders", and the IASB updated Example 7 for IFRS 18 so that it now runs through operating profit and profit before financing before arriving at that line. PwC's illustrative IFRS 18 fund statement takes this route: distributions in financing, and the increase in net assets attributable shown as the profit or loss line.
Operating, as an investment contract with participation features. IFRS 18.64(a) takes out of financing, and puts into operating, income and expenses from issued investment contracts with participation features recognised under IFRS 9. IFRS 18.B58(b) gives as an example a contract of that kind issued by an investment entity, and that example was added at the drafting stage, when reviewers asked the IASB to clarify a phrase it had not defined. A redeemable unit in a fund that is an IFRS 10 investment entity looks a lot like that.
Why the third reading does not work
If IFRS 18.64(a) caught fund units, the whole unitholders' share would move above operating profit. Operating profit would become whatever is left once unitholders have been credited in full, which for most funds is little more than the tax charge. The subtotal IFRS 18 created to show performance would show nothing.
The result is not the only reason to reject it. IFRS 18 does not define an investment contract with participation features, and the purpose of the exception (BC194) is to let entities that issue such contracts reflect their margin appropriately in the operating category. An insurer's unit-linked business is the obvious case. A fund earns no such margin: everything after expenses belongs to the unitholders. PwC's view is that IFRS 18.64(a) and B58(b) do not apply to investment funds, while acknowledging that the point is not clear. That is the better reading.
The example in B58(b) is not empty, though. Hypothetically, an investment entity that issued participating contracts to third parties alongside its own units, and kept a margin on them, could well be within it. That is a question to answer instrument by instrument, not a reason to move every fund's NAV movement into operating.
One portfolio, two share structures
Liffey Street Global Equity ICAV (a fictional fund) has a 31 December year end. Its 2027 results, in €000, are: dividends 1,200; interest on cash 100; net gains on financial assets at fair value through profit or loss 8,900; management, administration and depositary fees 1,400; withholding tax on dividends 200, which the fund treats as income tax under IAS 12; and distributions to its distributing class of 800.
If its participating shares met IAS 32.16A–16B and were equity, IFRS 18 would give operating profit and profit before financing and income taxes of €8,800,000, income tax of €200,000 and profit of €8,600,000, with the €800,000 distribution in the statement of changes in equity. With its real share structure the shares are liabilities, and the three readings give the following. The bottom line is profit or loss in readings 1 and 3, and the increase in net assets attributable to holders of redeemable shares in reading 2.
€000 | Financing | Bottom line | Operating |
|---|---|---|---|
Investment income and gains | 10,200 | 10,200 | 10,200 |
Fees and expenses | (1,400) | (1,400) | (1,400) |
Distributions to unitholders | – | – | (800) |
Remeasurement of units | – | – | (7,800) |
Operating profit | 8,800 | 8,800 | 200 |
Profit before financing and income taxes | 8,800 | 8,800 | 200 |
Distributions to unitholders | (800) | (800) | – |
Remeasurement of units | (7,800) | – | – |
Profit before income taxes | 200 | 8,000 | 200 |
Income tax | (200) | (200) | (200) |
Bottom line | nil | 7,800 | nil |
Three things stand out.
The first two readings match the equity-classified fund. Operating profit and profit before financing and income taxes are €8,800,000 either way. Profit before financing and income taxes is meant to be comparable however an entity is financed, and here it is: classifying the units as liabilities rather than equity does not change it.
The literal financing reading turns financing into a balancing figure. The €7,800,000 remeasurement is measured after tax, so profit before income taxes always equals the tax charge and profit is nil every year, whatever happens.
The operating reading tells a reader nothing. Operating profit equals the withholding tax, €200,000, and would be exactly nil for a fund that pays no tax.
What to do
Present the investment result in operating, put distributions to holders of liability-classified units in financing, and label the final line as the increase or decrease in net assets attributable to holders of redeemable shares, as IAS 32 Example 7 does (or Example 8, where a nominal class of subscriber or management shares sits in equity). That keeps the layout users of fund accounts already know, produces a meaningful operating profit and profit before financing and income taxes, and rests on IAS 32.18(b), the updated Example 7, and IFRS 18.7 and 18.43.
The obvious challenge is that the remeasurement is an expense under IAS 32, and IFRS 18.72 defines profit or loss as all income and expenses, so the relabelled line is not literally profit or loss. That is why the literal financing presentation is defensible too, and some preparers will prefer it because it shows the remeasurement of the liability where it happens. The IASB's own example still lands on the bottom-line presentation. What is hard to defend is the operating reading. Whichever you choose, say so in the accounting policies. IFRS 18 does not settle the point, and the judgements with the most significant effect on the amounts recognised have to be disclosed under IAS 8, which now carries the requirement that used to sit in IAS 1.
The smaller questions that follow
Distributions. IAS 32.35 puts distributions on liability-classified units through profit or loss as an expense, and there they are financing (IFRS 18.B52(c)), not operating. Some funds show them in the statement of changes in net assets attributable instead, a practice PwC notes; where units are equity, distributions go to equity.
Dealing costs. Incremental costs of issuing or redeeming the units themselves, where the fund bears them, are financing (IFRS 18.60(b)). Portfolio dealing costs triggered by subscriptions and redemptions are different: they are costs of acquiring and disposing of investments and stay in operating (IFRS 18.54(c) and 58), even where an anti-dilution levy or swing price recovers them from the dealing investor.
Hedged share classes. A forward that hedges the currency of one share class is arguably managing the currency risk of that class's units rather than of the portfolio. IFRS 18 puts gains and losses on derivatives used to manage identified risks in the category affected by those risks (IFRS 18.B70–B76), and in April 2026 the IASB approved an agenda decision placing a derivative that manages the currency risk of a net liability exposure in financing. Its facts are a group's foreign-currency loans, not fund units, so it helps only by analogy. If the hedge is instead seen as not managing a risk of the fund at all, because the currency risk falls on that class's investors, IFRS 18.B73 decides: financing if it relates to a transaction that involves only the raising of finance, operating otherwise. Under the literal financing reading, financing is the consistent answer. Under the bottom-line reading there is no financing line for the hedged item, and many funds will keep share-class hedge results with their other derivative gains in operating. This one is genuinely open: decide, and disclose the policy.
Feeder funds. Where a feeder measures its holding in the master at fair value, it is an investment held as a main business activity, so its returns are operating (IFRS 18.58, or 55(b) for an investment entity holding a subsidiary), even though in the master's own accounts the same units are liabilities. A feeder that controls its master and is not an investment entity faces a consolidation question first.
Cash flows. Subscriptions and redemptions of liability-classified units remain financing cash flows, and IAS 7 now starts the indirect method from operating profit.
Why this matters for December 2026
IFRS 18 applies to annual periods beginning on or after 1 January 2027, and the EU endorsed it in February 2026. It applies retrospectively, so a calendar-year fund's 2026 statement of profit or loss becomes the comparative, and the first IFRS 18 accounts must reconcile each of its lines from IAS 1 to IFRS 18 (IFRS 18.C3).
For an umbrella with dozens of sub-funds, the presentation of the unitholders' line is a decision to make once, at umbrella or house level, and to build into the reporting templates before this year-end closes. Agree it with the board and the auditor now; the answer should be the same for every sub-fund with liability-classified shares.
What the auditor will look at
Consistency across sub-funds and umbrellas; whether the main business activity disclosure is made; whether distributions and dealing costs have left the operating category; how hedged share class results are classified, and whether the policy says so; and whether the 2026 comparatives have been reclassified on the same basis.
Work it through with our tools
Our IFRS 18 Transition Tool moves a real set of accounts from IAS 1 to IFRS 18: it classifies income and expenses into the new categories, builds the required subtotals, and helps you identify, reconcile and document your MPMs. It is free with a member account.
For the year-end work in Excel, our IFRS 18 Transition Pack takes the statement of profit or loss from IAS 1 to IFRS 18 line by line, restates both years, and drafts the transition note with the IFRS 18.C3 reconciliation and a disclosure checklist.
IFRS 18 in the Learning Hub: the categories, the specified main business activities and the new subtotals, with practice questions.
Year-End 2026 Reporting Update: our CPD course. Webinar 2 treats 2026 as the dress rehearsal for IFRS 18.
The Tipping Point: weigh and write up judgements like this one, where the standard leaves the answer open.
Disclosure Review: check the accounting policy and judgement disclosures before the auditor does.
A fund that never makes a profit is not a problem IFRS 18 created. It is one IFRS 18 forgot to mention. The standard's own structure and twenty years of fund practice point to the same place: below profit before financing and income taxes, not above operating profit.
