When investing in property is your business, can its income really be treated as an investment?
That question captures one of the most important shifts IFRS 18 brings to real estate reporting.
For many years, real estate companies often presented rental income and fair value gains as an “investing” result set apart from operating performance. But for a company whose core business is real estate, property isn’t a side investment; it’s the engine of the business. It generates the rental income, drives the fair value movements, and underpins operating performance year after year. But, IFRS 18 changes how companies prepare and present their annual reports and it is effective from 1 January 2027.
The interesting part is that IFRS 18 does not change how real estate companies measure rental income or fair value gains, but it changes how those numbers are classified, presented and explained.
And that changes the story an income statement tells.
Real Estate different treatment: it is not one size fits all
Consider two companies that both hold investment property.
For one, property is simply an investment held on the side. For the other, property is the business itself. IFRS 18 makes the distinction relevant.
The standard requires an entity to assess whether investing in assets is one of its specified main business activities. For a real estate company that satisfies the criteria, income and expenses arising from those investments may be classified within operating category. That accounts that rental income and fair value gains or losses from investment property become part of operating story rather than investing category.
This is an important modification; it means how a company is categorized in its financial statements now depends on how it operates. The way the business runs determines how it’s reported.
Rental Income and Fair value gains, now sit in Operating and not Investing
Under IFRS 18, it is a thumb rule that income and expenses that do not fall in other categories fall in operating category. However, if a company’s main business activity involves investment, then income and expenses from those investments are also included in operating activity. This is certainly true in case real estate company.
And their numbers are closer to operating profit. And it is the most important metric as it shows how well the company is doing. It is purely a classification shift and not a change in value creation, that can meaningfully influence how results are read and compared.
Main business activity is key distinction factor
This is the area where IFRS 18 moves beyond a technical classification exercise. Any entity should assess whether investing in assets is a specified main business activity based on evidence. One relevant indicator is whether the entity uses a subtotal similar to gross profit one that includes income and expenses that would otherwise sit in investing as an important measure of its operating performance. Other facts and circumstances, including how the business is described externally, are also considered.
One noteworthy, exception for real estate groups with investments accounted using the equity method. Therefore, income and expenses from equity-accounted associates and joint ventures are part of investing category, because the underlying activity relates to group’s broader business. The point of difference is relevant only for real estate groups that use joint ventures to own or develop properties.
The Second Shift: How Management Performance Measures Come into Focus
Classification isn’t the only story in IFRS 18. The standard also introduces new requirements around Management-defined Performance Measures (MPMs). These are subtotals of income and expenses that management uses in public communications.
They convey the entity’s view of its financial performance. These measures aren’t otherwise specified by IFRS Accounting Standards.
The Three-Part MPM Test
To qualify as an MPM, a measure has to meet a specific test. It must be a subtotal of income and expenses. It must have been used in public communications outside the financial statements. Importantly, it must reflect management’s view of the financial performance of the entity as a whole. This applies to the whole entity, not a segment, division, or individual property.
Why This Matters Specifically for Real Estate
This last point matters for real estate companies. A property-level or portfolio-level metric generally won’t meet the definition of an MPM on its own. Entity-wide measures such as adjusted earnings, funds from operations (FFO), or similar group-level metrics commonly used in the sector likely will meet it.
From Investor Communications to Audited Disclosure
Previously, companies could report these adjusted, non-GAAP-style metrics in investor communications. This included earnings calls, press releases, and MD&A. These metrics didn’t need to touch the audited financial statements.
Under IFRS 18, any measure meeting the MPM definition must now be disclosed. This must happen in a single dedicated note within the financial statements. This note requires a reconciliation to the closest IFRS-defined subtotal. It also requires an explanation of how it’s calculated and why it’s useful.
The Takeaway for Real Estate Companies
The takeaway: if management uses a measure to tell investors how the business is performing, the reporting now needs to show something specific. It must show explicitly how that measure connects back to the IFRS numbers.
Real estate is a sector with several widely used, sector-specific performance measures. Companies should expect to spend real time assessing which of their existing metrics meet the MPM definition. They should also assess how these metrics will need to be reconciled and disclosed going forward.
IFRS 18 goes beyond income-statement redesign
It is easy to view IFRS 18 as a presentation exercise; reclassifying certain amounts, introducing new subtotals, and updating the notes.
For real estate reporting teams that would be too narrow a viewpoint.
The changes can have implications for:
- classification of property-related income and expenses;
- operating profit and other subtotals;
- assessment of the entity’s main business activities;
- equity-accounted investments and joint ventures;
- management performance measures;
- expense disclosures; and
- the systems and processes used to collect and map disclosure data.
This standard also mandates companies to present operating expenses in a way that provides a useful, structured summary, using nature function or a combination of both. Additional disclosures are required for specified expenses such as depreciation, amortization, employee benefits, impairment and inventory write-downs.
For disclosure teams, that means the work should not begin with the final financial statement.
It should begin much before then that with data, classification logic, reporting processes and the controls, supporting the disclosures.
What does this mean for real estate companies?
Though 2027 effective date may look far away, but the transition is retrospective. That means comparative information will also need to reflect IFRS 18.
The practical question for reporting teams is:
Are we ready for IFRS 18?
It is:
“Can we explain why every significant number is appearing where it does and can we support that explanation with consistent data and evidence? “
There is much a bigger question.
It leads to accounting policy, management reporting, investor communication and disclosure management into a single conversation.
Future of IFRS 18 in Real Estate
There is less focus on where rental income appears and more on how financial performance is communicated.
Real Estate companies have always had their own ways of measuring performance. This standard facilitates greater structure to the relationship between those management measures, and the financial statements investors rely on.
As the effective date is coming closer, the strongest reporting process will be those that connect three things:
- What the business does?
- How do management measure it?
- How the financial statements explain it?
The real opportunity with IFRS 18 is that the property is still the same, the underlying economics are still the same.
What’s changing is the narrative the financial statements tell about that property. Real estate companies will need to make sure that the story is clear, consistent and supported by the right disclosure processes.
Frequently Asked Questions (FAQs)
Does IFRS 18 change how real estate companies measure rental income or fair value gains?
No. IFRS 18 doesn’t change the measurement of rental income or fair value gains it changes how those numbers are classified, presented, and explained in the financial statements.
Why would rental income move from “investing” to “operating” for a real estate company?
Under IFRS 18, investing in assets may be one of an entity’s specified main business activities. If so, income and expenses from those investments are classified within the operating category. This applies rather than investing.
For a real estate company where property is the core business, this typically means something specific. Rental income and fair value gains or losses now sit in operating results.
How does a company know if real estate investment counts as a “main business activity“?
>>>>>>This is judged on evidence, not just intent.A key indicator is whether the entity uses a subtotal similar to gross profit.
This subtotal includes income and expenses that would otherwise sit in investing. The entity treats this as an important measure of operating performance.
Other facts, including how the business is described externally, are also considered.
Are equity-accounted joint ventures and associates treated the same way?
No, this is a notable exception. Income and expenses from equity-accounted associates and joint ventures stay in the investing category, since the underlying activity relates to the group’s broader business. This mainly matters for real estate groups that use joint ventures to own or develop properties.
What are Management-defined Performance Measures (MPMs), and why do they matter for real estate?
>>>>>>>>>MPMs are subtotals (like adjusted earnings or FFO) that management uses in public communications to describe entity-wide financial performance, and that aren’t otherwise defined by IFRS. Real estate companies use several sector-specific metrics like this.
Under IFRS 18, any measure meeting the MPM definition must now be disclosed. This must happen in a dedicated note in the financial statements. This note requires a reconciliation to the nearest IFRS subtotal. It also requires an explanation of why it’s used.
Previously, these measures could live purely in investor communications. They remained untouched by the audited statements.
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