Is an income statement presented by nature of expense or by function of expense? Under Singapore Financial Reporting Standards, either is acceptable. The choice is a presentation decision: it changes how the same result is explained, not the result itself.
SFRS(I) 1-1 asks you to analyse expenses using whichever classification is reliable and more relevant to your business. This guide sets out both formats with a worked example of each, then covers what changes when SFRS(I) 18 takes effect.
Income Statement by Nature of Expense
An income statement by nature discloses expenses according to what they were spent on, such as raw materials, transport costs, employee benefits, depreciation and utilities. Those expenses are not further allocated to functions such as cost of sales, selling or administrative.
This format is common among smaller businesses because it is simple to prepare. Expenses are reported broadly as they fall out of the accounting records, with no need to allocate shared costs across functions. The trade-off is that it does not present cost of sales, so gross profit cannot be shown on the face of the statement. Movements in stock are instead shown as a separate “changes in inventory” line, as in the example below.
The following example shows the format of an income statement by nature:
| ABC PTE. LTD. — Statement of Profit or Loss (For the Financial Year Ended 31 December 20XX) | |
|---|---|
| Sales revenue | 573,610 |
| Operating expenses: | |
| Purchases, delivery charges and other direct costs | (158,401) |
| Changes in inventory | 69,426 |
| Employee benefit expenses | (124,630) |
| Rent expense | (24,000) |
| Utilities expense | (6,900) |
| Depreciation expense | (3,250) |
| Total operating expenses | (247,755) |
| Results from operating activities | 325,855 |
| Finance costs (interest expense) | (375) |
| Profit before tax | 325,480 |
Income Statement by Function of Expense
An income statement by function discloses expenses according to the activity they relate to: cost of sales, selling and distribution, administrative expenses and so on.
Because cost of sales is presented separately, this format shows gross profit and operating results on the face of the statement, which is why most medium-sized and large businesses use it. It does require more judgement, since shared costs such as premises or staff time have to be allocated across functions.
The following shows the format of an income statement by function of expense:
| ABC PTE. LTD. — Statement of Profit or Loss (For the Financial Year Ended 31 December 20XX) | |
|---|---|
| Revenue | 102,716 |
| Cost of sales | (55,708) |
| Gross profit | 47,008 |
| Other income | 1,021 |
| Selling and distribution expenses | (17,984) |
| Administrative expenses | (17,142) |
| Research and development expenses | (1,109) |
| Other expenses | (860) |
| Results from operating activities | 10,934 |
| Finance income | 1,161 |
| Finance costs | (1,707) |
| Net finance costs | (546) |
| Share of profit of equity-accounted investees, net of tax | 541 |
| Profit before tax | 10,929 |
| Tax expense | (3,371) |
| Profit from continuing operations | 7,558 |
Presenting by function does not remove the need for information about the nature of your expenses. SFRS(I) 1-1 requires an entity that classifies expenses by function to disclose additional information on their nature in the notes, including depreciation and amortisation expense and employee benefits expense. This is a commonly missed disclosure.
Which Presentation Should You Choose?
The standard frames this as a judgement rather than a free choice: use the classification that is reliable and more relevant to your business. In practice:
- By nature suits businesses with a straightforward cost base, or where allocating costs to functions would be arbitrary.
- By function suits businesses where gross margin is a meaningful measure of performance, such as trading, manufacturing and distribution.
Whichever you choose, apply it consistently from year to year so the figures remain comparable.
What Changes Under SFRS(I) 18
SFRS(I) 18, Singapore’s adoption of IFRS 18, replaces SFRS(I) 1-1 for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted. It does not change how profit is measured, only how it is presented and disclosed. For the statement of profit or loss, though, the changes are substantial:
- Two subtotals become mandatory: operating profit or loss, and profit or loss before financing and income taxes.
- Income and expenses are classified into defined categories, including operating, investing and financing.
- Operating expenses may be presented by nature, by function, or on a mixed basis, whichever gives the most useful structured summary. The either/or choice described above becomes a three-way choice.
- If any operating expenses are presented by function, or on a mixed basis, cost of sales must be presented separately, and the notes must disclose five specified expenses by nature: depreciation, amortisation, employee benefits, impairment losses and their reversals, and write-downs of inventories and their reversals.
The timing matters more than the 2027 date suggests. A company with a 31 December year end applying SFRS(I) 18 for FY2027 will need restated FY2026 comparatives, so how expenses are classified has to be decided and captured in the accounting system during the current financial year, not in 2027.
If you report under the SFRS for Small Entities framework rather than SFRS(I), confirm which requirements apply to you before assuming this change affects your accounts.
Practical Takeaway
By nature and by function are both acceptable ways of presenting the same result. Choose the one that explains your business most faithfully, remember the notes disclosure if you present by function, and apply your choice consistently.
If your financial year ends on 31 December, treat the current year as the one in which to settle how expenses will be classified under SFRS(I) 18, because your comparatives will be prepared on that basis.
Last updated: August 2026. This article is provided for general information only and reflects the reporting standards in issue at that date. Reporting requirements change, so please refer to the current pronouncements or speak to our team about how they apply to your financial statements.