Ind AS 118 for NBFCs, holding companies and conglomerates: the main-business-activity test

Short answer: Under Ind AS 118, where interest, dividends and fair value gains sit depends on whether investing in assets, or providing finance to customers, is a main business activity of the reporting entity. That assessment is made entity by entity, not transaction by transaction, and a holding company can reach a different answer from the group it heads.

Why this one test decides so much

Ind AS 118 sorts every item of income and expense into operating, investing, financing, income taxes or discontinued operations, and creates two new mandatory subtotals: operating profit, and profit before financing and income taxes. The overview of what changes in the profit and loss covers the structure.

For a plain manufacturer the sorting is mostly obvious. Interest income on surplus cash is investing. Interest on borrowings is financing. Dividends received are investing. Operating profit is close to what you already call operating profit.

For a lender, that answer would be nonsense. Interest income is the revenue. So the standard provides a test, and the test is the difference between an operating profit that describes your business and one that does not.

What the test actually asks

The test has two limbs, and they work independently:

1. Is investing in particular types of assets a main business activity? If yes, then the income and expenses from those assets — interest, dividends, fair value changes, rental income — are classified in operating rather than investing. Think of an investment company holding equities, or a company whose business is holding and letting investment property.

2. Is providing financing to customers a main business activity? If yes, then income and expenses from financing activities that relate to that business are classified in operating. There is also a policy choice available in this case that widens what can go into operating, including amounts related to cash and cash equivalents. The exact mechanics of that choice sit in the notified text, so read it rather than a summary.

Two points people miss. “Main” does not mean “only”, and it does not mean “largest”. A company can have several main business activities. And the assessment is about the business, not about how material a line is in one year.

Who has to do this properly

• NBFCs and housing finance companies. The answer is usually clear, but it still has to be written, and the boundary between financing provided to customers and treasury activity has to be drawn.
• Holding companies. A pure holding company earning dividends and interest from group entities has to decide whether investing is its main business activity in its standalone statements. Many will conclude it is. The consolidated statements of the same group, which eliminate those flows and show a manufacturing business, will conclude it is not.
• Conglomerates. A group with a manufacturing arm and a captive finance arm has two main business activities. Classification has to reflect the finance arm without turning the whole group into a lender.
• Treasury-heavy manufacturers. Large cash piles and a big investment book feel like a main business activity to the treasurer and usually are not one under the standard. Say so in writing, before an auditor asks.
• Real estate and infrastructure groups. Investment property, project SPV interest and construction finance all need a view.

What the test does not move

Three things stay where they are, whatever your main business activities:

• Income taxes. Its own category.
• Discontinued operations. Its own category.
• Your share of profit of associates and joint ventures accounted for using the equity method. This sits in investing, below operating profit. For groups whose strategy runs through joint ventures, that is a real change to how operating profit reads, and no main-business-activity argument moves it.

Standalone and consolidated can differ, and that is fine

This is the part that surprises people. Ind AS 118 is applied by the reporting entity. A holding company’s standalone profit and loss and the group’s consolidated profit and loss are two reporting entities. If investing is a main business activity of the parent on its own but not of the group, the same dividend can be an operating item in one statement and an investing item in the other.

That is not an inconsistency to be fixed. It is the standard working as intended. What it does mean is that a group cannot maintain one classification table and apply it everywhere. Category tags have to be capable of differing by reporting entity, which is exactly what the transition data plan is about.

How to write the assessment

Treat it as a document your auditor will keep on file, not a slide:

1. Name the reporting entity. One assessment per set of statements you publish, standalone and consolidated.
2. Describe how the entity makes its returns, in the entity’s own terms, with reference to what you already tell investors and regulators.
3. Take each limb separately. Investing in assets: which assets, and why they are a main business activity or not. Providing financing to customers: which customers, and whether it is a business or an accommodation.
4. Record the consequence. List the specific income and expense lines that move as a result, by ledger.
5. Record the policy choices available to you and which you have taken.
6. State when you will revisit it. The assessment follows the facts, so a new finance subsidiary or a disposal can change it.
7. Agree it with the auditors before the comparative year closes, not during the first year of application.

Where things stand

Ind AS 118 is the Indian equivalent of IFRS 18. NFRA recommended it to the Central Government in December 2025 for annual periods beginning on or after 1 April 2027, with an option for calendar-year companies from 1 January 2027. It becomes law when the MCA notifies it, and the notified text governs everything above. More on the wider set of changes on the Ind AS 118 hub.

Because the standard applies retrospectively, the year you restate is the year before adoption. On the recommended dates that is FY 2026-27 — the year you are closing now. The assessment is the first thing on the list, because nothing else can be tagged until it is settled.

Where FINAHQ fits

FINAHQ maps each company’s trial balance to the group’s reporting lines once and produces the statements from approved templates. Because consolidation and the standalone statements run off the same mapped data, a category tag can differ between the parent’s own statements and the group’s without keeping two sets of books. See how consolidation works, or calculate what it would save your close.

This article is general information, not professional advice. The final notified Ind AS 118 text governs. Discuss your assessment with your auditors.