Classification of foreign exchange differences

Learning objectives

• Determine the category of a foreign exchange difference according to the item that gave rise to it.L2
• Justify the undue cost or effort exception.L2, L3

Normative references

• IFRS 18 §B65Foreign exchange differences recognised in profit or loss under IAS 21 are classified in the same category as the income and expenses from the items that gave rise to them (for example a trade receivable in operating, a borrowing that involves only the raising of finance in financing: B66), unless doing so would involve undue cost or effort, assessed item by item, in which case they are classified in the operating category (B68).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• Cyprès SA, whose functional currency is the euro, has borrowed USD 2,000,000 from a bank, a transaction of pure financing (case facts). At the closing date, the change in the exchange rate gives rise to an exchange loss of EUR 35,000 on this loan. In which category is this loss classified?L2
• Marée SA has three dollar positions at the closing date: a trade receivable (exchange loss of EUR 22,000), a bank loan of pure financing (exchange loss of EUR 40,000) and a cash balance (exchange gain of EUR 8,000). Management proposes to classify all three differences in the operating category, citing undue cost or effort to trace their origin. The accounting system already identifies the originating item for each difference (case facts). Write a short note concluding on the proposed classification, distinguishing rule, case facts and professional judgement.L3