Disaggregating foreign exchange differences in the IFRS 18 statement of profit or loss

IFRS 18 Presentation and Disclosure in Financial Statements is a new financial statements presentation standard that replaces IAS 1 Presentation of Financial Statements and has consequential changes to IAS 7 Statement of Cash Flows and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. It will result in entities having to classify income and expenses in the statement of profit or loss in one of five categories, with special rules for the investing and financing category of entities with specified main business activities.

IFRS 18 has specific requirements for classifying foreign exchange differences in the statement of profit or loss, with some amounts presented in the financing category and others in the operating category. However, many entities’ systems are not currently designed to capture information in a format that will facilitate appropriate classification and presentation under IFRS 18. For example:

Some entities may capture foreign exchange differences in a single line item in the statement of profit or loss
Others may record foreign exchange differences relating to financing (e.g. bank loans) as part of ‘finance costs’.

The work effort involved in applying these new requirements will differ from entity to entity, but we anticipate that most entities will need to make some changes to their chart of accounts. Entities should, therefore, start their IFRS 18 implementation projects now to be ready to retrospectively restate comparatives from 1 January 2026.

How do foreign exchange differences arise?

Foreign exchange differences are recognised in profit or loss when a monetary item is denominated in a currency other than the entity’s functional currency. For example, if an entity has the Australian dollar as its functional currency but holds trade receivables denominated in US dollars, foreign exchange gains and losses will be recognised in profit or loss in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates.

The special rules for classifying foreign exchange differences under IFRS 18 apply only to foreign exchange differences recognised in profit or loss. They don’t apply to foreign exchange differences recognised in equity (foreign currency translation reserve) when:

Translating the results and financial position of a foreign operation into the presentation currency of the consolidated group, or
A monetary item receivable from, or payable to, a foreign operation forms part of the net investment in a foreign operation (i.e. settlement is neither planned nor likely to occur in the foreseeable future).

What does IFRS 18 require?

IFRS 18 requires foreign exchange differences included in profit or loss applying IAS 21 to be classified in the same category as the income and expenses from the items that gave rise to the foreign exchange differences, unless doing so would involve undue cost or effort. For example, an entity classifies foreign exchange differences as follows:

Source of foreign exchange difference	Classification
A trade receivable denominated in a foreign currency	Operating category. This is because trade receivables are assets that do not generate a return individually and largely independently of the entity’s other resources, meaning associated income and expenses are classified in the operating category.
Liabilities that arise from transactions that involve only the raising of finance (the entity does not provide financing to customers as a main business activity)	Financing category. This results in matching the foreign exchange difference with the income and expenses arising from the debt (e.g. interest expense).
Liabilities that arise from transactions that involve only the raising of finance (the entity provides financing to customers as a main business activity)	Operating category. This results in matching the foreign exchange difference with the income and expenses arising from the debt (e.g. interest expense).
Liabilities that arise from transactions that don’t involve only the raising of finance	Judgement is required (see further discussion below).

Liabilities arising from transactions that don’t involve only the raising of finance

An example of a liability that arises from a transaction that doesn’t involve only the raising of finance is where an entity purchases services in a transaction denominated in a foreign currency and negotiates extended credit terms. This transaction gives rise to expenses in the operating category for the purchase of services, and the financing category for the interest expense. There is also a foreign exchange difference recognised in profit or loss for the translation of the foreign currency denominated debt (the extended credit liability) into the entity’s functional currency.

The entity must apply judgement to determine whether the foreign exchange difference relates to an expense classified in the operating category or to an expense classified in the financing category.

The whole foreign exchange difference related to this transaction must be classified in one category. The entity is not permitted to allocate the foreign exchange difference between different categories – it must choose the most appropriate category. This is not an accounting policy choice, but the result of the applying judgement.

Other points to note:

The entity need not classify foreign exchange differences on all liabilities that arise from transactions that don’t involve only the raising of finance in the same way. For example, it may classify foreign exchange differences on payables for services with extended credit terms differently from contract liabilities with a significant financing component under IFRS 15 Revenue from Contracts with Customers.
However, entities must classify foreign exchange differences in the same profit or loss category if they relate to similar liabilities. For example, foreign exchange differences for payables for services with similar extended credit terms must be classified in the same way.

‘Undue cost or effort’?

If applying the above requirements would involve undue cost or effort, the entity must classify the relevant foreign exchange differences in the operating category.

The ‘undue cost or effort’ assessment is not made for the reporting entity as a whole (i.e. all foreign exchange differences) but for each item that gives rise to foreign exchange differences. The assessment is specific to the facts and circumstances related to each item.

‘Undue cost or effort’ is generally considered to be a high threshold, meaning that an entity is not permitted to simply classify all foreign exchange differences in the operating category by virtue of there being costs associated with modifying their systems and processes to comply with the requirements of IFRS 18.

More information

You can find more articles about IFRS 18 challenges on our IFRS 18 topic page, and our publication and webinar will also help you on your IFRS 18 implementation journey.

Need help

Our recent IFRS 18 articles demonstrate the complexity of applying IFRS 18 in practice. Your chart of accounts will need to change in many ways to appropriately tag income and expenses to the five categories, and transition dates start from 1 January 2026. It’s crucial that entities start preparing now. Reach out to our team for help with understanding the latest requirements in IFRS 18.