ACCA Strategic Business Reporting (SBR) Practice Exam

In which financial statement are exchange differences related to property, plant, and equipment typically recorded?

1. Statement of cash flows

2. Income statement

3. Statement of changes in equity

4. Other comprehensive income

The correct answer is: Other comprehensive income

Exchange differences related to property, plant, and equipment are typically recorded in Other Comprehensive Income (OCI). This treatment is aligned with the requirements of the International Financial Reporting Standards (IFRS), particularly IAS 21 – The Effects of Changes in Foreign Exchange Rates. According to these standards, when an entity has foreign operations, the financial statements of these operations are translated into the presentation currency of the parent company. Any exchange differences that arise from this translation process are usually recognized in OCI rather than the income statement. Recording exchange differences in OCI allows for a more accurate representation of the company’s financial performance without impacting net profit in the income statement in the period in which they arise. This reflects a clearer picture of the underlying operational performance by separating foreign currency translation adjustments from the earnings generated by the business, which are reported in net profit. In contrast, the other financial statements listed — like the statement of cash flows, income statement, and statement of changes in equity — do not capture these translation differences in the same manner. The statement of cash flows focuses on cash transactions, the income statement typically reflects gains and losses from operational activities, and the statement of changes in equity tracks movements in equity attributed to transactions with owners and other profit or loss items, but not exchange differences