ACCA Strategic Business Reporting (SBR) Practice Exam

What is the treatment of exchange differences for non-current assets in foreign exchange reporting?

1. Recognized in profit or loss

2. Deferred for future periods

3. Accounted for in other comprehensive income

4. Ignored altogether

The correct answer is: Accounted for in other comprehensive income

In the context of foreign exchange reporting, exchange differences arising from non-current assets are treated by accounting for them in other comprehensive income (OCI). This approach is grounded in the principle that fluctuations in foreign exchange rates can impact the carrying amounts of non-current assets, which are typically held for a longer duration and whose valuations may be subjected to volatility due to currency movements. When a non-current asset is acquired in a foreign currency, it is typically recorded at its cost in the functional currency of the reporting entity. Over time, if the reporting entity is required to translate the values of non-current assets denominated in foreign currencies into the functional currency for reporting purposes, any exchange differences that arise from this translation are recognized in OCI. This is consistent with the requirements of the relevant accounting framework, such as International Financial Reporting Standards (IFRS), particularly IAS 21, which governs the effects of changes in foreign exchange rates. This approach allows for a more accurate representation of an entity's financial position without immediately impacting profit or loss, thus preserving the long-term perspective on the asset's value against short-term fluctuations in exchange rates. It also provides transparency to users of the financial statements about the potential impacts of currency changes on the entity's assets, which might eventually impact future profit