Where should exchange differences be included in goodwill calculation?

In the context of the calculation of goodwill, exchange differences arise when translating the financial statements of a foreign operation into the reporting currency of the parent company. According to IFRS, specifically IFRS 3 Business Combinations and IAS 21 The Effects of Changes in Foreign Exchange Rates, exchange differences related to goodwill are typically included in other comprehensive income (OCI).

When a subsidiary’s financial statements are translated, any exchange differences due to changes in exchange rates between the subsidiary's functional currency and the parent's reporting currency affect the carrying amount of goodwill. These differences are recorded in OCI as part of the foreign currency translation reserve. This is aligned with the principle that such fluctuations should be reflected in the equity section of the statement of financial position rather than impacting profit or loss directly at the time they occur.

Including exchange differences in OCI helps to avoid volatility in profit or loss that could arise from fluctuations in exchange rates, which can distort the financial results of the parent entity within a reporting period. Therefore, recognizing these differences in OCI supports a more stable view of the parent's financial performance over time while also adhering to the requirements of the relevant accounting standards.