CFM26050 - Accounting for corporate finance: foreign exchange: SSAP20: profit and loss account

Profit and loss account

SSAP20 provides that exchange gains and losses arising on translating monetary items are generally recognised in the profit and loss account.

You will normally find exchange gains and losses arising from trading transactions, such as the £20 loss in the example at CFM26030 and the £150 profit in the first example at CFM26040), under ‘other operating income or expense’.

Gains or losses from financing arrangements (such as the £10,000 exchange loss on the bank borrowing in the first example at CFM26040) will normally come under ‘other interest receivable (payable) and similar income (expense)’.

There is no requirement for the company to disclose in its statutory accounts what exchange differences are contained within these items. However, where a company submits a detailed profit and loss account with its corporation tax return, exchange differences will usually be separately identified.

The effect of SSAP 20 is that the company will recognise, as part of its normal operating profit, not only gains or losses on settled transactions (as in the CFM26030 example), but also gains and losses on unsettled items (as in the CFM26040 examples. It could be argued that it is not prudent to recognise exchange gains before they have actually been realised. There is more about this at CFM26060.

There are two exceptions to this general rule that exchange gains and losses form part of normal operating profits:

• where there are doubts about the convertibility of the currency - see CFM26060.
• where a long-term liability (or a currency contract) hedges the company’s interest in a foreign entity - see CFM26140.

Note that these exceptions do not apply to companies adopting FRS23/IAS21 rather than SSAP 20, but others relating to cash-flow hedging might (see CFM26310).