CFM8007 - Accounting for foreign exchange: recognition of translation gains and losses

Reporting exchange gains and losses

SSAP20 provides that exchange differences 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 £10 loss in the example at CFM8005, and the £150 profit in the first example at CFM8006) 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 CFM8006) 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.

This means that the company will recognise, as part of its normal operating profit, not only gains or losses on settled transactions (as in the CFM8005 example), but also gains and losses on unsettled items. 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 CFM8007a.

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 CFM8007a.
• where a long-term liability (or a currency contract) hedges the company’s investment in a foreign entity – see CFM8011