IFRS NEWS January 2025

1. Accounting News

Classification of foreign exchange differences in the Income Statement

IFRS 18, “Presentation and Disclosures in Financial Statements,” provides guidance on classifying foreign exchange differences in the Income Statement.

An entity shall classify foreign exchange differences included in the Statement of Profit or Loss in the same category as the gains and losses on the items that gave rise to the foreign exchange differences, unless doing so would involve a disproportionate cost or effort.

For example, an entity will classify exchange differences as:

• A foreign currency-denominated account receivable, in the same category as the income and expenses of that asset, meaning in the operating category.
• A financial instrument of debt that is a foreign currency liability, in the same category as that liability, i.e., in the financing category.

If the application of these requirements would involve a disproportionate cost or effort, an entity shall, instead, classify the exchange differences arising in operating activities.

An entity shall apply these amendments when it adopts IFRS 18.

IFRS 18 becomes effective on January 1, 2027, and may be applied early.

B. Accounting Inquiries

Sublease Classification

To classify a sublease, an intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows:

• If the head lease is a short-term lease that the entity, as lessee, has accounted for as an expense, the sublease will be classified as an operating lease.
• In the second case, the sublease will be classified by reference to the right-of-use asset that arises from the head lease, rather than by reference to the underlying asset.

In this second case, the risks of the intermediate lessor associated with the right-of-use asset can become credit risk when subleasing, if the term of the sublease covers most or all of the head lease term. Accounting for this sublease as a finance lease would reflect that risk, because the intermediate lessor would recognize a receivable rather than a right-of-use asset.