IFRS 18 will not change how foreign exchange gains and losses are measured, but it will change where they appear in the income statement. For businesses exposed to volatile currencies, the new classification can reveal whether the main pressure comes from trading, financing or cash management.
A company can report one large foreign exchange loss even though several different business decisions produced it. Part may arise from unpaid imports or from foreign currency debt, while a gain on dollar cash may offset some of the losses. When these amounts are presented together, investors see the total but will not see the source of the exposure.
IFRS 18 addresses that presentation problem. IAS 21 will continue to determine how foreign currency monetary items are translated and how exchange differences are recognised. IFRS 18 generally requires exchange differences recognised in the statement of financial performance to be classified in the same category as the income and expenses arising from the item that produced them. If applying that approach would involve undue cost or effort, the exchange difference is classified as operating.
This matters in markets where companies combine local-currency revenues with imported inputs, dollar or euro debt and foreign currency cash balances. A weakening local currency can therefore affect several parts of the business at once, even when sales volumes and production efficiencies are improving.
One currency movement, three different effects
Consider a food manufacturer whose functional currency is the GH¢ . At the start of the reporting period, the exchange rate is GH¢12 to US$1. By year-end, it has moved to GH¢15 to US$1.
The company has three dollar-denominated monetary items:
| Monetary Item | US$ amount | At GH¢12/US$ | At GH¢15/US$ | FX effect |
|---|---|---|---|---|
| Cash and cash equivalents | 5 million | 60 | 75 | 15 gain |
| Trade payables for imported wheat | 6 million | 72 | 90 | 18 loss |
| Bank loan used for factory expansion | 20 million | 240 | 300 | 60 loss |
The company records a net foreign exchange loss of GH¢63 million:
GH¢15 million gain − GH¢18 million loss − GH¢60 million loss = GH¢63 million net loss
The total does not change under IFRS 18. The presentation in the income statement does.
The GH¢18 million loss on trade payables would normally be operating because the payables arose from purchasing raw materials. The GH¢60 million loss on the bank loan would normally be financing because it follows the classification of the borrowing. IFRS 18’s project materials use the same principle, including classifying exchange differences on bank loans in financing.
The GH¢15 million gain on cash and cash equivalents needs separate treatment. For an ordinary manufacturer, income and expenses from cash and cash equivalents are generally classified as investing, unless investing in financial assets or providing finance to customers is a specified main business activity. The related foreign exchange gain would normally follow that classification.
The resulting presentation would therefore be:
| IFRS 18 Category | Foreign exchange effect |
| Operating: trade-payable loss | GH¢18 million loss |
| Investing: gain on dollar cash | GH¢15 million gain |
| Financing: bank-loan loss | GH¢60 million loss |
| Net foreign exchange loss | GH¢63 million loss |
This tells a more useful story. The company faces some currency pressure from imported inputs, earns a partial offset from holding dollar cash and carries a much larger exposure through foreign currency borrowing. Its main vulnerability is financing, not weak demand for its products.
What companies should prepare for
Companies will need to map foreign exchange differences to the assets and liabilities that produced them rather than treating foreign exchange as one general ledger category. Finance teams should distinguish trade balances, borrowings, cash, investments and intragroup monetary items, then document the basis for classification.
The exercise may also expose weaknesses in treasury policy. Holding dollar cash can provide some protection against currency depreciation, but it may be too small to offset a much larger foreign currency loan. IFRS 18 will not reduce that risk. It should make its source easier for investors, boards and lenders to identify.