IFRIC recently discussed the classification of a foreign exchange difference from an intragroup monetary liability (or asset). 

The fact pattern involves an entity that enters into a loan with its subsidiary; the entity and its subsidiary have different functional currencies. This intragroup loan is denominated in the functional currency of either the entity or its subsidiary; and isn’t part of the entity’s net investment in the subsidiary. The entity or the subsidiary applies IAS 21 to translate the loan to its functional currency and recognizes any resulting exchange difference in profit or loss. In preparing its consolidated financial statements the entity eliminates in full the intragroup balances relating to the loan, recognizing the exchange difference on the loan in profit or loss.

IFRS 18 requires an entity to ‘classify foreign exchange differences included in the statement of profit or loss applying IAS 21 in the same category as the income and expenses from the items that gave rise to the foreign exchange differences…’. But how should this be applied when those items have been eliminated on consolidation? One view would be that as the exchange difference arose from the intragroup loan before the elimination of that loan and related income and expenses on consolidation, the entity classifies the difference using the category in which the income and expenses from the intragroup loan would have been classified before they were eliminated. The underlying staff paper sets out one of the arguments for this view:

• IFRS 10 does not define the term ‘offset’ or ‘eliminate’. Paragraph 7.10 of the (Conceptual Framework), however, states ‘[o]ffsetting occurs when an entity recognizes and measures both an asset and liability as separate units of account, but groups them into a single net amount in the statement of financial position…’. We think it is reasonable to infer from paragraph 7.10 of the Conceptual Framework that eliminating the intragroup loan does not mean that the loan does not exist in the consolidated financial statements. Rather, the intragroup loan has been offset for presentation purposes. While paragraph 7.10 of the Conceptual Framework is in the context of items that are offset in the statement of financial position, we think it is reasonable to consider that this concept of offsetting also applies to income and expenses that are offset in the statement of profit or loss. Accordingly, we think it is reasonable to conclude that eliminating income and expenses arising from an intragroup loan on consolidation does not mean that those income and expenses do not exist; rather, those income and expenses have been offset for presentation purposes.

The standard provides an exemption though: if the entity determines that classifying the exchange difference in this way would involve undue cost or effort, it instead classifies the exchange difference in the operating category.

An alternative view would be that as the income and expenses arising from the intragroup loan have been eliminated on consolidation, there is no ‘same’ category within which the entity can classify the exchange difference, and therefore the entity by default classifies it in the operating category. The staff thought this was a reasonable alternative view.

The discussion resulted in a rare (unprecedented?) split right down the middle, although perhaps not an overly serious one. Seven Committee members concluded the view described in the preceding paragraph is the only reasonable reading of IFRS 18; the other seven members thought both views set out above are reasonable. The staff paper noted that intragroup loans and resulting exchange differences that remain on consolidation can be prevalent and the amounts involved can be large; however, “most entities are in the process of applying—but have not yet applied— IFRS 18.” It follows that while “differences in understanding the applicable requirements could result in diversity in applying those requirements once IFRS 18 becomes effective,” stakeholders wouldn’t yet be unable to comment on whether that diversity does or will exist. Noting factors including the ”undue cost or effort” exemption noted above, and the ability to deal with this issue through disclosure (of exchange differences included in profit and loss and the relevant line items; of material accounting policies and significant judgments), the staff recommended that a standard-setting project not be added to the work plan, and the Committee tentatively agreed.

The tentative agenda decision is open for comment until November 25, 2025, and I suppose it’s possible some respondents might push for more. If nothing else, the fact of the IASB investing so much time into researching and documenting and debating and soliciting comment on such an issue should amply indicate that the existence of the ISSB isn’t overly diluting its accounting-related resources and energies. And the significance to the discussion of items that aren’t in the financial statements, that by definition couldn’t be, gives the issue an unusual contour: has there been another high-profile accounting discussion that depended so much on the meaning of an absence…?

The opinions expressed are solely those of the author.