Foreign exchange differences under IFRS 18: small line, big judgement

The change

From 1 January 2027, IFRS 18 Presentation and Disclosure in Financial Statements will require foreign exchange (FX) differences recognised in profit or loss to be classified within specific categories (operating, investing, or financing) rather than presented as a single net line. The classification depends entirely on what created the FX difference. For many entities, this means restructuring how FX is captured, classified, and disclosed. 2026 comparatives will generally need to be restated.

The core principle: Follow the item, not the currency

IFRS 18 paragraph B65 is clear: classify an FX difference in the same category as the income and expenses from the item that created it, unless doing so would involve undue cost or effort.

In practice, this means:

• Trade receivables and payables (goods and services): FX differences sit in the operating category, alongside related revenue or expense.

• Borrowings and financing liabilities: FX differences belong in the financing category, matched with interest expense, unless your entity provides financing as a main business activity, in which case they move to operating.

• Investment assets (e.g. bond portfolios): FX differences follow the related income into the investing category.

• Income tax balances: FX differences sit in the income taxes category.

These outcomes are not automatic. Each entity must assess its own facts and circumstances. The nature of the underlying item, the entity's main business activities, and the specific transaction all matter.

Important boundary: These rules apply only to FX differences recognised in profit or loss. Translation differences taken to the foreign currency translation reserve (on consolidating foreign operations or on net investments in foreign operations) remain unaffected.

Where judgement enters: Mixed-purpose liabilities

Not all liabilities arise purely from financing. A services contract with extended credit terms, a trade payable for inventory, or a lease liability can generate both operating and financing expenses. IFRS 18 requires entities to exercise judgement in determining which category an FX difference relates to. 

This is not an open accounting policy choice; it is the outcome of applying judgement to specific facts. However, consistency is expected: similar liabilities should be treated the same way, though different types may be classified differently depending on circumstances.

The "undue cost or effort" relief: Narrower than it sounds

Entities may classify FX differences in operating when tracing to source would be unduly costly. However, this relief is narrowly applied and assessed item by item, not as blanket permission. Implementation costs alone do not satisfy the test. The threshold is genuinely high, and entities cannot use this as an escape from data capture obligations.

The consolidation puzzle: Intragroup loans

The most debated FX questions concern groups. When an entity lends to its subsidiary in a foreign currency and the loan is not part of the net investment in the foreign operation, IAS 21 requires the FX difference to remain in consolidated profit or loss, even though the loan and interest are eliminated in full.

The IFRS Interpretations Committee addressed this in its agenda decision ‘Classification of a Foreign Exchange Difference from an Intragroup Monetary Liability (or Asset) (IFRS 18),’ published in April 2026, concluding that two approaches are acceptable, applied consistently as an accounting policy choice:

1. Default to operating: Because underlying income and expenses have been eliminated, there is no "same category" to follow, so the difference falls into operating as the residual category.
2. Classify as if before elimination: Place the FX difference in the category the loan's income and expenses would have occupied before elimination, assessed from the group's perspective. If tracing would involve undue cost or effort, operating applies.

The Committee rejected automatically classifying as financing because intragroup loans do not always represent pure financing. Similarly, investing was rejected because it is the monetary item itself, not the underlying cash deployment, that gives rise to the FX difference. The substance of the transaction, not its form, determines the outcome.

Common pitfalls to avoid

Many entities assume all FX on borrowings is financing (it is not, if the borrowing funds operating activities) or treat all intragroup loan FX as investing (the Committee explicitly rejected this). Others attempt to classify FX in bulk by transaction type rather than assessing each item's substance. These shortcuts create compliance risk and may require restatement. Judgement must be documented and applied consistently.

What you should do now

Classification principles are conceptually clean but operationally demanding. Many general ledgers record FX in a single account or within finance costs. Preparing for IFRS 18 requires:

• Immediate: Map main sources of FX differences to the categories of their underlying items; identify mixed-purpose liabilities requiring detailed analysis.

• Q4 2024–Q1 2025: Audit your chart of accounts and implement changes to capture FX at the required granularity; document judgements for complex items.

• Q2–Q3 2025: Establish a group policy for intragroup loan FX differences, applied consistently; prepare 2026 comparatives for restatement.

• By end 2026: Finalise FX classification policy document; train finance teams on the new approach.

FX may be immaterial to your income statement, but IFRS 18 will subject it to considerably closer scrutiny. If your entity has not yet assessed the impact, now is the time. Deloitte's IFRS specialists can help you map your FX exposure, design your classification approach, and prepare for the transition. Contact us to discuss your specific situation.