NZ IFRS 18: Flexibility in classifying foreign exchange differences on intercompany loans
NZ IFRS 18: Flexibility in classifying foreign exchange differences on intercompany loans
NZ IFRS 18 Presentation and Disclosure in Financial Statements (‘NZ IFRS 18’) is a new financial statements presentation standard that replaces NZ IAS 1 Presentation of Financial Statements, and is effective for the first time for annual periods beginning on or after 1 January 2027 (with prior periods restated).
Under NZ IFRS 18, all entities will have to change the way they classify expenses in the statement of profit or loss, allocating them to one of five categories: investing, financing, income taxes, discontinued operations and operating (click here for our initial March 2025 article for further information).
A full list of the previous articles in our NZ IFRS 18 series is provided at the end of this article.
In this month’s article, we highlight where NZ IFRS 18 provides flexibility in classifying foreign exchange differences on intercompany loans.
One of the first significant issues considered by the Committee relates to how foreign exchange differences arising from intercompany monetary assets and liabilities should be classified in the statement of profit or loss.
Agenda decisions provide insight into how existing IFRS requirements should be applied. While they do not amend accounting standards, they are an important source of interpretive guidance for entities applying IFRS.
The IFRS Interpretations Committee recently considered the issue and published an agenda decision.
The question arises because NZ IAS 21 The Effects of Changes in Foreign Exchange Rates (‘NZ IAS 21’) requires exchange differences on foreign-currency monetary items to be recognised in profit or loss.
Where the monetary item is an intercompany loan between entities with different functional currencies, the loan balance is eliminated on consolidation under NZ IFRS 10 Consolidated Financial Statements (‘NZ IFRS 10’).
However, NZ IAS 21 specifically requires that the resulting foreign exchange difference not be eliminated, because the group remains exposed to currency fluctuations arising from its commitment to convert one currency into another.
Under NZ IFRS 18, foreign exchange differences are generally classified in the same category as the income and expenses that gave rise to them.
However, because income and expenses relating to intercompany loans are eliminated on consolidation, uncertainty arises about how the remaining foreign exchange difference should be classified.
While the loan itself is eliminated on consolidation, foreign exchange differences recognised under NZ IAS 21 remain in consolidated profit or loss.
The issue was how to classify the remaining exchange differences under NZ IFRS 18.
It considered several possible classification approaches, including treating the exchange difference as financing, investing or operating in nature.
Ultimately, it determined that two approaches represent reasonable interpretations of NZ IFRS 18.
Entities may therefore either:
For organisations with significant foreign currency intercompany funding arrangements, that choice could materially affect NZ IFRS 18 profit or loss subtotals and management-defined performance measures (MPMs).
Foreign exchange differences on intercompany loans can be material and volatile, particularly for multinational groups with centralised treasury structures.
The agenda decision may also create implementation challenges for entities that choose to classify foreign exchange differences in the same category as the income and expenses from the intercompany loan would have been classified before elimination on consolidation.
To apply this approach consistently, a consolidated group may need systems capable of:
For more on the above, please contact your local BDO representative.
This article has been based on an article that originally appeared on BDO Australia, read the original article here.
Under NZ IFRS 18, all entities will have to change the way they classify expenses in the statement of profit or loss, allocating them to one of five categories: investing, financing, income taxes, discontinued operations and operating (click here for our initial March 2025 article for further information).
A full list of the previous articles in our NZ IFRS 18 series is provided at the end of this article.
In this month’s article, we highlight where NZ IFRS 18 provides flexibility in classifying foreign exchange differences on intercompany loans.
Recent IFRS Interpretations Committee agenda decisions
Although [NZ] IFRS 18 is not yet mandatory, the IFRS Interpretations Committee has already published four new agenda decisions and continues to consider new application questions. This highlights the practical challenges organisations are encountering as they prepare for implementation.One of the first significant issues considered by the Committee relates to how foreign exchange differences arising from intercompany monetary assets and liabilities should be classified in the statement of profit or loss.
Agenda decisions provide insight into how existing IFRS requirements should be applied. While they do not amend accounting standards, they are an important source of interpretive guidance for entities applying IFRS.
Key implementation question
A key implementation question arising from NZ IFRS 18 relates to the classification of foreign exchange differences that remain in consolidated profit or loss after elimination of an intercompany monetary asset or liability.The IFRS Interpretations Committee recently considered the issue and published an agenda decision.
The question arises because NZ IAS 21 The Effects of Changes in Foreign Exchange Rates (‘NZ IAS 21’) requires exchange differences on foreign-currency monetary items to be recognised in profit or loss.
Where the monetary item is an intercompany loan between entities with different functional currencies, the loan balance is eliminated on consolidation under NZ IFRS 10 Consolidated Financial Statements (‘NZ IFRS 10’).
However, NZ IAS 21 specifically requires that the resulting foreign exchange difference not be eliminated, because the group remains exposed to currency fluctuations arising from its commitment to convert one currency into another.
Under NZ IFRS 18, foreign exchange differences are generally classified in the same category as the income and expenses that gave rise to them.
However, because income and expenses relating to intercompany loans are eliminated on consolidation, uncertainty arises about how the remaining foreign exchange difference should be classified.
Fact pattern considered
The Committee considered a fact pattern involving an intercompany loan between entities with different functional currencies.While the loan itself is eliminated on consolidation, foreign exchange differences recognised under NZ IAS 21 remain in consolidated profit or loss.
The issue was how to classify the remaining exchange differences under NZ IFRS 18.
What did the Committee conclude?
The Committee concluded that the exchange difference arises from the intercompany monetary asset or liability itself, rather than from the related cash flows or financing arrangements.It considered several possible classification approaches, including treating the exchange difference as financing, investing or operating in nature.
Ultimately, it determined that two approaches represent reasonable interpretations of NZ IFRS 18.
Entities may therefore either:
- Classify the exchange difference in the same category that would have applied to the income and expenses from the intercompany loan had they not been eliminated on consolidation, or
- Classify the exchange difference in the operating category by default.
Practical implications
The agenda decision effectively provides entities with an accounting policy choice.For organisations with significant foreign currency intercompany funding arrangements, that choice could materially affect NZ IFRS 18 profit or loss subtotals and management-defined performance measures (MPMs).
Foreign exchange differences on intercompany loans can be material and volatile, particularly for multinational groups with centralised treasury structures.
The agenda decision may also create implementation challenges for entities that choose to classify foreign exchange differences in the same category as the income and expenses from the intercompany loan would have been classified before elimination on consolidation.
To apply this approach consistently, a consolidated group may need systems capable of:
- Identifying the underlying intercompany monetary item
- Determining how related income or expenses would have been classified under NZ IFRS 18
- Tracking differences at a consolidated level, and
- Applying the "undue cost or effort" exemption in paragraph B68 of NZ IFRS 18, where relevant.
Why do you need to consider NZ IFRS 18 now?
| Transitioning your financial statement presentation from NZ IAS 1 to NZ IFRS 18 is not a simple exercise. NZ IFRS 18 is not just about reclassifying line items. While this may be the result, how and why an entity gets to those reclassifications is challenging because NZ IFRS 18 is a long and complex standard. Addressing the how and why involves entities making judgements regarding specified main business activities and income and expense categories. These judgements must be documented, supportable and evidenced. In addition, system changes will be required to appropriately tag expenses to the five new categories. Entities should, therefore, start their NZ IFRS 18 implementation projects now in order to be ready to retrospectively restate comparatives from 1 January 2026. Our comprehensive In Practice publication will help you on your NZ IFRS 18 implementation journey. For more details, including our ‘Six steps to a successful adoption of NZ IFRS 18’, please refer to our Adopting NZ IFRS 18 page. |
Our previous articles on our NZ IFRS 18 series
In our previous articles in our NZ IFRS 18 series, we have looked at application areas related to :- Introduction: what will your profit or loss statement look like under NZ IFRS 18 (click here).
- What is meant by SMBA, and how entities will need to approach making this first, critical determination in applying NZ IFRS 18 (click here).
- How the new investing category in profit or loss of an entity with a SMBA differs from entities with that have no SMBA (click here).
- How the new financing category in profit or loss of an entity with a SMBA of providing financing to customers differs from other entities (click here).
- How foreign exchange gains or losses will need to be disaggregated between the three new categories to be presented in an entity’s Statement of Profit or Loss (i.e., operating, investing, financing) (click here).
- Example of how the Statement of Profit or Loss could look like for a typical retail, wholesale, manufacturer, or service business with no SMBA (click here).
- Illustrative examples: Entities that have a SMBA that is asset investment (click here).
- Illustrative examples: Entities that have a SMBA that is providing finance to customers (click here).
- How entities will be required to reassess how they aggregate, disaggregate, and label line items in the financial statements and notes (click here).
- How entities will be able to present their expenses under NZ IFRS 18, compared to the current requirements under NZ IAS 1 (click here).
- A (re)focus on Specified main business activities (click here).
- How the statement of profit or loss differs when expenses are presented by nature, function, or both (click here).
Need help
Please contact our Financial Reporting Advisory team for assistance in your entity’s adoption journey of NZ IFRS 18.For more on the above, please contact your local BDO representative.
This article has been based on an article that originally appeared on BDO Australia, read the original article here.