ACCA Strategic Business Reporting (SBR) Practice Exam

When dealing with non-monetary items in financial reporting, exchange differences are typically recognized in profit or loss. This stems from the requirement to reflect the economic reality of transactions and how changes in exchange rates affect the value of these items.

Non-monetary items, such as property, plant, and equipment, or investments in subsidiaries, are carried at historical cost in a functional currency. When these items are translated into a different currency for reporting purposes, any changes in exchange rates may result in gains or losses that reflect the changes in the purchasing power of the currency. This is particularly important for companies operating in multiple currency environments, as it allows stakeholders to understand how foreign currency fluctuations can impact overall profitability.

The recognition of these exchange differences in profit or loss ensures that the financial statements provide a complete picture of the company's performance during a reporting period, capturing all economic events that have affected the organization's reported results. This principle is crucial for informed decision-making by investors, creditors, and other stakeholders relying on the financial statements to assess the firm’s financial health and performance.

In contrast, other options do not accurately represent how exchange differences are treated in financial statements. For instance, disregarding these differences (the first option) would ignore significant financial impacts that can arise from