Unexpected/Unwanted Foreign Exchange Gains on P&L

This is true when the situation is stable. Countries and opportunities differ widely. Some have more than half of the population living under extreme poverty (less than US$1.5 per day per person), with extreme unemployment rates (more than 40%). Lack of access to financing (loans) because of lack of collateral, etc. It is a poverty trap and social investments indeed are high risk but have shown to help develop the necessary SME sector and where it just takes longer to get into being profitable.

It is common in such countries that forex gains that arise from transactions that are capital in nature (rather than revenue in nature) such as forex loans for land and assets that forex gains should be seen as capital profits and therefore not be taxed while forex losses on capital are disallowed.

In a nutshell, as asked for, it would be helpful if forex gains/losses are capital in nature they need to be treated as non-taxable and the best place would be under equity in the the balance sheet while forex gains/losses that are revenue in nature should stay as income in profit and loss.

Financial reports are generally produced to disclose the financial strength of a business in terms of its profitability and nett assets. Adjustments are then made for taxation considerations. Producing financial reports on a tax basis only will not provide information for managers to adequately assess the viability of a business.

Changes in value of land held does not affect the profitability of a business, whereas changes in the value of debt does.

Having said that, I believe that realised forex gains/losses (e.g. foreign currency loan repayment transactions) should be shown separately to unrealised forex gains/losses. This would allow for better disclosure.

In our country (Zimbabwe), trade in the local currency (ZWL$) is considered separately from trade in foreign currency (usually US$) for our tax purposes. We now have separate accounts with the tax authority for the two currencies (see also this topic). This means that we don’t include the foreign exchange gains/losses in our submissions to the tax authority. They will not consider a foreign exchange loss to be a deductible expense, and we will not be taxed on foreign exchange gains.

I understand, however, that the principles of double-entry accounting require that the foreign exchange gains and losses are displayed in the profit and loss statement so that the books are balanced when everything is converted to the base currency. It is easy enough for us to omit them in our filings, which is what our accountant has advised.

Indeed, is what we do.