Foreign Exchange Gains and Losses - Accounting and Tax treatment
The accounting treatment on the effects of changes in foreign exchange rates has been outlined in MFRS 121 which is equivalent to IAS 21. The Malaysian Inland Revenue Board (LHDN) has issued a revised Guidelines on tax treatment related to the implementation of MFRS 121 on 16 May 2019 and subsequently issued a Public Ruling (PR 12/2019) on the tax treatment of foreign exchange gains and losses on 13 December 2019. The following are the key features of the MFRS 121, revised Guidelines and Public Ruling 12/2019.
Some terms that need clarifications are as follows:
Closing rate is the spot exchange rate at the end of the reporting period, viz. the reporting date or balance sheet date.
Spot exchange rate is the exchange rate for immediate delivery. It is the current price level in the market to directly exchange one currency for another.
Exchange difference is the difference resulting from translating/converting/exchanging a given number of units of one currency into another currency at different exchange rates.
Exchange rate is the ratio of exchange for two currencies.
Functional currency is the currency of the primary economic environment in which the entity operates.
Presentation currency is the currency in which the financial statements are presented.
Monetary items are units of currency held, as well as assets and liabilities to be received or paid in a fixed or determinable number of units of currency, e.g. trade receivables, trade payables, cash, deposits and bank balances.
Non-monetary items are those such as PPE, intangible assets, investments in associates and others which have no rights to receive or obligation to pay a fixed or determinable number of units of currencies.
Comprehensive income consists of 2 sections: income statement and other comprehensive income. Unrealised gains and losses are included in the other comprehensive income by the larger corporations.
At the end of each reporting period
Foreign currency monetary items shall be translated using the closing rate.
Non-monetary items which are measured at historical cost in a foreign currency shall be translated using the exchange rate at the date of transaction. Subsequently, no recalculation is needed.
Non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured.
Reporting foreign currency transactions
A foreign currency transaction is a transaction that is denominated in or requires settlement in a foreign currency, including transactions arising when an entity:
buys or sells goods or services whose price is denominated in a foreign currency;
borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or
otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.
Recognition of foreign exchange gains or losses
When the entity translates the balances in the foreign currency of monetary items into the presentation currency at the reporting date; or
When the entity makes settlement of monetary items in a foreign currency, and there is a change in the exchange rates on the transaction date and on the date of settlement.
Gains or losses arising on translating monetary items or on the settlement of monetary items shall be recognised in profit or loss in the period in which they arise.
Realised and Unrealised gains or losses
Realised gains or losses are the gains or losses on foreign exchange transactions that have been completed as at the reporting date. In clearer terms, this means that the payment has been made or received prior to the close of the accounting period.
Unrealised gains or losses are the gains or losses on transactions that have not been completed as at the reporting date. This would mean that the payment has not been made or received prior to the close of the accounting period.
Taxability and deductibility of foreign exchange gains and losses
Foreign exchange gains and losses are taxable and deductible respectively if the gains and losses are:
arising from revenue transactions;
arising from a trade.
Foreign exchange gains and losses are not taxable and deductible respectively, if the gains or losses are:
arising from capital transactions;
arising from a non-trade activity/transaction;
arising from translation of foreign currency into presentation currency at the reporting date.
Revenue transactions are transactions relating to the normal operating cycle of an entity such as sales, purchases, trading, etc.
Capital transactions are transactions relating to assets, such as the purchase of property, plant and equipment, investments, speculations outside the normal operating cycle of an entity, etc.
Trade and non-trade activities
Trade generally refers to activities involving sales of goods and services, whereas non-trade activities refer to activities that are not related to selling of goods or the provision of services.
If an entity has foreign currency borrowings that are used in the ordinary course of business operations, any foreign exchange gain or loss on repayment of the borrowings would be considered as revenue transactions.
Similarly, if foreign currency borrowings are used to purchase capital assets, any foreign exchange gain or loss on repayment of the borrowings would be considered as capital transactions.
Foreign exchange rates to be used for reporting in the tax returns
An entity may translate foreign currency into the presentation currency (RM) at the date of transaction using the spot exchange rate between the foreign currency and the presentation currency (RM).
For the purpose of translating the balances of foreign currency into the presentation currency (RM) at the reporting date, the closing rate published by Bank Negara Malaysia or the entity’s bank shall be used.
The following is the link for the MFRS 121, revised guidelines and public rulings 12/2019;
All information contained herein is summarised based on MFRS 121 which is equivalent to IAS 21, revised guidelines issued by LHDN on 13 May 2019 and Public Rulings 12/2019 issued by LHDN on 13 December 2019. The key features presented above are intended to provide a general overview of the accounting and tax treatment on the subject of foreign exchange and should not be regarded as a basis for ascertaining the tax liability in specific circumstances or as a a basis for formulating business decisions. No responsibility for loss to any person acting or refraining from acting as a result of any material in this publication can be accepted by GSK & Associates. Readers should not act on the basis of this publication without seeking professional advice.
Should you require further clarification, please do not hesitate to contact us at firstname.lastname@example.org or the Manager whom you are accustomed to dealing with or the person who is responsible for the audit and tax affairs of your organisation.