Translation Differences That Will and Will Not Be Reclassified to Profit or Loss: What Is the Distinction?

Under IAS 21 / TAS 21, how foreign currency translation differences are carried in equity and when they are transferred to profit or loss is an important distinction. Let us examine it under two headings:

1. Translation differences that will be reclassified to profit or loss

These differences accumulate in equity and are transferred to profit or loss under certain conditions (this is known as "recycling").

🔹 Examples:

Translation differences arising from the translation of a foreign operation and from a net investment in that operation:

• On consolidation, differences arising when the assets and liabilities of a foreign subsidiary, associate or branch are translated into the presentation currency are first reported in equity (other comprehensive income – OCI).

• When the operation is disposed of, the cumulative translation difference is transferred to profit or loss (in proportion, in the case of partial disposals).

They therefore belong to the group of items "that will be reclassified to profit or loss (recyclable OCI)".

2. Translation differences that will not be reclassified to profit or loss

These differences remain in equity and are not transferred to profit or loss ("no recycling").

🔹 Examples:

• Differences arising from translating the entity's own financial statements from its functional currency into a different presentation currency. For example, a company whose functional currency is the US dollar presenting its financial statements in Turkish lira (TAS 21, paragraphs 38–43). Because these differences do not relate to a foreign operation, they are not transferred to profit or loss through a disposal; in the TFRS taxonomy they are presented under "Foreign currency translation differences that will not be reclassified to profit or loss".

• In addition, exchange effects included in the remeasurement of equity instruments measured at fair value through other comprehensive income under IFRS 9 (the FVOCI election) are not transferred to profit or loss either.

Note: A change in functional currency does not give rise to a translation difference; under TAS 21, the change to the new functional currency is applied prospectively.

3. Presentation

In the statement of other comprehensive income (OCI), entities split translation differences into the following two groups:

a) "Items that will not be reclassified to profit or loss" → Remain permanently in equity (no recycling).

b) "Items that will be reclassified to profit or loss" → Transferred to profit or loss on disposal or similar events.

This distinction clearly shows investors and other users whether the ultimate effect of a translation difference will be reflected in the income statement.

In short:

• Recyclable (will be reclassified) → Accumulates in equity and is transferred to profit or loss on disposal or a similar event.

• Non-recyclable (will not be reclassified) → Remains in equity and is not transferred to profit or loss.