Question：IAS 21 and IAS 39 deal with the situation where a company has a foreign investment and a loan in the same currency.
Which is the correct treatment for gains or losses on the investment and the loan?
A. The gains and losses are offset on the statement of financial position.
B. The gain or loss on the investment is taken to equity, the loss or gain on the loan is taken to the income statement.
C. The gains or losses are taken to the income statement.
D. The gain or loss on the investment is taken to equity and then the loss or gain on the loan is offset against it in equity.
The correct answer is:The gain or loss on the investment is taken to equity and then the loss or gain on the loan is offset against it in equity.
This mechanism recognises that having an investment and loan in the same currency provides a hedge, reducing the company's exposure to exchange rate risks.
In effect this treats the transaction as a cash flow hedge.