AASB 121 mandates the immediate recognition method whenever there is any change in the monetary items to be recognized in profit and loss. The decision that has been made is appropriate as the changes that take place should be recognized immediately rather than deferring them over the years. This will help in appropriately analyzing profit and loss. According to this standard whenever there is a change that happens it should be recognized immediately in the same period. This will give an exact position of the profit and loss for the period. Differing that will change the situation and won't provide an exact position.
AASB 121 also states that the foreign currency should be recognized at the spot exchange rate at the date of the transaction. If the immediate recognition method is not applied then the spot rates will change and the exact value for profit and loss will not be determined (Commenced, 2018). So, deferring won't give exact results in the scenario. In the accountings standard, it has been mentioned that if the exchanges are settled in the accounting period that is subsequent than the differences are determined during the settlement period. This too should be done on the same date as rates change every day.
Also, when there is immediate recognition of the changes tax payments are also affected. If there are losses that are made then the tax liability on the firm will reduce for the year (Miah et al., 2020). If the payments or the losses are deferred than actual benefits won't be derived for the company as they will get deferred and there are chances that the company will earn profits next year which will eliminate the tax gains that the company might have while recognizing them immediately.
The alternative for immediate recognition is not recognizing it immediately. Suppose an exchange transaction took place and the benefit from that exchange is $120 million at the spot rate that is at $1.5. This benefit was not immediately recognized and deferred to another month for mention in profit and loss account. In the next month suppose the exchange rate difference reduced to $.5 and the benefits reduced to $60 million. So, in the profit and loss statement, the profit that will show is $60 million while in actual terms the profit that will be made is $120 million. This will not provide an appropriate picture of the earnings and also the tax will not be charged accordingly. Thus, it is better to opt for the immediate recognition rather than opting for the deferred payment.
There are various reasons for preferring this method. The very first being the appropriate position of the profits and loss (Banks, Hodgson & Russell, 2018). Another benefit of opting for the immediate recognition method is that accurate rates of difference can be attained and accordingly they can be mentioned in the profit and loss account. Thus, this method will provide an appropriate picture of gains and losses rather than any other method.
Banks, L., Hodgson, A., & Russell, M. (2018). The location of comprehensive income reporting–does it pass the financial analyst revision test?. Accounting Research Journal. Retrieved from: https://www.emerald.com/insight/content/doi/10.1108/ARJ-04-2017-0075/full/html
Commenced, D. (2018). 2.5 STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES. Policy. Retrieved from: https://www.coomalie.nt.gov.au/images/Documents/All/2.5%20Statement%20of%20Significant%20Accounting%20Policies%202017.pdf
Miah, M. S., Jiang, H., Rahman, A., & Stent, W. (2020). Audit effort, materiality, and audit fees: evidence from the adoption of IFRS in Australia. Accounting Research Journal. Retrieved from: https://www.emerald.com/insight/content/doi/10.1108/ARJ-06-2018-0103/full/html
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