What is the criterion regarding exchange gains or losses in financial statements?

The criterion regarding exchange gains or losses in financial statements is based on the treatment of foreign currency transactions, particularly with monetary assets and liabilities. When entities hold monetary assets and liabilities that are denominated in foreign currencies, they are required to translate these amounts into their functional currency at the exchange rates that are applicable at the reporting date.

Option B is correct because gains or losses arise from the changes in exchange rates between the date of the transaction and the reporting date. If the currency in which a monetary item is denominated appreciates in value, the entity realizes a gain when it translates that item into its functional currency. Conversely, if the currency depreciates, the entity incurs a loss. These exchange gains or losses are considered realized for the purposes of financial reporting since they impact the financial position of the entity and must be recognized in the profit or loss for the period.

In contrast, the other options do not adequately reflect the nature of exchange gains and losses. The notion that they are always unrealized until disposed is inaccurate because they can be realized upon translation. Stating that they do not affect net profits contradicts the requirement to recognize these gains and losses in the income statement, as they do indeed impact the net profit of the entity. Finally, exchange gains