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6.11 Foreign currency cash flows
Publication date: 29 Nov 2020
us Financial statement presentation guide 6.11
A reporting entity with operations in foreign countries or with foreign currency transactions must report the reporting currency equivalent of foreign currency cash flows using the exchange rates in effect at the time of the cash flows. If the pattern of cash flows and exchange rates are relatively consistent throughout the period, the reporting entity may use an average exchange rate for translation, as the cash flow results would not be significantly different from the result if actual exchange rates on the day of the cash flows were used. However, if the pattern of cash flows is not consistent or the exchange rates are volatile, a simple average of the rates at the beginning and end of the period may not yield an appropriately-weighted average exchange rate, especially for large and infrequent investing and financing transactions. In such circumstances the rate in effect at the time of the transaction should be disclosed.
Specific requirements for the presentation of foreign currency activities on the statement of cash flows are as follows:
- Foreign currency transaction gains and losses reported on the income statement should be reflected as a reconciling item from net income to cash flows from operating activities
- The effect of exchange rate changes on cash and cash equivalents denominated in currencies other than the reporting currency should be a separate line item as part of the reconciliation of the change in cash equivalents during the period
- The effect of exchange rate changes on cash and cash equivalents reflected in the statement of cash flows is not a “plug.” It is a balancing amount and may be proven using the following formula:
The net cash flow activity for the period measured in the functional currency multiplied by the difference between the exchange rates used in translating functional currency cash flows and the exchange rate at year end.
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+
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The fluctuation in the exchange rates from the beginning of the year to the end of the year multiplied by the beginning cash balance denominated in currencies other than the reporting currency.
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See Step 3 in Example FSP 6-15 for further illustration of how to calculate this number.
6.11.1 Presenting the cash flows of foreign operations
When preparing the statement of cash flows for a reporting entity with foreign operations, the reporting entity should perform the following steps:
- Step 1: The statement of cash flows for each distinct and separable operation should be prepared on a standalone basis in its respective functional currency.
- Step 2: The statement of cash flows for each distinct and separable operation that is a foreign entity (as defined in ASC 830) should be translated into the reporting entity’s reporting currency.
- Step 3: The reporting entity should prepare a consolidating statement of cash flows using the individually translated statements of cash flows for each distinct and separable operation. The effect of exchange rate changes on cash and cash equivalents denominated in currencies other than the reporting currency should be calculated for each distinct and separable operation.
Example FSP 6-15 illustrates the preparation of a statement of cash flows for a reporting entity with foreign operations. ASC 830-230-55 also includes an example of how to calculate the effect of exchange rate changes on cash.
EXAMPLE FSP 6-15
Statement of cash flows — foreign subsidiary
FSP Corp is located in the US and has one wholly-owned subsidiary, Britain Limited (Britain).
Britain is not an extension of FSP Corp, and its functional currency is the British pound (GBP). The reporting currency for FSP Corp is the US dollar (USD). The year end for FSP Corp is December 31, 20X2.
The British pound to US dollar exchange rates are as follows:
Code
|
Description
|
GBP to USD
|
B
|
Current rate, beginning of year
|
GBP 1 = USD 1.45
|
E
|
Current rate, end of year
|
GBP 1 = USD 1.55
|
A
|
Average rate for the year
|
GBP 1 = USD 1.50
|
R
|
Rate in effect at time of transaction
|
GBP 1 = USD Varies
|
Significant transactions during the year include the following:
- Britain sold a piece of equipment with a net book value of 20,000 GBP and received proceeds of 10,000 GBP. The exchange rate on the date of the transaction was GBP 1 = USD 1.46.
- Britain made one property, plant, and equipment purchase for 155,000 GBP. The exchange rate on the date of purchase was GBP 1 = USD 1.47.
- Britain paid cash dividends of 100,000 GBP. The exchange rate on the date of the dividend was GBP 1 = USD 1.54.
- Britain has a bank note denominated in US dollars. There were no payments or additional borrowings on the bank note. As a result of movements in the exchange rate, a transaction gain of 26,000 GBP was recorded at December 31, 20X2.
- Britain has an intercompany note denominated in US dollars. There were no payments or additional borrowings on the intercompany note. As a result of movements in the exchange rate, a transaction gain of 9,000 GBP was recorded at December 31, 20X2.
The GBP to USD exchange rate is deemed to not have significantly fluctuated throughout the period.
The balance sheet for Britain in GBP as of December 31, 20X1 and December 31, 20X2 is as follows:
Functional currency (GBP) |
|||||
12/31/20X1 |
12/31/20X2 |
Change |
|||
Assets |
|||||
Cash and cash equivalents |
256,000 |
457,000 |
201,000 |
||
Accounts receivable |
225,000 |
250,000 |
25,000 |
||
Inventory |
478,000 |
500,000 |
22,000 |
||
Property, plant and equipment, net |
1,000,000 |
1,050,000 |
50,000 |
||
Total assets
|
1,959,000
|
2,257,000
|
298,000
|
||
Liabilities |
|||||
Accounts payable |
300,000 |
340,000 |
40,000 |
||
Accrued expenses |
120,000 |
190,000 |
70,000 |
||
Debt, denominated in USD |
413,000 |
387,000 |
(26,000) |
||
Debt, denominated in GBP |
50,000 |
50,000 |
– |
||
Debt, intercompany |
138,000 |
129,000 |
(9,000) |
||
Deferred income taxes |
100,000 |
80,000 |
(20,000) |
||
Total liabilities |
1,121,000
|
1,176,000
|
55,000
|
||
Stockholders’ equity |
|||||
Common stock |
500,000 |
500,000 |
– |
||
Retained earnings |
338,000 |
581,000 |
243,000 |
||
Total stockholders’ equity |
838,000
|
1,081,000
|
243,000
|
||
Total liabilities and stockholders’ equity
|
1,959,000
|
2,257,000
|
298,000
|
||
The income statement and changes in retained earnings for Britain in GBP for the year ended December 31, 20X2 is as follows:
Functional currency (GBP) 12/31/20X2 |
|||
Revenue |
2,000,000 |
||
Cost and expenses |
|||
Cost of sales |
1,000,000 |
||
Selling and administrative expenses |
341,000 |
||
Interest expense |
86,000 |
||
Depreciation |
85,000 |
||
Loss on sale of equipment |
10,000 |
||
Foreign currency transaction gain |
(35,000) |
||
Total costs and expenses |
1,487,000 |
||
Income before income taxes |
513,000 |
||
Current |
190,000 |
||
Deferred |
(20,000) |
||
Total provision for income taxes |
170,000 |
||
Net income |
343,000
|
||
Retained earnings, beginning |
338,000 |
||
Cash dividends |
(100,000) |
||
Retained earnings, ending |
581,000 |
||
How should FSP Corp prepare Britain's statement of cash flows as of December 31, 20X2 in US dollars?
Analysis
Step 1:
FSP Corp would prepare the statement of cash flows in Britain's functional currency (GBP) based on the changes in assets, liabilities, and stockholders' equity noted. Refer to the table in Step 2 for an illustration.
The transaction gain created by the USD denominated debt balances would be reflected in the reconciliation of net income to operating cash flows.
Step 2:
FSP Corp would translate the functional currency statement of cash flows into the reporting currency, USD.
Step 1
|
Step 2
|
|||
GBP
12/31/20X2 |
Code |
Exchange Rate |
USD
12/31/20X2 |
|
Cash flows from operating activities |
||||
Net Income |
343,000 |
A |
GBP 1 = USD 1.50 |
514,500 |
Adjustments to reconcile net income to net cash provided by operating activities |
||||
Depreciation |
85,000 |
A |
GBP 1 = USD 1.50 |
127,500 |
(Gain) loss on sale of equipment |
10,000 |
R |
GBP 1 = USD 1.46 |
14,600 |
(Gain) loss on foreign currency exchange rates |
(35,000) |
A |
GBP 1 = USD 1.50 |
(52,500) |
Deferred income taxes |
(20,000) |
A |
GBP 1 = USD 1.50 |
(30,000) |
Change in operating assets and liabilities |
||||
Accounts receivable |
(25,000) |
A |
GBP 1 = USD 1.50 |
(37,500) |
Inventory |
(22,000) |
A |
GBP 1 = USD 1.50 |
(33,000) |
Accounts payable |
40,000 |
A |
GBP 1 = USD 1.50 |
60,000 |
Accrued expenses |
70,000 |
A |
GBP 1 = USD 1.50 |
105,000 |
Net cash provided by operating activities |
446,000 |
668,600 |
||
Cash flows from investing activities |
||||
Proceeds from sale of equipment |
10,000 |
R |
GBP 1 = USD 1.46 |
14,600 |
Purchases of property, plant and equipment |
(155,000) |
R |
GBP 1 = USD 1.47 |
(227,850) |
Net cash used in investing activities |
(145,000) |
(213,250) |
||
Cash flows from financing activities |
||||
Payment of dividends |
(100,000) |
R |
GBP 1 = USD 1.54 |
(154,000) |
Net cash used in financing activities |
(100,000) |
(154,000) |
||
Effect of exchange rate changes on cash |
— |
35,800 |
||
Change in cash |
201,000 |
337,150 |
||
Cash, beginning of the year |
256,000 |
B |
GBP 1 = USD 1.45 |
371,200 |
Cash, end of the year |
457,000 |
E |
GBP 1 = USD 1.55 |
708,350 |
Because the pattern of cash flows and the GBP to USD exchange rate has not significantly fluctuated throughout the year, an average exchange rate can be used to translate most of the cash flows from operating activities (Tickmark A in the example above). For specific transactions such as dividends, significant purchases, and dispositions of equipment, the rate in effect at the time of transaction should be used (Tickmark R).
Step 3:
Upon consolidating the statement of cash flows of each distinct and separable operation, FSP Corp should record elimination entries for the reporting currency equivalent of intercompany transactions. Since the information for FSP Corp's US operations has not been provided in this example, the consolidating statement of cash flows for FSP Corp is not presented. However, the effect of exchange rate changes on cash held by Britain is presented below.
When a reporting entity holds cash and cash equivalents in a currency other than the reporting currency, the resulting transaction gains and losses and translation adjustments are not cash flows, but should instead be reported within the effect of foreign currency exchange rates on cash and cash equivalents.
Calculation of effect of exchange rate changes on cash |
Code
|
Calculation
|
Result
|
|||
Effect on beginning cash balance |
||||||
Beginning cash balance in local currency |
256,000 |
|||||
Net change in exchange rate during the year |
(E - B) |
0.10 |
||||
Effect on beginning cash balance |
25,600 |
|||||
Effect from operating activities during the year |
||||||
Cash provided by operating activities in local currency |
446,000 |
|||||
Year-end exchange rate |
E |
1.55 |
||||
Operating cash flows based on year-end exchange rate |
691,300 |
|||||
Operating cash flows reported in the statement of cash flows |
668,600 |
|||||
Effect from operating activities during the year |
22,700 |
|||||
Effect from investing activities during the year |
||||||
Cash provided by investing activities in local currency |
(145,000) |
|||||
Year-end exchange rate |
E |
1.55 |
||||
Investing cash flows based on year-end exchange rate |
(224,750) |
|||||
Investing cash flows reported in the statement of cash flows |
(213,250) |
|||||
Effect from investing activities during the year |
(11,500) |
|||||
Effect from financing activities during the year |
||||||
Cash provided by financing activities in local currency |
(100,000) |
|||||
Year-end exchange rate |
E |
1.55 |
||||
Financing cash flows based on year-end exchange rate |
(155,000) |
|||||
Financing cash flows reported in the statement of cash flows |
(154,000) |
|||||
Effect from financing activities during the year |
(1,000) |
|||||
Effect of exchange rate changes on cash |
35,800
|
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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