9.6 Statement of Cash Flows

ASC 830-230

45-1 A statement of cash flows of an entity with foreign currency transactions or foreign operations shall report the reporting currency equivalent of foreign currency cash flows using the exchange rates in effect at the time of the cash flows. An appropriately weighted average exchange rate for the period may be used for translation if the result is substantially the same as if the rates at the dates of the cash flows were used. (That is, paragraph 830-30-45-3 applies to cash receipts and cash payments.) The statement of cash flows shall report the effect of exchange rate changes on cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents held in foreign currencies as a separate part of the reconciliation of the change in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents during the period. See Example 1 (paragraph 830-230-55-1) for an illustration of this guidance.

Entities may have transactions that are denominated in a foreign currency or businesses that operate in foreign currency environments. For transactions denominated in a foreign currency, an entity should report the cash flow effects on changes in cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents by using the exchange rates in effect on the date of such cash flows. As noted above, instead of using the actual exchange rate on the date of a foreign currency transaction, an entity may use an “appropriately weighted average exchange rate” for translation “if the result is substantially the same as if the rates at the dates of the cash flows were used.”

A consolidated entity with operations whose functional currencies are foreign currencies may use the following approach when preparing its consolidated statement of cash flows:

Prepare a separate statement of cash flows for each foreign entity by using the operation’s functional currency.
Translate the stand-alone cash flow statement prepared in the functional currency of each foreign entity into the reporting currency of the parent entity.
Consolidate the individual translated statements of cash flows.

The effects of exchange rate changes, or translation gains and losses, are not the same as the effects of transaction gains and losses and should not be presented or calculated in the same manner. Effects of exchange rate changes may directly affect cash receipts and payments but do not directly result in cash flows themselves.

Because unrealized transaction gains and losses arising from the remeasurement of foreign-currency-denominated monetary assets and liabilities on the balance sheet date are included in the determination of net income, such amounts should be presented as a reconciling item between net income and net cash from operating activities (either on the face of the statement under the indirect method or in a separate schedule under the direct method). Subsequently, any cash flows arising from the settlement of the foreign-currency-denominated asset and liability should be presented in the statement of cash flows as an operating, investing, or financing activity on the basis of the nature of such cash flows.

Translation gains and losses, however, are recognized in OCI and are not included in cash flows from operating, investing, or financing activities.

The effects of exchange rate changes on cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents should be shown as a separate line item in the statement of cash flows as part of the reconciliation of beginning and ending cash balances. This issue was discussed in paragraph 101 of the Basis for Conclusions of FASB Statement 95, which stated, in part:

The effects of exchange rate changes on assets and liabilities denominated in foreign currencies, like those of other price changes, may affect the amount of a cash receipt or payment. But exchange rate changes do not themselves give rise to cash flows, and their effects on items other than cash thus have no place in a statement of cash flows. To achieve its objective, a statement of cash flows should reflect the reporting currency equivalent of cash receipts and payments that occur in a foreign currency. Because the effect of exchange rate changes on the reporting currency equivalent of cash held in foreign currencies affects the change in an enterprise’s cash balance during a period but is not a cash receipt or payment, the Board decided that the effect of exchange rate changes on cash should be reported as a separate item in the reconciliation of beginning and ending balances of cash. [Emphasis added]

In a manner consistent with the implementation guidance in ASC 830-230-55-15, the effect of exchange rate changes on cash and cash equivalents is the sum of the following two components:

For each foreign operation, the difference between the exchange rates used in translating functional currency cash flows and the exchange rate at year-end multiplied by the net cash flow activity for the period measured in the functional currency.
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.

Example 1 in ASC 830-230-55-1 through 55-15 illustrates the computation of the effect of exchange rate changes on cash:

ASC 830-230

Illustrations

Example 1: Statement of Cash Flows for Manufacturing Entity With Foreign Operations

55-1 This Example illustrates a statement of cash flows under the direct method for a manufacturing entity with foreign operations. The illustrations of the reconciliation of net income to net cash provided by operating activities may provide detailed information in excess of that required for a meaningful presentation. Other formats or levels of detail may be appropriate for particular circumstances.

55-2 The following is a consolidating statement of cash flows for the year ended December 31, 19X1, for Entity F, a multinational U.S. corporation engaged principally in manufacturing activities, which has two wholly owned foreign subsidiaries — Subsidiary A and Subsidiary B. For Subsidiary A, the local currency is the functional currency. For Subsidiary B, which operates in a highly inflationary economy, the U.S. dollar is the functional currency.

Reconciliation of net income to net cash provided by operating activities:

55-3 The entity would make the following disclosure.

Cash in excess of daily requirements is invested in marketable securities consisting of U.S. Treasury bills with maturities of three months or less. Such investments are deemed to be cash equivalents for purposes of the statement of cash flows.

55-4 Summarized in the following tables is financial information for the current year for Entity F, which provides the basis for the statement of cash flows presented in paragraph 830-230-55-2.

55-5 The U.S. dollar equivalents of one unit of local currency applicable to Subsidiary A and to Subsidiary B are as follows.

55-6 The computation of the weighted-average exchange rate for Subsidiary A excludes the effect of Subsidiary A’s sale of inventory to the parent entity at the beginning of the year discussed in paragraph 830-230-55-10(a).

55-7 Comparative statements of financial position for the parent entity and for each of the foreign subsidiaries are as follows.

55-8 Statements of income in local currency and U.S. dollars for each of the foreign subsidiaries are as follows.

55-9 All of the following transactions were entered into during the year by the parent entity and are reflected in the preceding financial statements:

The parent entity invested cash in excess of daily requirements in U.S. Treasury bills. Interest earned on such investments totaled USD 35.
The parent entity sold excess property with a net book value of USD 35 for USD 150.
The parent entity’s capital expenditures totaled USD 450.
The parent entity wrote down to its estimated net realizable value of USD 25 a facility with a net book value of USD 75.
The parent entity’s short-term debt consisted of commercial paper with maturities not exceeding 60 days.
The parent entity repaid long-term notes of USD 200.
The parent entity’s depreciation totaled USD 340, and amortization of intangible assets totaled USD 10.
The parent entity’s provision for income taxes included deferred taxes of USD 90.
Because of a change in product design, the parent entity purchased all of Subsidiary A’s beginning inventory for its book value of USD 160. All of the inventory was subsequently sold by the parent entity.
The parent entity received a dividend of USD 22 from Subsidiary A. The dividend was credited to the parent entity’s income.
The parent entity purchased from Subsidiary B USD 270 of merchandise of which USD 45 remained in the parent entity’s inventory at year-end. Intra-entity profit on the remaining inventory totaled USD 15.
The parent entity loaned USD 15, payable in U.S. dollars, to Subsidiary B.
Entity F paid dividends totaling USD 120 to shareholders.

55-10 All of the following transactions were entered into during the year by Subsidiary A and are reflected in the above financial statements. The U.S. dollar equivalent of the local currency amount based on the exchange rate at the date of each transaction is included. Except for the sale of inventory to the parent entity (the transaction in [a]), Subsidiary A’s sales and purchases and operating cash receipts and payments occurred evenly throughout the year.

Because of a change in product design, Subsidiary A sold all of its beginning inventory to the parent entity for its book value of LC 400 (USD 160).
Subsidiary A sold equipment for its book value of LC 275 (USD 116) and purchased new equipment at a cost of LC 600 (USD 258).
Subsidiary A issued an additional LC 175 (USD 75) of 30-day notes and renewed the notes at each maturity date.
Subsidiary A issued long-term debt of LC 400 (USD 165) and repaid long-term debt of LC 250 (USD 105).
Subsidiary A paid a dividend to the parent entity of LC 50 (USD 22).

55-11 The following transactions were entered into during the year by Subsidiary B and are reflected in the preceding financial statements. The U.S. dollar equivalent of the local currency amount based on the exchange rate at the date of each transaction is included. Subsidiary B’s sales and operating cash receipts and payments occurred evenly throughout the year. For convenience, all purchases of inventory were based on the weighted-average exchange rate for the year. Subsidiary B uses the first-in, first-out (FIFO) method of inventory valuation.

Subsidiary B had sales to the parent entity as follows.
Subsidiary B sold equipment with a net book value of LC 200 (USD 39) for LC 350 (USD 14). New equipment was purchased at a cost of LC 500 (USD 15).
Subsidiary B borrowed USD 15 (LC 500), payable in U.S. dollars, from the parent entity.
Subsidiary B repaid LC 1,000 (USD 35) of long-term debt.

55-12 Statements of cash flows in the local currency and in U.S. dollars for Subsidiary A and Subsidiary B are as follows.

55-13 A reconciliation of net income to net cash provided by operating activities follows.

55-14 The following is the computation of cash received from customers and cash paid to suppliers and employees as reported in the consolidating statement of cash flows for Entity F appearing in paragraph 830-230-55-2.

55-15 The following is the computation of the effect of exchange rate changes on cash for Subsidiary A and Subsidiary B.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.