Chapter 7 — Common Issues Related to Cash Flows

7.1 Foreign Currency 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. An entity should report the cash flow effect of transactions denominated in a foreign currency by using the exchange rates in effect on the date of such cash flows. As noted in ASC 830-230-45-1, 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 operation 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 have a direct impact on 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 generally 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 the cash flows from operating, investing, or financing activities.

The effects of exchange rate changes on cash 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 of ASC 830-230-55-1 through 55-15 (see Appendix A) illustrates the computation of the effect of exchange rate changes on cash. The example below illustrates the translation of a statement of cash flows that was prepared in a functional currency into a reporting currency.

Example 7-1

Company B, a wholly owned foreign subsidiary of Company A whose reporting currency is the U.S. dollar (USD), is a calendar-year-end company and uses the euro (EUR) as its functional currency. Company B issues 200,000 shares of common stock with a par value of EUR 1 on January 1, 20X0. On May 24, 20X1, B issues long-term debt of EUR 240,000, and on July 26, 20X1, B purchases equipment for EUR 200,000. Company A translates B’s statement of cash flows into A’s reporting currency to prepare its consolidated statement of cash flows.

The exchange rates between the EUR and the USD are as follows:

Balance Sheet

Statement of Income as of December 31, 20X1

Statement of Comprehensive Income as of December 31, 20X1

Statement of Cash Flows as of December 31, 20X1

Notes to Table:

(a) Common stock was issued on January 1, 20X0, when the exchange rate was 1 EUR to 1.05 USD.

(b) Retained earnings represents beginning retained earnings plus current-period net income. Accordingly, beginning retained earnings is translated by using the historical rate as of December 31, 20X0 (1.10), and current-period net income is translated by using the 20X1 weighted-average rate (1.15). The resulting foreign exchange rate is 1.126 but is rounded up to 1.13 for simplicity.

(d) 20X1 weighted-average rate is used.

(e) Equipment was purchased on July 26, 20X1, when the exchange rate was 1 EUR to 1.19 USD.

(f) A long-term debt was issued on May 4, 20X1, when the exchange rate was 1 EUR to 1.12 USD.

(g) Effect of foreign exchange rate changes on cash:

(h) Represents the difference between the exchange rate on December 31, 20X0, and that on December 31, 20X1.

(i) Represents the difference between the exchange rate on December 31, 20X1, and the 20X1 weighted-average rate.

For more information about foreign currency accounting and reporting matters, see Deloitte’s Roadmap Foreign Currency Matters.

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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.