Foreign currency future cash flows

Learning objectives

• Calculate a value in use in a foreign currency: cash flows and discount rate in that currency, present value translated at the spot exchange rate at the date of the calculation.L2, L3

Normative references

• IAS 36 §54Cash flows in a foreign currency are estimated in that currency and discounted using a rate appropriate for that currency; the present value is then translated using the spot exchange rate at the date of the calculation.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

6 questions

• Nalvière, whose functional currency is the euro, is estimating the value in use of a mine operated by its Brazilian branch, whose cash flows are in reais. Which method complies with IAS 36?L2
• At 30 September 20X1, Ostrevan calculates the value in use of a hotel in Japan, using cash flows in yen discounted at a rate specific to the yen. Its financial year ends on 31 December 20X1. Which rate should be used to translate the resulting present value into euros?L3
• Perlaise, whose functional currency is the euro, holds a bottling plant in the United States. At 31 December 20X1, the net cash flows expected from this asset are {cash_flow_y1} USD in 20X2 and {cash_flow_y2} USD in 20X3, with no other cash flows. The appropriate pre-tax discount rate for the dollar is {usd_discount_rate}. At 31 December 20X1, the spot rate is 1 USD = {spot_rate} EUR. Calculate value in use in dollars, then in euros.L2
• A Swiss testing laboratory belongs to Quintavel (functional currency: euro). It will generate {chf_flow_a} CHF in one year and {chf_flow_b} CHF in two years, then nothing more. A pre-tax rate of {chf_rate} is appropriate for cash flows in Swiss francs. On the day of the test, 1 CHF is exchanged at spot for {eur_per_chf} EUR. What is the laboratory's value in use, in Swiss francs and then in euros?L2
• At 31 December 20X1, Rambrune is testing a data centre located in the United Kingdom. Expected net cash flows, in pounds sterling: {gbp_flow_20x2} in 20X2, {gbp_flow_20x3} in 20X3 and {gbp_flow_20x4} in 20X4. The treasury department provides: a pre-tax rate appropriate for the pound of {gbp_rate}, a pre-tax rate appropriate for the euro of {eur_rate}, a spot rate at 31 December 20X1 of 1 GBP = {spot_gbp} EUR and a forecast rate for 20X4 of 1 GBP = {forecast_gbp_20x4} EUR. Calculate value in use in pounds, then in euros.L3
• A Canadian sawmill of Sablerac (functional currency: euro) must be tested at 30 June 20X1. The controller has the net cash flows in Canadian dollars for the next three years ({cad_flow_1}, {cad_flow_2} and {cad_flow_3}), a pre-tax rate suited to the Canadian dollar of {cad_rate} and a pre-tax rate suited to the euro of {euro_rate}. The controller also knows the spot rate at 30 June 20X1 (1 CAD = {spot_cad} EUR) and the average rate for the first half-year (1 CAD = {average_cad} EUR). Determine value in use in Canadian dollars and its equivalent in euros.L3