Foreign currency flows and exchange effect

Learning objectives

• Determine the exchange rate applicable to foreign currency cash flows and to the cash flows of a foreign subsidiary (rate at the date of the cash flow, average rate, closing rate not permitted).L2, L3
• Calculate the effect of exchange rate changes on cash and reconcile opening and closing cash.L2, L3, L4

Normative references

• IAS 7 §25Cash flows arising from transactions in a foreign currency are recorded in the entity's functional currency by applying to the foreign currency amount the exchange rate at the date of the cash flow.
• IAS 7 §26The cash flows of a foreign subsidiary are translated at the exchange rates at the dates of the cash flows.
• IAS 7 §27Cash flows denominated in a foreign currency are reported in a manner consistent with IAS 21, which permits the use of a rate that approximates the actual rate, for example a weighted average rate for the period; the closing rate may not be used to translate the cash flows of a foreign subsidiary.
• IAS 7 §28Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows; however, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the statement in order to reconcile cash at the beginning and the end of the period; this amount, presented separately from operating, investing and financing cash flows, includes the differences, if any, had those cash flows been reported at end-of-period exchange rates.

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

15 questions

• At which rate does an entity record a cash flow arising from a foreign currency transaction?L2
• Which rate may be used, as an approximation, to translate the cash flows of a foreign subsidiary?L2
• How is the effect of exchange rate changes on cash held in foreign currencies presented?L3
• Which of these statements about foreign currency cash flows are correct?L2
• To translate the cash flows of its Brazilian subsidiary, which rates may the Halbris group use?L3
• Ardesia pays a US supplier {usd_amount} USD on a day when 1 USD equals {payment_rate} EUR (case data). The invoice had been recorded at a different rate. Compute the operating outflow in euros.L2
• Fendane group: opening cash {opening_cash}; operating flows {operating}, investing flows (outflow) {investing}, financing flows (outflow) {financing}; closing cash {closing_cash}, part of it held in foreign currencies. Compute the effect of exchange rate changes on cash.L3
• At Isdane, cash and cash equivalents were {opening_cash} at the start and {closing_cash} at the end of the period, a large part in pounds sterling which weakened. The period's flows are: operating {operating}, investing (outflow) {investing}, financing (inflow) {financing}. Determine the exchange effect line to present (negative if a loss).L3
• Morbane's subsidiary generated {local_operating} of operating cash flows in local currency (LC) evenly over the year. Weighted average rate: {average_rate} EUR per 1 LC; closing rate: {closing_rate} EUR (case data). Compute the translated operating flow and the difference wrongly using the closing rate would have caused.L3
• Rindane holds a dollar account: opening balance {opening_usd} USD (rate {opening_rate}); customer receipt of {receipt_usd} USD (spot rate {receipt_rate}); supplier payment of {payment_usd} USD (spot rate {payment_rate}); closing rate {closing_rate} (rates in EUR per 1 USD). Compute the closing balance in euros and the exchange effect for the period.L4
• Velsane presents in its operating cash flows a “receipt” of 45,000 corresponding to the unrealised exchange gain on its dollar receivables. What is the error?L2
• Borlane's statement shows: opening cash 400,000 + net flows 150,000 = 550,000, whereas closing cash is 532,000, part being held in Swiss francs. What is the error?L3
• On 10 March Elsane receives 500,000 CHF from a customer, recorded on invoicing at a rate of 1.02 EUR; the rate on 10 March is 1.05 EUR per 1 CHF (case data). What operating receipt should be presented?L2
• Galmira's Turkish subsidiary collects 80% of its receipts in the last month of the year, a period of sharp depreciation of the Turkish lira (case data). The consolidation team proposes a simple annual average rate. Which position should be taken?L3
• Tornore group: closing cash includes 3 million dollars whose euro value rose by 120,000 EUR through exchange rates; the dollar debt rose by 200,000 EUR through exchange rates (case data). How do these effects appear in the statement?L4