Foreign currency cash flows
IAS 7.25 requires cash flows arising from transactions in a foreign currency to be recorded at the exchange rate between an entity’s functional currency and the foreign currency at the date of the cash flow.
A similar approach is required for cash flows of a foreign subsidiary (IAS 7.26).
IAS 7.27 Foreign currency cash flows notes that cash flows denominated in a foreign currency are dealt with in a manner that is consistent with that required by IAS 21 The Effects of Changes in Foreign Exchange Rates.
Consequently, it is possible to use exchange rates that approximate the exchange rates at the dates of transactions (for example, a monthly rate or, if exchange rates are stable, a quarterly rate). However, the use of the period end rate for transactions that take place during a reporting period is not permitted. Foreign currency cash flows
IAS 7.28 deals with unrealised gains and losses arising from transactions in foreign currency. Foreign currency cash flows
This means that unrealized exchange differences in respect of cash and cash equivalents are not classified as operating, investing or financing. Instead, those unrealised exchange differences are presented as a separate, reconciling item, between the opening and closing balances of cash and cash equivalents in the statement of cash flows. Foreign currency cash flows
Worked example – foreign currency translation
Background information: Foreign currency cash flows
- Entity A has its head office in its home country (HC) but sells most of its products in an overseas jurisdiction in foreign
currency (FC), Foreign currency cash flows - Most of entity A’s raw material purchases are denominated in FC and its production factory is located in the overseas jurisdiction, Foreign currency cash flows
- The management of entity A has concluded that, for the purposes of its IFRS financial statements, its functional currency is FC, Foreign currency cash flows
- Entity A has a local currency (LC) bank account which is used to pay the salaries and expenses of head office management and various other head office cost, Foreign currency cash flows
- The balance in Entity A’s LC bank account as at 1 January 20X1 was LC25,000,000.
During the year ended 31 December 20X1, the following transactions took place:
- Entity A paid LC12,500,000 in salaries from its LC account (spread evenly over the year),
- On 31 August 20X1, entity A acquired computers for its local offices for LC600,000, paid on 30 September 20X1.
Exchange rates between LC and FC during the year were:
| Date | FC1+LC |
| 1 January 20×1 | 5.00 |
| 31 August 20×1 | 5.10 |
| 30 September 20×1 | 5.25 |
| 31 December 20×1 | 5.40 |
| Average for the year 20×1 | 5.28 |
Entity A considers that the movements in exchange rates during the year were not significant, because not only were the variations in rates at each date specified above small, an analysis shows that changes in exchange rates between these dates were also small and were not volatile. Foreign currency cash flows
Consequently, for the purposes of translating the monthly salary payments, the annual average rate will be used.
The example has been simplified, in that an annual average rate has been used for the purposes of translating transactions that take place during the year. It has been assumed that not only has the exchange rate not moved significantly, but that exchange rates between the dates specified above were not volatile; in addition, the monthly payments were all equal.
If, for example, the payments had been made on specific dates for substantially different amounts, and the exchange rates on those dates were significantly different, it would not be appropriate to use an average rate. Foreign currency cash flows
In all cases, it is necessary to consider the timing of payments and the exchange rates applicable at each payment date when determining whether a monthly, quarterly or annual average rate can be used as an approximation for the exchange rate at the date of each separate transaction. In practice, it is very unlikely for it to be appropriate for a period of more than three months to be used and in many cases monthly gaps between exchange rate resets will be the maximum possible period.
The LC transactions as recorded in the LC bank account are: Foreign currency cash flows
| Reporting attribute | Date | LC | FX rate | FC | |
| Opening balance Foreign currency cash flows | 1/1/20×1 | 25,000,000 | 5.00 | 5,000,000 | |
| Payment of salaries Foreign currency cash flows | Mid month | (12,500,000) | 5.281 | (2.367.424) | |
| Payment for computers 2 | 30/09/20×1 | (600,000) | 5.25 | (114,286) | |
| Book balance FC Foreign currency cash flows | (mixed rates) | calculated | 2,518,290 | ||
| Closing balance Foreign currency cash flows | 31/12/20×1 | 11,900,000 | 5.40 | 2,203,704 | |
| FX translation loss3 (314,586) | |||||
Also read: Foreign currency cash flows
Foreign currency cash flows
Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.
