6.11 Foreign currency cash flows (2024)

When preparing the statement of cash flows for a reporting entity with foreign operations, the reporting entity should perform the following steps:

• Step 1: The statement of cash flows for each distinct and separable operation should be prepared on a standalone basis in its respective functional currency.
• Step 2: The statement of cash flows for each distinct and separable operation that is a foreign entity (as defined in ASC 830) should be translated into the reporting entity’s reporting currency.
• Step 3: The reporting entity should prepare a consolidating statement of cash flows using the individually translated statements of cash flows for each distinct and separable operation. The effect of exchange rate changes on cash and cash equivalents denominated in currencies other than the reporting currency should be calculated for each distinct and separable operation.

Example FSP 6-17 illustrates the preparation of a statement of cash flows for a reporting entity with foreign operations. ASC 830-230-55 also includes an example of how to calculate the effect of exchange rate changes on cash.

EXAMPLE FSP6-17
Statement of cash flows for a foreign subsidiary

FSP Corp is located in the US and has one wholly-owned subsidiary, Britain Limited (Britain).

Britain is not an extension of FSP Corp, and its functional currency is the British pound (GBP). The reporting currency for FSP Corp is the US dollar (USD). The year-end for FSP Corp is December 31, 20X2.

The British pound to US dollar exchange rates are as follows:

Significant transactions during the year include the following:

• Britain sold a piece of equipment with a net book value of 20,000 GBP and received proceeds of 10,000 GBP. The exchange rate on the date of the transaction was GBP 1 = USD 1.46.
• Britain made one property, plant, and equipment purchase for 155,000 GBP. The exchange rate on the date of purchase was GBP 1 = USD 1.47.
• Britain paid cash dividends of 100,000 GBP. The exchange rate on the date of the dividend was GBP 1 = USD 1.54.
• Britain has a bank note denominated in US dollars. There were no payments or additional borrowings on the bank note. As a result of movements in the exchange rate, a transaction gain of 26,000 GBP was recorded at December 31, 20X2.
• Britain has an intercompany note denominated in US dollars. There were no payments or additional borrowings on the intercompany note. As a result of movements in the exchange rate, a transaction gain of 9,000 GBP was recorded at December 31, 20X2.

The GBP to USD exchange rate is deemed to not have significantly fluctuated throughout the period.

The balance sheet for Britain in GBP as of December 31, 20X1 and December 31, 20X2 is as follows:

The income statement and changes in retained earnings for Britain in GBP for the year ended December 31, 20X2 is as follows:

How should FSP Corp prepare Britain's statement of cash flows as of December 31, 20X2 in US dollars?

Analysis

Step 1:

FSP Corp would prepare the statement of cash flows in Britain's functional currency (GBP) based on the changes in assets, liabilities, and stockholders' equity noted. Refer to the table in Step 2 for an illustration.

The transaction gain created by the USD denominated debt balances would be reflected in the reconciliation of net income to operating cash flows.

Step 2:

FSP Corp would translate the functional currency statement of cash flows into the reporting currency, USD.

Because the pattern of cash flows and the GBP to USD exchange rate has not significantly fluctuated throughout the year, an average exchange rate can be used to translate most of the cash flows from operating activities (Tickmark A in the example above). For specific transactions such as dividends, significant purchases, and dispositions of equipment, the rate in effect at the time of transaction should be used (Tickmark R).

Step 3:

Upon consolidating the statement of cash flows of each distinct and separable operation, FSP Corp should record elimination entries for the reporting currency equivalent of intercompany transactions. Since the information for FSP Corp's US operations has not been provided in this example, the consolidating statement of cash flows for FSP Corp is not presented. However, the effect of exchange rate changes on cash held by Britain is presented below.

When a reporting entity holds cash and cash equivalents in a currency other than the reporting currency, the resulting transaction gains and losses and translation adjustments are not cash flows but should instead be reported within the effect of foreign currency exchange rates on cash and cash equivalents.