Foreign Currency Cash Flows, Extraordinary Items and Non-cash Transactions
Chapter Fifty-Two
Syllabus topic 4, "Classification of cash flows"
Pages 143 to 145 of 162
Foreign currency cash flows: paragraphs 25 to 27
The rule, paragraph 25.
Cash flows arising from transactions in a foreign currency should be recorded in an enterprise's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same.
Three points.
- The rate is the one at the date of the cash flow, not at the year end and not at the date of the transaction that gave rise to it.
- An approximate rate is permitted, and paragraph 26 gives the example: a weighted average exchange rate for the period.
- Paragraph 26 ties the treatment to AS 11, The Effects of Changes in Foreign Exchange Rates, so the two standards agree.
And the exception, in the last sentence of paragraph 25. The effect of changes in exchange rates on cash and cash equivalents held in a foreign currency shall be reported as a separate part of the reconciliation of the changes in cash and cash equivalents.
Paragraph 27 explains why it is separate. Unrealised gains and losses from exchange rate changes are not cash flows. But the effect on foreign currency cash held must be reported, in order to reconcile the opening and closing cash, and it is presented separately from operating, investing and financing activities.
So the statement gains a fourth line before the closing balance.
| Rs | |
|---|---|
| Net cash from operating activities | x |
| Net cash used in investing activities | (x) |
| Net cash from financing activities | x |
| Effect of exchange rate changes on cash held in foreign currency | x |
| Net increase in cash and cash equivalents | x |
It is not a fourth activity. It is a reconciling item, and calling it an activity is the error.
Extraordinary items: paragraphs 28 and 29
The rule is one sentence and it surprises students.
The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed.
There is no fourth heading for them. An extraordinary item's cash flow goes under whichever of the three fits it, and is shown on a line of its own within that heading.
| Extraordinary item | Heading | Why |
|---|---|---|
| Insurance claim received for stock destroyed by fire | Operating | The stock was operating |
| Insurance claim received for a building destroyed | Investing | The building was a fixed asset |
| Compensation paid on a lawsuit about a trading contract | Operating | It arises out of trading |
| Cost of a bad debt written off on a loan given to a third party | Investing | The loan was investing |
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