OCI Impact on CF

All topics related to IFRS Standards.
Post Reply
AQS
Posts: 33
Joined: 07 Feb 2019, 18:05

OCI Impact on CF

Post by AQS »

Hello Members,

Need clarification on impact of OCI related item on CF.
We have foreign currency translation reserve arising out of conversion of foreign subsidiaries net assets converted into Parent company functional currency at each period end date, with the impact being recorded in OCI.

In my CF where should I adjust the impact of this transaction. Should I adjust the respective asset & liability from which we have this exchange difference? Or somewhere else.

Thanks
Adeel
DJP
Trusted Expert
Posts: 114
Joined: 26 Jun 2020, 15:57

Re: OCI Impact on CF

Post by DJP »

I presume you are referring to the cash flow statement.

The effect of unrealised FX gains or losses should be reported as a reconciling item separately from operating, investing and financing activities. (IAS 7.28)
AQS
Posts: 33
Joined: 07 Feb 2019, 18:05

Re: OCI Impact on CF

Post by AQS »

Thanks a lot DJP! Yes I am talking about cash flow here.

7.28 basically relates to effect of fx rate on cash & cash equivalent.

I am looking for impact of foreign currency translation reserve through OCI. At the end of reporting period we convert net assets of foreign subsidiary into parent company functional currency & record any difference in OCI. This will roll into reserve account within equity & not retained earning.

Hope this helps to understand the trx.

Thanks
Adeel
DJP
Trusted Expert
Posts: 114
Joined: 26 Jun 2020, 15:57

Re: OCI Impact on CF

Post by DJP »

No worries.

Why do you say IAS 7.28 relates only to FX changes on cash equivalents? If you read paragraph 27 you will see that cash flows should be reported in a manner consistent with IAS 21. IAS 7 does not address cash equivalents only. My interpretation of paragraphs 25 ~ 28 of IAS 7 is that any difference due to FX changes according to IAS 21 are to be presented as a reconciliation amount in the SCF (including the consolidated SCF).
AQS
Posts: 33
Joined: 07 Feb 2019, 18:05

Re: OCI Impact on CF

Post by AQS »

Agreed on the point that IAS 7 is not only related to cash & cash equivalent.

But if you read para 28 it specifically says “ the effect of exchange rate change on cash & cash equivalent held ...... reported in CF in order to reconcile op & closing cash & cash equivalent”

I am referring to fx reserve arising as per ias 21.38 & 21.44 in my question.

Thanks
DJP
Trusted Expert
Posts: 114
Joined: 26 Jun 2020, 15:57

Re: OCI Impact on CF

Post by DJP »

Cash flows are the reconciling items between the opening and closing balance of the cash and cash equivalents balances. Any difference caused by the application of IAS 21 needs to be "plugged" into the SCF to bridge the opening and closing balances.
pub_acco
Trusted Expert
Posts: 271
Joined: 19 Mar 2020, 16:40

Re: OCI Impact on CF

Post by pub_acco »

I am assuming AQS is calculating the changes in working capital based on the consolidated balances, which include the effect of exchange differences. If you first calculate the changes based on the foreign currency balances and then translate the changes using the same rate as PL, the OCI translation adjustments will be naturally eliminated from the statements of cash flows. I think there are several ways in practice to deal with foreign operations in preparing a cash flow statement, and I am not sure if the standards prefer one way to another, but one technique I know is to (1) prepare subs' cash flow statements in the subs' currencies, (2) translate them using the average rates, and (3) consolidate them. By this method, translation adjustments other than those on cash equivalents won't show up in the consolidated cash flow statement.
DJP
Trusted Expert
Posts: 114
Joined: 26 Jun 2020, 15:57

Re: OCI Impact on CF

Post by DJP »

Agree.

However, when the separate SCFs are translated at average rates, the C&CEs' opening and closing balances in presentation currency will not reconcile. In my view that difference is included as a FX differences "plug". This is what I have seen in practice.
Post Reply