Foreign Currency Translation Reserve (FCTR)

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Aady001
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Foreign Currency Translation Reserve (FCTR)

Post by Aady001 »

Hi All,
This is rather a generic question, which I would like to ask.

When we consolidate foreign subsidiaries for consolidated financial statements, we usually get a forex difference due to translating the reporting currency of subsidiaries to the reporting currency of the holding company. We park this difference as a translation reserve and disclose it as part of other equity.

My question is since this FCTR is the outcome of translating both the Balance Sheet and Income Statement of subsidiaries. How we disclose the effect of movement in FCTR in the consolidated cash flow statement.

Thanks
Leo
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Leo »

Hi

Please correct me if I'm wrong, the Fx differences is disclosed in a separate line at the end of the CFS :

Cash at the opening +/- movements of the period +/- foreign exchanges effects = Cash at the closing.

The movements in the cash flow statements are using the average exchange rate of the FY.
Aady001
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Aady001 »

Hi
The FX difference you are talking about is only related to cash and cash equivalent and not the entire FCTR
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Marek Muc
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Marek Muc »

can you please illustrate, using simple numerical example, the impact that you're talking about?
Aady001
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Aady001 »

It's difficult to illustrate with an example, but I have tried. Refer attachment

Y is the parent entity that prepares consol financials in USD
X is the subsidiary whose reporting currency is GBP and for the purpose of consolidation, its FS is converted into USD.
The above conversion leads to an FCTR of USD 20.

Question:
How to give the effect of this FCTR in consolidated cash flow
Attachments
Example.GIF
Leo
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Leo »

It's more complicated than that, you should have at least an opening because cash flow is the difference between closing and opening.

Let's take a much simpler example, your subsidiary has only cash for 100 GDP at the opening, and supposing that nothing has changed during the year, and they closing with 100 GDP in cash.

The balance sheet at the opening :

Cash: 100
Capital: 100

the balance sheet at the closing :

cash: 100
Capital: 100

Opening rate USD/GDP let's say 1.1, and the closing rate is 1,2. so in consolidation, you'll have in the opening:

Cash : 110
Capital : 110

and in the closing :

Cash ; 120
Capital : 110 (because equity is always at historical rate)
FX reserves : 10

and in the cash flow :

no movement.

Cash at opening = 110
FX differences : 10
Cash at closing : 120
JRSB
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Re: Foreign Currency Translation Reserve (FCTR)

Post by JRSB »

Nice example Leo.
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Marek Muc
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Marek Muc »

@Aady001
the illustration for CTA is already in the knowledge base:
https://ifrscommunity.com/knowledge-bas ... -operation

you asked about cash flow specifically, but your example does not even touch cash flow statement, so perhaps you need to spend more time on your example

Leo provided a nice simple example to start with
Aady001
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Aady001 »

Hi Marek
I have given only the Balance Sheet and Income statement in one table (like a TB) so that cash flow can be visualized easily.

I wanted to check that where the amount of FCTR will be parked in the cash flow taking this illustration.

Hi Leo,
Thanks for the inputs
But I think you are again referring to disclosing it as a separate line item between opening and closing of cash balances which i am not very convinced. This approach usually followed for the translation difference in cash and cash equivalent only and not the entire Balance Sheet and Income Statement.

I am trying hard to get an appropriate solution will update here as well if I found one.
Aady001
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Aady001 »

Hi Marek
The topic link that is shared also contains the CTA in the example.
Can we consider that example also, to see how the CTA will be adjusted in cash flow.
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Marek Muc
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Marek Muc »

yep, I can add that to the knowledge base, but I'm very busy right now, so something to do in the coming months

in the meantime, you can still draft a simple example here in this topic, and we will see what impacts in cash flow statement should be reflected due to CTA
Leo illustrated the impact on cash
Blesxzoh
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Blesxzoh »

Great question...

Short answer... Show it as a line after net changes in cash and cash equivalents for the period.

But how do you arrive at that number? That's often the big question!!! O this, I say, it's a long story as most people get it wrong. To know if the number there is wrong, just compare the number you have with the number in FCT gain/loss for the year in OCI/SCIE. If they are the same, then something went wrong. So how do you solve the puzzle? First... Avoid focusing on the Consolidated Balance Sheet.

- Start with the individual cash flows of the subsidiaries and the parent
- Translate using the transaction date rates or average rates (as necessary) - this is why you should avoid B/S focus as for the most part, they don't reflect this condition
- Adjust for elimination entries
- Consolidate on line-by-line basis
- Gaps you have after point 2 will flow in as the FCT gain/loss in cash flow.

Again, if the FCT gain/loss in SCF is same as in SCIE/SCI, then you missed something, or you did the quick and dirty way, and not IFRS compliant.

Please see:
- https://www.cohencpa.com/insights/artic ... of-foreign
- https://www.cpdbox.com/consolidated-cas ... urrencies/

Hope this helps!
Leo
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Leo »

Hi,

From my last example, it only works for cash, when it comes to cash, the FX reserves in OCI equals fx changes in the bottom line of the cash flow statements. For every other items of the balance sheet, only remember that the cash flow statement only takes average rate on the variation of the balance sheet.

Please let me illustrate with another example :
Currency, GDP/USD, Functional currency of the company is in GDP and they report in USD in consolidation.
Opening rate 1,1, average rate, 1,2 and closing rate 1,3.

Opening balance sheet :
Inventory : 100 GDP
Capital : 100 GDP

Mouvements of the year :
Inventory increased for 100 GDP and liabilities increased for 100 GDP as well so the closing balance sheet is :
Inventory : 200
Capital : 100
Liabilities : 100

In consolidation you'll have :
Opening balance sheet :
Inventory : 110 USD
Capital : 110 USD

Closing balance sheet :
Inventory 260 = Flow opening 110 + Flow variation 120 + Flow FX differences 30
Capital 110
FX reserves 20 = counterpart of Flow FX differences arising from all the balance sheet items
Liabilities 130 = Flow opening 0 + flow variation 120 + Flow FX differences 10

But as there was no cash flow mouvements, the cash flow statement should be NIL. but in reality it could be like :

Net income : 0
Working capital variations : Inventory -120 USD + Liabilities + 120 USD = 0

Cash at opening : 0
Cash at closing : 0

you see that the cash flow statement only takes every variation flows except flow FX differences.
You also see that FX reserves is not equal to the one in the cash flow cause you don't have any in my case.
Leo
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Re: Foreign Currency Translation Reserve (FCTR)

Post by Leo »

Just a small correction from what I said in my last post :

"you see that the cash flow statement only takes every variation flows except flow FX differences".

By variation flows I meant the movement during the year, not the opening flow and not the FX differences flows.

The opening flow is in reality not a cash flow, but often in consolidation tools it's shown as a opening flow.
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