Foreign exchange and cash flows

Gill Gittings

Hello I am hoping for some inspiration here. I am trying to get my head around this question for my ACCA studies and I've tried so many times to do it I can't see the wood for the trees:(

A subsidiary prepares accounts in $ showing:

Fixed assets. 15000. 12000
Capital 10000. 8000
Cash 5000. 4000
Tax (3000). (2500)
Loans (5000) (3000)
Shares 10000. 10000
Profit and loss 12000 8500
Operating profit after 1000 depreciation 7500
Interest payable (1000)
Taxation (3000)

The above is meant to show the $ accounts for 2008 and 2007 but I can't get them to line up.

Exchange rate at start is $1.85 to £1 and at end is 1.75$ to 1£. Average used for profit and loss is 1.80

We have to show the effects of the foreign exchange rates over the period I.e the change in opening and closing cash as a result of the differences in the opening and closing rates. Assume the closing rate has been used.

Gill Gittings

Sorry posted in wrong forum as well. In not having a good day:(

Gill Gittings

And also it's a FRS 1 style practice question.

Steve Collings

Gill Gittings wrote: »

We have to show the effects of the foreign exchange rates over the period I.e the change in opening and closing cash as a result of the differences in the opening and closing rates. Assume the closing rate has been used.

I'm somewhat confused with the requirement here. Are you trying to work out the subs figures to be used in the consolidated (translated) statement of cash flows???

Gill Gittings

Yes I think so. Sorry but I'm having a very blonde day today and can't understand this question at all.

Steve Collings

It's a very strange question...... anyhow, here's how I would do it (using FRS 1 rather than IAS 7):

The first thing I'd do is prepare the information for the cash flow statement in dollars and then translate this into sterling at the average rate (the rate used for your P&L account) like this:

......................................2008 $..........................2008 £ (ex rate = 1.80)

Operating profit................7,500.........................4,167
Increase in working cap....(2,000).......................(1,111)
Depreciation.....................1,000............................556
Cash flow from operating
activities...........................6,500.........................3,612

Interest paid...................(1,000)..........................(556)
Capital expenditure W1....(4,000).......................(2,222)
Loans received..................2,000.........................1,111

Increase in cash..............1,000...........................556

W1 = 15,000 - (12,000 - 1,000 depreciation)

You can use these figures for the consolidated cash flow statement but you will still need to do some further calculations because neither the group's movement in cash nor that in financing will arise solely from the cash flow movement. The group's increase in cash will include the following in respect of your subsidiary:

Opening balance ($4,000 x $1.85)........................2,162
Net cash inflow at average rate
(ie before adjs for effects of forex movements) =
$1,000 @ $1.80....................................................556
Effect of forex exchange rates................................139
CLOSING BALANCE ($5,000 @ $1.75).................2,857

The £139 can be proved as follows:

Opening balance at closing rate ($4,000 @ $1.75) = 2,286
Opening balance at opening rate ($4,000 @ $1.85)= (2,162)
............................................................................................124
Increase in value of net cash inflow from
average to year-end rate:
Movement at closing rate (1,000 @ 1.75)...........571
Movement at average rate (1,000 @ 1.80)........(556)
.............................................................................................15
TOTAL..................................................................................139

There will also be a change in financing due to changes in the forex rates. Your consolidated accs will contain the following figures reference the loans of the foreign subsidiary (and prove your closing translated closing cash balance):

Opening balance ($3,000 @ 1.85)............................................1,622
Cash flow from financing at average rate ($2,000 @ $1.80)........1,111
Effect of foreign exchange differences.........................................124
Closing balance ($5,000 @ $1.75)............................................2,857

You can prove the £124 (the increase in the group's loans due to effects of forex differences) as follows:

Opening balance at closing rate ($3,000 @ $1.75) = 1,714
Opening balance at opening rate ($3,000 @ 1.85) = (1,622)
.............................................................................................92
Increase in value of cash flow from financing
from average to year-end rate:
Movement at closing rate ($2,000 @ $1.75).........= 1,143
Movement at average rate ($2,000 @ $1.80)........= (1,111)
..............................................................................................32
TOTAL....................................................................................124

Bear in mind that when the consolidation has been undertaken the movement in cash is very unlikely to agree to the movement in the statement of financial position figures and the difference is because of the effect of forex changes over the period but if the closing rate has been used the difference is the change in the opening balance of your cash and cash equivalents as a result of the difference between the opening and closing rates.

That's how I would work it out anyway....

Cheers
Steve

Gill Gittings

Aww thanks Steve you are a lifesaver I can see where I've been going wrong. I now need to do the same under IAS 7 using this and the temperal method:( back to studying I go.

Gill x

Steve Collings

Gill Gittings wrote: »

. I now need to do the same under IAS 7 using this and the temperal method:( back to studying I go.

Gill x

Hmmm...where are you getting this question from? Reason I ask is that I'm questioning its relevance to today's financial reporting exams - you seem to be working a very old UK-based consolidated cash flow Q.

You can't use the temporal method under IFRS because IAS 21 no longer allows this method. Under SSAP 20 you should only use the temporal method where the subsidiary's affairs are so closely inter-related with that of the parent that its results may be considered being more dependant on the economic environment of the parent rather than its own reporting currency.

Gill Gittings

They are from my tutor who said that we should attempt them to give us an idea of how the whole foreign exchange issues fit into the financial statements. She did say that some if this won't be tested in our exam but just to illustrate how all this works.

Thanks again steve

Steve Collings

I see. I wouldn't be doing anything with the temporal method under IFRS though - it was done away with years ago!

beverly hudson

SSAP 20 was replaced in the UK wasn't it by FRS23? SSAPs are slowly but surely being withdrawn.

Steve Collings

beverly hudson wrote: »

SSAP 20 was replaced in the UK wasn't it by FRS23? SSAPs are slowly but surely being withdrawn.

FRS 23 has not replaced SSAP 20 - it is still a live SSAP. FRS 23 should only be used by listed entities who also apply FRS 26. FRSs 23-26 were issued as part of a 'package'.

Steve

beverly hudson

Steve is this certain? Our material suggests otherwise i.e. FRS23 replaced SSAP 20?

Steve Collings

beverly hudson wrote: »

Steve is this certain? Our material suggests otherwise i.e. FRS23 replaced SSAP 20?

SSAP 20 is withdrawn for entities which apply FRS 23 (i.e. listed entities). SSAP 20 applies to all other UK entities so I am afraid your material will need amendment if it refers to SSAP 20 being consigned to history. It is still a live standard.

Regards
Steve

beverly hudson

I don't understand what you are referring to. If FRS 23 deals with foreign exchange SSAP 20 is surely withdrawn. I'm not responsible for writing our material but there is no reference to SSAP 20 following FRS23 being issued.

Steve Collings

Beverly,

FRS 23 applies where an entity applies FRS 26 (Financial Instruments: Recognition and Measurement). The suite of standards from FRS 23 to 26 are for listed entities. Therefore, FRS 23 deals with foreign exchange differences for listed entities, SSAP 20 continues to deal with foreign exchange differences for unlisted entities.

You only have to look at the ASB's standards in issue and you will see SSAP 20 is in the list.

Unfortunately, if your material refers to SSAP 20 being withdrawn completely and replaced by FRS 23 your material is wrong and will have to be amended to avoid misleading/confusing students.

Regards
Steve

beverly hudson

I see what you are saying now. I'll run this through our tech team about our material.

beverly hudson

Having discussed this issue with our tech team we think that FRS23 does act as a replacement to SSAP 20 so our material will not be updated as a result, which I initially concluded.

JaffasGirl

Seriously Beverly, please tell me where you work so I can avoid the company!

Steve is one of the most respected authorities on this subject, and has proved your 'materials' and 'collegues' to be wrong on more than one occasion.

If nothing else please confirm you don't work for BPP.

Julia

I am a subject specialist, FR and audit for BPP and no Beverly does not work for us.

Beverly you are missing Steve's point, SSAP 20 is still in existence. FRS 23 is only for companies listed on a stock market as Steve has pointed out to you. BPP material covers this for its UK stream of FR papers. If your material ignores this issue you are misinforming students which is reckless. Steve is absolutely correct in what he has advised on this thread and you might do well to listen to him to avoid embarrassment. I might also advise you to put your technical team on a refresher course.

Julia (BPP)

Steve Collings

Beverly, without sounding unprofessional, your technical team are confused! Please, please refer to the ASB's website - in fact I would suggest you speak directly to them and confirm that SSAP 20 IS still alive. If you do not amend your material you are failing students.

Jaffasgirl, BPP are the platinum publisher for ACCA (which I assume you are doing) therefore all their material is reviewed by ACCA examiners. Fundamental issues such as this would be pointed out by the examiner for inclusion in the material. Even if you are not studying ACCA you can rest assured BPP material is top notch. You will be fine.

Regards
Steve

JaffasGirl

Julia wrote: »

I am a subject specialist, FR and audit for BPP and no Beverly does not work for us.

Julia (BPP)

thank god! At least I can continue to study with you now!