What is the Effect of Foreign Exchange Changes on Cash?

The Effect of Forex Changes on Cash captures the gain or loss recognized when a company’s cash balances denominated in foreign currencies are remeasured at reporting-date exchange rates. It reflects the impact of currency movements on the value of cash holdings.

Why is This Effect Important?

Understanding the Forex impact on cash is important because it:

• Affects Reported Liquidity: Alters the reported cash position when translating foreign currency balances into the functional currency.
• Impacts Cash Flow Analysis: Foreign exchange gains or losses can distort operational cash flows if not adjusted separately.
• Signals Currency Risk: Highlights exposure to currency volatility and the effectiveness of hedging strategies.

How is the Effect of Forex Changes on Cash Calculated?

On the cash flow statement, the Effect of Forex Changes on Cash is presented as a reconciling item in the reconciliation of opening and closing cash balances:

1Effect of Forex Changes on Cash = (Closing Cash Balance at Period-End Rate)
2  − (Closing Cash Balance at Beginning-of-Period Rate)
3  − Net Cash Flows for the Period

Where:

• Closing Cash Balance at Period-End Rate is the closing foreign currency cash balance translated at the current exchange rate.
• Closing Cash Balance at Beginning-of-Period Rate is the same balance translated at the prior period’s closing rate.
• Net Cash Flows for the Period are the sum of operating, investing, and financing cash movements translated at appropriate rates.

Additional Considerations

• Presentation: IFRS and US GAAP require this item to be disclosed separately to prevent distortion of operating cash flows.
• Hedging Impact: Companies may use currency hedges to mitigate these effects; hedge gains or losses are reflected in hedging disclosures.
• Currency Exposure Management: Monitoring this effect aids in designing treasury policies for managing foreign currency exposures and optimizing cash repatriation.