Sometimes you will see this item at the end of a Cash Flow Statement: “Effect of exchange rate changes on the balance of cash held in foreign currencies” or “Currency Translation Differences” or “Effects of exchange rate fluctuations on cash and cash equivalents” or other similar terms. The following is a snapshot of OLDTOWN’s Cash Flow Statement (AR 2017). For simplicity, I will call this line item as “FX Rate Effects on Cash Balance” in this post.

What exactly does this line item mean?

“FX Rate Effects on Cash Balance” doesn’t impact Income Statement, so it won’t show up there. To be more precise, this item is not taxable.

Let’s take OLDTOWN as example. OLDTOWN sells products in other countries (as following). So OLDTOWN is selling products in Renminbi, Indonesian Rupiah, Singapore Dollar, and others. Since OLDTOWN is a Malaysia based company, so OLDTOWN will report all their revenue and expenses in MYR.

In reality, OLDTOWN has actually sold some of their products in other currencies, and OLDTOWN has paid out some of their expenses in other currencies as well. In a very short time period, it doesn’t really matter; you can just convert it to MYR and that’s all there is to it.

The problem is that over the course of a year, the exchange rates on those currencies are going to change in some way. So, maybe the Renminbi becomes more valuable, the Indonesian Rupiah falls in value versus the MYR. When that happens, what ends up happening here is that even though OLDTOWN recorded their revenue in MYR, the actual Cash Flows will not match up because the value of some of those currencies has changed during this time period. (Remember Accrual Accounting?)

This is recorded in the “FX Rate Effects on Cash Balance” line item, normally shown on the Cash Flow Statement at the bottom.

This line item just corresponds to these exchange rate changing over time and the fact that these exchange rates may have changed in between the time when something was sold and then when the company actually even recorded it as revenue or paid out as an expense.

Don’t worry too much about the specifics of how this actually happens. Just remember the following:

1. Income Statement – No impact because all revenue are reported in the company’s local currency.
2. Cash Flow Statement – Net Income hasn’t changed, but “FX Rate Effects on Cash Balance” increasing mean that the company has increased its cash flow as a result of how other currencies have changed.
3. Balance Sheet – Cash balance will be increased accordingly.

If “FX Rate Effects on Cash Balance” is a negative, it works exactly the same way.

How does this line item impact your analysis? Well, just trust the company’s accountants and auditors. Don’t ever forecast this number as this involves “rocket science”…

https://lcchong.wordpress.com/2017/11/18/effect-of-forex-rates-changes-on-cash-balance/