IAS 7(SOCF) and Exchange gain or loss on monetary items

@juve said:
Hello dear tutor

I hope that you are well

if we want to use Indirect method for preparing SOCF how should we treat with exchange gain or loss on monetary items?I know that as a non cash item which was previously added to (or deducted from) the profit, we should adjust the total effect and i know that we should show exchange gain or loss on cash and cash equivalent in the seperate line at the end of the SOCF.

this is extracted from IAS 7:
here(indirect method), you start with the profit or loss before tax and then you adjust it for the effect of:

– Working capital changes over the period (inventories, operating receivables, payables);
– Non-cash items (depreciation, unrealized foreign exchange gains or losses, etc.);
– Items associated with investing or financing activities.

in the above text it is said that we should adjust for TOTAL unrealized exchange gain or loss but by looking at a simple example(if it is necessary i will type it in the next message), it seems that we should adjust for exchange gain or loss on CASH and CASH EQUIVALENT only…so which one is correct:

1- Adjust for the total exchange gain or loss(according to the IAS 7) and account for the effect of exchange gain or loss on rec. and pay. in ‘working capital changes’ and account for exchange gain or loss on cash and cash equivalent at the bottom of the SOCF
OR
2- Adjust for exchange gain or loss on cash and cash equivalent ONLY account for the effect of exchange gain or loss on rec. and pay. in ‘working capital changes’ and account for exchange gain or loss on cash and cash equivalent at the bottom of the SOCF?

Thank you in advance

Hello again and thank you for your reply…

Please take a look at this example:

A company has $1 cash and $2 rec.at the start of the year 1$=1000R and at the year end 1$=2000R…and assume that there is no other profit or loss for this co.
So its profit(R) is=1000+2000=3000

If we want to prepare cashflow(R) and adjust for total exchange gain or losd:

Pbt 3000
Adjust for:
Total exchange gain (3000)
————————-
0

Increase in rec (2000)
————————-
Total cash flow (2000)
Cash at start 1000 Exchane gain on cash 1000
————————
Cash at year end 0

Which is incorrect…

But if adjust only exchange gain on cash,our cash flow(R) will be as follows:

Pbt 3000
Adjust:
Exchange gain on cash (1000)
————————–
2000

Increase in rec. (2000)
—————————-
Total cash flow for the yr 0
Cash in advance 1000 Exchange gain on cash 1000
————————–
Cash at year end 2000

Which is correct…

So it seems that we must adjust for exchange gain or loss on cash and cash equivalent and not the total amount of exchange gain or loss…

If what i wrot is incorrect please tell me the incorrect points.

Thank you in advance