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Issue Relating to: Effect of Exchange Rate on Cash and Cash Equivalents

The following analysis points out that of 403 SEC filings, at least 345 (could be more) calculate the net changes to cash and cash equivalents on the cash flow statement one way, 8 filers do this in a different way.

345 use this equasion: Beginning balance in cash + Net changes in cash = Ending balance in cash (i.e. exchange gains in cash are included in the net change in cash, this is also the approach used by the US GAAP Taxonomy)

8 filers use this equasion: Beginning balance in cash + Net changes in cash + Exchange gains (losses) from cash transactions = Ending balance in cash

The difference between the two approaches relates to whether the effect of exchange rate changes on cash and cash equivalents is included in the net changes in cash and cash equivalents.

To me, this raises several questions:

  • Are there really two (or maybe even more) ways of computing the net change in cash?
  • If so, why?  What benefit does this have to anyone?
  • If there are two ways, what would it hurt to use only one way in order to have better comparability?
  • Will peer pressure possibly motivate the 8 to follow the approach followed by the majority?
  • Are the 8 filers correct and being more progressive than the other 345?  Should this "progressiveness" be encouraged?  Is this being progressive?
  • Should the FASB or the SEC or someone address issues like this? Or, should the capital market deal with this in some manner?

This specific financial line item is really not that big of a deal.  And frankly it is pretty easy to do some things to make the 8 consistent with everyone else.  But focusing on this one line item would miss the bigger point which is that this type of issue exists not only where I pointed this out here, but in many other areas of the US GAAP Taxonomy and in SEC filings.  The fact patterns are different for the different areas of the taxonomy.

In some cases different ways of computing things is very important and does, in fact, differentiate one company from another.  In other cases, and I think in this case, the difference is not a significant differentiator.

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Reader Comments (1)

I hope that this is not an example of the tail wagging the dog. XBRL is a reporting tool and should not constrain valid reporting techniques. It is the role of standard-setters, preparers, auditors and the capital markets to set, follow, check and influence company's financial reporting practices.

Whether the presentation adopted by the 8 is optimal or not is open to question but the answer should not be derived from the ease of preparation of the XBRL reports.

To be fair, I do not think that this is where your post is heading but there may be some that think this way. However, I do believe that XBRL does have an important role to play flagging up these inconsistent reporting practices which as a result of XBRL will be more easily spotted.

Nick Topazio
Chartered Institue of Management Accountants
See my blog at http://community.cimaglobal.com/node/21380
November 25, 2009 | Unregistered CommenterNick Topazio

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