Location: AICPA Washington Office

(Reference: AICPA International Practices Task Force - December 2, 1997 meeting)

At the last AICPA Task Force meeting we discussed preparing cash flow statements when the financial statements are price level adjusted and presented in a constant currency. This issue came about as a result of the staff's realization of how accounting for changes in debt is presented in the statement of changes in financial position under Mexican GAAP -the monetary gain would be included as operating cash flow and the change in debt compared to the recasted balance at the beginning of the year would be presented as a use of financing cash flow even if there were no cash transactions. In correspondence dated February 21, 1997 I indicated that some companies were presenting a reconciliation to US GAAP in the following format:

At a meeting of the Task Force's Mexican counterparts in Mexico City this summer, the firms agreed that this type of reconciliation should be included in the note on US GAAP information.

It would appear that the monetary gain/loss is the same as a foreign currency gain or loss - i.e., balances can change simply as a result of inflation (or exchange rates with respect to foreign currency gains/losses). These changes do not result in cash being generated or cash being expended. SFAS 95 is clear that foreign exchange gains/losses should be excluded from the cash flow statement. Accordingly, a foreign exchange loss on receivables would not effect cash received from customers if the direct method was used and if the indirect method was used the foreign exchange loss should be added to net income and excluded from the change in receivables. By analogy, it would appear that a monetary loss on receivables would not effect cash received from customers if the direct method was used and if the indirect method was used the monetary loss should be added to net income and excluded from the change in receivables. The effect of exchange rate changes on cash balances held in foreign currencies is presented as a separate item in the reconciliation of changes in cash. Likewise, the effects of changes on cash balances due to recasting into a constant currency would be presented as a separate line item in the reconciliation of changes in cash.

ISSUES

1. Should the reconciliation in a method similar to that presented above be required?

2. Alternatively, since Mexican GAAP uses a statement changes in financial position and not a cash flow statement should a true cash flow statement be required?