Foreign Exchange Effects
It is possible that a company has subsidiaries in foreign locations and the financial statements of such subsidiaries are reported in the currency of the country in which it is located. If an Indian company owns an outlet in New York through a subsidiary, then the subsidiary will report its numbers in USD whereas the Indian company will report numbers of its Indian operations in INR. If the company has to prepare a consolidated financial statement, then it has to convert the numbers of its New York subsidiary into INR.
So if the consolidated statement is being prepared for the 1st Jan 2018 – 31st March 2018 period, cash flow and income statement items are converted into INR using average INR/USD exchange rate between the before mentioned dates.
However, balance sheet items will have to be converted using spot INR/USD rate as of 31st March 2018. The previous periods consolidated balance sheet will be prepared as of the period ending dates INR/USD rate.
Because of the average rate and the sport rate used for conversion, an imbalance is caused that could either increase or decrease the amount of the data item. This increase or decrease will have nothing to do with the actual cash flow and will be caused due to foreign currency fluctuation. This imbalance caused due to fluctuation will be captured in the data item foreign exchange effects.