Consolidating foreign currency subsidiaries

11 Nov

In a consolidation, you gather transactions from several company accounts into a single set of company accounts.

You can print reports, such as financial statements, from the consolidated company, but you cannot use this company for daily transactions.

This mistake can arise when a company has an intercompany account (for example, a parent’s intercompany receivable from a subsidiary) recorded on the books of companies with different functional currencies. On that date, Parent Company A records a million receivable on its balance sheet, and the subsidiary records €6,961,000 on its balance sheet. Now assume that no other entries are recorded to this account, but that on March 31, 2011, Parent Company A must report its financial statements.

The issue boils down to how to account for an intercompany balance when each of the parties has the balance recorded in different currencies (for example, the parent company records the balance in U. dollars, while the subsidiary records the balance in euros). 1, 2011, Parent Company A lends million to its subsidiary in Germany, and the loan is payable in U. Assuming the German subsidiary used the exchange rate of

In a consolidation, you gather transactions from several company accounts into a single set of company accounts.You can print reports, such as financial statements, from the consolidated company, but you cannot use this company for daily transactions.This mistake can arise when a company has an intercompany account (for example, a parent’s intercompany receivable from a subsidiary) recorded on the books of companies with different functional currencies. On that date, Parent Company A records a $10 million receivable on its balance sheet, and the subsidiary records €6,961,000 on its balance sheet. Now assume that no other entries are recorded to this account, but that on March 31, 2011, Parent Company A must report its financial statements.The issue boils down to how to account for an intercompany balance when each of the parties has the balance recorded in different currencies (for example, the parent company records the balance in U. dollars, while the subsidiary records the balance in euros). 1, 2011, Parent Company A lends $10 million to its subsidiary in Germany, and the loan is payable in U. Assuming the German subsidiary used the exchange rate of $1 = €0.6961 in its journal entry, the intercompany balance should be eliminated when the euro balance is translated to U. The prevailing exchange rate on that date is $1 = €0.7433.Avoiding these pitfalls can make a big difference to companies’ financial statements.

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In a consolidation, you gather transactions from several company accounts into a single set of company accounts.

You can print reports, such as financial statements, from the consolidated company, but you cannot use this company for daily transactions.

This mistake can arise when a company has an intercompany account (for example, a parent’s intercompany receivable from a subsidiary) recorded on the books of companies with different functional currencies. On that date, Parent Company A records a $10 million receivable on its balance sheet, and the subsidiary records €6,961,000 on its balance sheet. Now assume that no other entries are recorded to this account, but that on March 31, 2011, Parent Company A must report its financial statements.

The issue boils down to how to account for an intercompany balance when each of the parties has the balance recorded in different currencies (for example, the parent company records the balance in U. dollars, while the subsidiary records the balance in euros). 1, 2011, Parent Company A lends $10 million to its subsidiary in Germany, and the loan is payable in U. Assuming the German subsidiary used the exchange rate of $1 = €0.6961 in its journal entry, the intercompany balance should be eliminated when the euro balance is translated to U. The prevailing exchange rate on that date is $1 = €0.7433.

Avoiding these pitfalls can make a big difference to companies’ financial statements.

The first common mistake is difficult to detect without knowing how the accounting system consolidates subsidiaries.

= €0.6961 in its journal entry, the intercompany balance should be eliminated when the euro balance is translated to U. The prevailing exchange rate on that date is

In a consolidation, you gather transactions from several company accounts into a single set of company accounts.You can print reports, such as financial statements, from the consolidated company, but you cannot use this company for daily transactions.This mistake can arise when a company has an intercompany account (for example, a parent’s intercompany receivable from a subsidiary) recorded on the books of companies with different functional currencies. On that date, Parent Company A records a $10 million receivable on its balance sheet, and the subsidiary records €6,961,000 on its balance sheet. Now assume that no other entries are recorded to this account, but that on March 31, 2011, Parent Company A must report its financial statements.The issue boils down to how to account for an intercompany balance when each of the parties has the balance recorded in different currencies (for example, the parent company records the balance in U. dollars, while the subsidiary records the balance in euros). 1, 2011, Parent Company A lends $10 million to its subsidiary in Germany, and the loan is payable in U. Assuming the German subsidiary used the exchange rate of $1 = €0.6961 in its journal entry, the intercompany balance should be eliminated when the euro balance is translated to U. The prevailing exchange rate on that date is $1 = €0.7433.Avoiding these pitfalls can make a big difference to companies’ financial statements.

||

In a consolidation, you gather transactions from several company accounts into a single set of company accounts.

You can print reports, such as financial statements, from the consolidated company, but you cannot use this company for daily transactions.

This mistake can arise when a company has an intercompany account (for example, a parent’s intercompany receivable from a subsidiary) recorded on the books of companies with different functional currencies. On that date, Parent Company A records a $10 million receivable on its balance sheet, and the subsidiary records €6,961,000 on its balance sheet. Now assume that no other entries are recorded to this account, but that on March 31, 2011, Parent Company A must report its financial statements.

The issue boils down to how to account for an intercompany balance when each of the parties has the balance recorded in different currencies (for example, the parent company records the balance in U. dollars, while the subsidiary records the balance in euros). 1, 2011, Parent Company A lends $10 million to its subsidiary in Germany, and the loan is payable in U. Assuming the German subsidiary used the exchange rate of $1 = €0.6961 in its journal entry, the intercompany balance should be eliminated when the euro balance is translated to U. The prevailing exchange rate on that date is $1 = €0.7433.

Avoiding these pitfalls can make a big difference to companies’ financial statements.

The first common mistake is difficult to detect without knowing how the accounting system consolidates subsidiaries.

= €0.7433.

Avoiding these pitfalls can make a big difference to companies’ financial statements.

The first common mistake is difficult to detect without knowing how the accounting system consolidates subsidiaries.

Although the rules on accounting for foreign-currency translations have not changed in many years, mistakes in this area persist. With the increase in foreign transactions comes a parallel increase in foreign-currency reporting, and since many companies do business in multiple countries, the complexity of such reporting is on the rise.

This would put you in the position of either implementing a new system for your legal entity that supports consolidation from other systems, or implementing a consolidation tool that is separate from your ERP environment.

The separate consolidation tool category includes Adaptive Planning, a tool that is certainly very popular.

As a result, the individual line items in your consolidated cash flow statement would contain lots of effects of changes in foreign exchange rates – and maybe you know that this effect should be reported separately at the end.

How can you spot this wrong methodology in any financial statements? It’s a full IFRS learning package with more than 30 hours of private video tutorials, more than 100 IFRS case studies solved in Excel, more than 120 pages of handouts and many bonuses included. Let’s explain in a few simple steps and illustrate on an example.