Recently, I am in charge for preparation of consolidation accounts with other companies which using different currencies. How do I record the translation differences? Is it same treatment as Trade Receivables - unrealised gain/loss? Can anyone help?
I am having problem on doing the consolidation account on recording the CTA
Answers
Translation differences should be recorded in Equity.
The answer is not as straightforward as most of us would like. You have to first determine the functional currency of each foreign operation that you are consolidating. It's possible for your foreign sub's functional currency to be the reporting currency if it is not a standalone, self-sustaining operation. You need to review the applicable guidance for each one of your subs (FAS 52 under the old naming convention).
Option 1: Translation differences in equity if functional currency is the same as the local currency. Option 2: Translation differences in the P&L (foreign currency gain/loss) if the functional currency is not the local currency (i.e. same as the parent for example). Under option 2, certain assets/liabilities (nonmonetary I think) are translated at their historical conversation rates. As mentioned above, best to read the guidelines. You should have your reasons for option 1 or option 2 determined upfront.
One more vote for reading the guidelines from me. FAS 52 is actually fairly digestible as standards go.
Some general guidelines:
1) The method for conversion / translation for each subsidiary depends on the status (expense or P&L) role assigned to the subsidiary. When in doubt the P&L role will usually do.
2) Accounts have different conversion rates used in the P&L model. Balance sheet accounts are usually revalued at the month end rate (including revaluation of prior period balances). P&L accounts are often revalued at a midpoint rate for the month. Investment accounts (like investment in subsidiary) are valued at historical rates (and never revalued). The different valuation models result in a currency transaction adjustment (CTA) that is the number required to make each ledger balance after applying the various revaluation rates.
3) The order you do things is important as well. Subsidiaries can have a reporting currency as well as transactional currencies. You need to revalue your subsidiary ledgers (unrealized gain/loss) before you consolidate them.
4) Other normal consolidation processes apply as well - isolating inter-company transactions for possible elimination entries, etc.
Ideally there is a financial tool available for your financial system to support this - doing it all by hand isn't where most people want to be. Any perceived savings of not having software to support this will be more than consumed in extra time to close each month and extra audit charges.
Bob Scarborough
www.tensoft.com
Following is a US company, US GAAP related response:
If you are just starting to add foreign entities that require consolidation it is critical that you spend time considering the functional currency. That is pivotal to the consolidation methodology. It also has an amazing impact on the future. For companies with heavy international deferred revenue (ie: software) or depreciation (ie: manufacturing) USD functional currency fixes the USD value of the revenue/expense making it VERY predictable in consolidated reporting, whereas those same items are not hedge-able or predictable in a foreign functional entity.
For those who will suggest that the selection of functional currency is not a "choice", I would suggest that many companies have a "mixed" profile. It is very much in how you approach the criteria. Having reviewed the functional currency decisions of hundreds of companies there appears to be a lot of flexibility in the application of the 6 "indicators" generally in favor of local currency functional. That appears to reflect more the capability of systems than the
Also, be sure you study the cash flow rules before you prepare consolitated CF. It needs to be done in local currency and then translated. A good upper level accounting textbook can be invaluable...get one used on Amazon.