Thread: Foreign Intercompany translation

If you have two foreign subsidaries (Non-US) that have intercompany balances between them and then both balances are translated into US Dollars, the balances (receviable and payable) in USD do not balance. Where does the difference go to when they are eliminated in consolidation by the US parent company, OCI or where? For example, 500,000 Euros translates into 5,347,400 SEK, but translating both to USD, 500,000 Euro translates into $707,700 USD and 5,347,400 SEK translates into $703,718 USD.

Foreign Currency Translation Adjustments are included in OCI.

FAS52 http://www.fasb.org/cs/BlobServer?bl...lication%2Fpdf

13. If an entity’s functional currency is a foreign currency,
translation adjustments result from the process
of translating that entity’s financial statements
into the reporting currency. Translation adjustments
shall not be included in determining net income but
shall be reported in other comprehensive income.

Originally Posted by texx

If you have two foreign subsidaries (Non-US) that have intercompany balances between them and then both balances are translated into US Dollars, the balances (receviable and payable) in USD do not balance. Where does the difference go to when they are eliminated in consolidation by the US parent company, OCI or where? For example, 500,000 Euros translates into 5,347,400 SEK, but translating both to USD, 500,000 Euro translates into $707,700 USD and 5,347,400 SEK translates into $703,718 USD.

I assume that the intercompany loans are $ dominated. i.e. the contractual obligation to pay back the is expressed in USD-$. Consequently, the subsidiaries that received the $ loans must keep them in their books as "foreign currency loans". At the end of each month, the foreign subsidiaries must realign their foreign currency denominated in other then their local currencies to reflect the corresponding orginal $ value expressed in local currency at the exchange rate that prevails at the end of each month. (This rate is communicated to the subsidiaries by the mother company to make sure that all subsidiaries relalign at the same rates) If this realignment at the end of the month results in a different local currency debt, the difference must be booked as foreign currency gain or (loss) in the local books. After that book entry, all the assets and liabilities of the intercompany balances balance again.
Werner Reisacher

No, the balances don't represent a loan, instead they represent sales from one foreign sub to another foreign sub, and both subs are owned by and consolidated into the US parent entity. For example, sales from a German sub are denominated in Euros, the functional currency of the Germany sub, and a Australian sub is the buyer and operaties in its functional currency, the Australian dollar. So the Austalian sub would convert from Euros to Australian dollar. When the US parent converts both subs to US dollars, there is a difference between the balances in US dollars, as I described in the original post.

I'm sticking with OCI. Functional translation gains are normally included in income except for intercompany eliminations which are shown in OCI. Sales are translated using daily or monthly rates which differs from the rates used for fixed assets. Well that's my read of FAS52. What's your take?

I used to do the books for a company with similar problems when I was still in Europe myself. This is what I always did.
I worked for the CPA company that went through the customers administration every three months. I would look up the exchange rate at the end of every threemonth period (so basically the exchange rates per 03/31 + 06/30 + 09/30 + 12/31) and then translate every mutation in foreign currency to this rate. At the end of the three month period, when matching the accounts, I almost never had a problem.

So basically you just determine a point in time, and an exchange rate. All differences from that exchange rate can be booked towards a special determined account in the Comprehensive Income section on the Profit- loss. These profits/losses can be considered exchange-rate results.

Hope this helps