By Stefan Farrugia on 2018-06-06
In today’s globalised economy, many business groups have their activities spread over multiple countries and continents. Tapping into the global market is an incredible opportunity, however it can also prove to be quite challenging when it comes to accounting consolidation.
This process is currently slightly simpler within the European Union’s Eurozone. The future, on the other hand, is anyone’s guess due to the new reality of cryptocurrency. This type of payment is not yet widely accepted, therefore companies with international subsidiaries still have to deal with multi-currency processes.
While the principles of accounting hold true, regardless of which country one is based in, the fundamental issue of multi-currency accounting is that apples and oranges cannot be compared.
The most important factor to keep in mind when it comes to multi-currency accounting consolidation is that subsidiaries must ‘translate’ all financial statements, which are worked in local currencies during the year, to the parent company’s presentation currency at the end of a financial year.
This is not however to be confused with the functional currency, i.e. the currency of the primary economic environment in which a company operates. For example, a company may operate in the UK and use the GBP to carry out transactions and banking functions. The presentation currency, on the other hand, is a matter of choice. The company may select dollars or euros to present any bids, offers or financial results.
Once subsidiaries translate to the presentation currency, and submit their financials to the parent company, the process of consolidation can begin – in the functional currency.
A Canadian subsidiary of a UK company must therefore prepare its accounts and submit them to the parent company in the presentation currency. Something else to look out for in multi-currency accounting is that since currency exchange markets are being used, this can lead to discrepancies in the balance sheet.
This is where a balancing figure needs to be used in order to offset the cost incurred. Currency exchange rates utilised for translating financial statements are usually obtained from banking institutions, and these same institutions need to be appointed year after year to ensure consistent results.
As in all, transaction processes, gains and losses from foreign currency transactions are included in current income.
Once the translation process is complete, the focus is then shifted onto the consolidated financial statements. At this stage, the parent company’s and the subsidiary’s income statements would be combined, and any necessary transaction adjustments between the two would be made.
The same applies for the balance sheet. Once this is finalised, consolidation in one currency can be accomplished!