Currency calculations — Management Console Consolidation

Converting currencies in a multi-currency consolidation involves:

• Currency conversion calculations
• Compensating journal entries for the conversions
• Compensating journal entries for fluctuations in exchange rates during the period

Applicable Standards

Intacct performs multi-currency consolidation in accordance with FASB Statement No. 52 Foreign Currency Translation. For more information on FASB Statement No. 52, search the web for FASB 52, or search the FASB website.

Currency calculation

Balance sheet accounts and income statement accounts are factored differently.

Balance sheet accounts

Balance sheet accounts are factored by the balance sheet rate (BSR), which is typically the exchange rate on the last day of the period. (However, shareholder equity accounts are treated somewhat differently.)

Income statement accounts

Income statement accounts are factored by the weighted average rate (WAR), which is typically the average of the currency conversion rate for the period. Statistical accounts are not factored in a multi-currency conversion because multi-currency exchange rates are not relevant for statistical objects, such as number of employees.

Automated journal entries during consolidation

During consolidation, the appropriate journal entries for these items are made automatically. If any subsidiary is partially owned, the portion not owned is subtracted.

After you have performed the one-time multi-currency setup and entered the current period information (such as the BSR and WAR), consolidations are performed for you. Sage Intacct makes the appropriate journal entries relative to currency conversion and fluctuation.

There are exceptions for which you must make manual journal entries:

• Gains or losses on excess hedge amounts
• Gains or losses on certain inter-entity advances
• Inter-entity profits in inventory
• Inter-entity charges

Consolidation setup overview

Before getting into the details of how consolidation is performed, let us briefly review the process of setting up a multi-currency consolidation setup. This will help you later understand certain points regarding the calculations.

Some steps are one time; others occur on a recurring basis. First, each entity grants consolidation access to its parent, and grants permission for the users who to slide into the subsidiary from the parent.

One-time steps

The parent then creates a list of subsidiaries to be consolidated. Each subsidiary entity is mapped to a consolidation location in the parent. In addition, the periods, locations, departments, and accounts of each subsidiary are mapped to those in the parent. Also defined for each subsidiary is the percentage of ownership, the reporting period before acquisition, and the journal in which the data for the subsidiary is collected. These apply to all consolidations. For multi-currency consolidations, you also specify the following. These settings are all found in the Subsidiary Information page (Company > All > Subsidiary links).

• The account for currency exchange gain/loss on net assets (also known as CTA1).
• The account for currency exchange gain/loss on net income (CTA2).
• The currency conversion rate on the date of acquisition.
• The account group for shareholder equity. (This group contains all the accounts for shareholder equity and retained earnings. All the shareholder equity accounts from subsidiary are mapped to one or more accounts in this group.)

Each period

Perform the following steps each period in the parent company for each new period.

• For periods that are used for budgeting, map each new period in the subsidiary to a corresponding period in the parent. Specify the BSR (balance sheet rate, usually the conversion rate as of the last day of the period) and WAR (weighted average rate, usually average over the period).
• Map any new subsidiary locations/departments to their corresponding locations/departments in the parent.
• Map any new GL accounts, including statistical accounts. The default BSR and WAR specified previously in the period mapping are used for conversion. Or, you can specify an overriding BSR for the balance sheet account and WAR for an income statement account.

Consolidation calculations: the details

The basic principle of multi-currency consolidations is simple: factor the subsidiary accounts by the appropriate conversion rate, and then make the corresponding journal entries in the parent. Errors can occur due to the slight difference between the balance sheet rate from the last day of the period and the weighted average rate based on the entire period. A set of calculations compensates for such fluctuations in exchange rates. These currency translation adjustments, known as CTA1 and CTA2, complicate this otherwise simple picture.

An example is useful to explain how this works. In this example, the offshore subsidiary currency is doubloons, but the U.S. parent is dollars.

Currency conversion rates

Because currency exchange rates fluctuate with respect to each other, obtain the balance sheet rate and the weighted average rate (WAR), which is typically the average of the currency conversion rate for the period. These rates are entered as default for all accounts in the period mapping, however you can override them for specific accounts.

The example uses the conversion rates listed in the following table.

Conversion Rates	Dec 31 last quarter of previous year (period of acquisition )	Mar 31 first quarter of current year
BSR Balance Sheet Rate	2.0	2.5
WAR Weighted Average Rate	2.0	2.4

Calculation of first period after acquisition

If this is the first period after acquisition of the subsidiary, Intacct obtains the balance sheet from the subsidiary as of the date of acquisition. It then factors all accounts by the BSR currency conversion rate provided as of the date of acquisition, and creates the transactions in the specified journal. In this example, Dec 31 is the acquisition date. As a result, only the BSR is used for converting the entire balance sheet from local to parent currency.

Ongoing conversion calculations

During subsequent consolidations (after the calculation of first period after acquisition), the same set of steps is performed for each period. The steps include different calculations for balance sheet accounts and income statement accounts. In addition, balance sheet asset accounts are handled differently from shareholder accounts.

Balance sheet account conversion: asset accounts

Sage Intacct computes two values for each balance sheet account. (Except shareholder equity accounts, which are explained later.)

The first is the amount by which the subsidiary account in local currency must be factored to equal the same amount in parent currency. This is a one-time calculation and is not repeated for subsequent periods. The March 31 Local Currency column contains the subsidiary account amounts. When these accounts are consolidated into the parent, they are factored by the balance sheet rate of 2.0. Thus, the Current Assets account containing §100 in local currency becomes $200 in parent currency.

To effect this, Intacct makes a journal entry called the NCPB, or "net change to parent balance" sheet asset accounts in parent currency due to currency conversion. These are the numbers listed under Assets in the Parent Journal Entry column. These amounts are made as journal entries in the parent to reflect the difference caused by the currency conversion. The NCPB is computed to arrive at the correct account balance for the account based on the current exchange rate. It does not include the loss or gain, which is actually made as a separate entry as CTA1 in the currency exchange gain/loss for net assets account.

The NCPB is computed according to the formula NCPB= (NC x BSR) + (OB x (BSR - BSRP), which is illustrated as follows, and where:

NC is the Net Change for the period (as shown in the next table).

BSR is the balance sheet rate of the current period (as shown in the conversion rates table).

BSRP is the balance sheet rate of the prior period (as shown in the conversion rates table).

OB is the Opening Balance. This is the balance as of the last day of the prior reporting period (calculated by using first day of the period less one day) in local currency.

Previously, we saw that for the first period, the §100 in local currency became $200 (as shown in the Current Assets line in the Parent Currency column of the balance sheet account conversion table). However, in the next period, the BSR increases from 2.0 to 2.5 (Mar 31 in the conversion rates table). Consequently, the original amount of $200 is now wrong because that amount was factored on a rate of 2.0. How is the fluctuation from 2.0 to 2.5 doubloons/dollar handled in this period? In addition, note there's a §30 transaction in this account in this period (shown in the Debit column under Local Currency in the balance sheet account conversion table).

First of all, what's the fluctuation on the original $200? This is calculated by subtracting the last period BSR from the current period BSR (in the conversion rates table). The fluctuation is calculated as BSRP-BSR, where the prior period BSR called the BSRP, or 2.5 - 2.0 = 0.5. In other words, there's a fluctuation of 0.5 doubloons in the BSR. Consequently, the original is increased by §50 (§100 x 0.5).

In addition, there's a new transaction of §30. This transaction is factored by the new BSR of 2.5, and so this §30 transaction becomes $75 in parent currency.

In the parent, we now have the original $200 for this account (parent currency, Current Assets line in the balance sheet account conversion table), the $50 BSR fluctuation, and a new transaction of $75, for a total of $325. A $125 journal entry (in the Parent Journal Entry column for Mar 31), known as the NCPB, is created, which when added to the $200 becomes $325 (in the Ending Balance column for Mar 31).

The subsidiary balance remains at §130 in the subsidiary's local currency (in the balance sheet account conversion table). This is the prior balance of §100 plus the new transaction of §30.

Balance sheet asset accounts: currency exchange gain/loss

During a consolidation when the balances from the subsidiaries are brought in, each subsidiary account is factored by the conversion rates you supply. Say you supplied a balance sheet rate of 2.0 [1] and you have an account in the subsidiary with a balance of 100 doubloons [4]. When that account is consolidated into the parent, it is multiplied by 2.0 and becomes 200 dollars [5]. However, say that the weighted average rate for the period is 2.5 [3], $100 doubloons becomes 250 dollars, not $200. This occurs because there was a fluctuation in the currency exchange rate of 0.5. The net difference between the debits and credits due to the conversion is accounted for in the Currency Exchange Gain/Loss Account on Net Assets [10].

The calculation that Intacct makes for this is known as the Currency Translation Adjustment for balance sheet accounts. More specifically, CTA1 is the sum of the total asset and liabilities fluctuations, but not the equities, and is computed according to the formula OB x (BSR - BSRP).

There was a gain of $50 on the current assets account as was described previously. Similarly, the fixed assets of §400 has a gain of $200 (§400 x 0.5). Other assets (§200) has a gain of $100. Thus, the assets group increased by $350 ($50 + $200 + $100).

The accounts in the liabilities group change similarly. Payables (§100), current debt (§100), and long-term debt (§200), each have a fluctuation of -$50, -$50 and -$100 respectively. These account fluctuations total -$200.

CTA1 is the result of the total fluctuation of assets ($350) plus the total liabilities fluctuation (-$200), or $150 in the Parent Journal Entry column.

Balance sheet accounts: shareholder accounts

As noted previously, shareholder accounts are treated separately. These are the Common Stock and Retained earnings accounts denoted in the balance sheet accounts table. Sage Intacct computes the following for each balance sheet account that's mapped to an account in the shareholder equity account group.

The net change to accounts in parent currency (NCPB) is computed according to the formula
NCPB = NC x BSR.

Income statement account conversion

Sage Intacct obtains the net change (NC) for each account for the period. This number is essentially the net of debits and credits as shown in the trial balance in local currency.

Sage Intacct then computes one value, called the net change to the account in parent currency (NCPI). To compute that, Intacct uses the formula NCPI = NC x WAR. (The WAR is the default value specified for the period unless an overriding rate is specified for the account.)

NC is the net change for the period, as shown in the total value for NC in the income statement accounts table.

WAR is the weighted average rate for the current period, as shown in the conversion rates table.

In the income statement accounts table, there are three revenue and two expense items that total §10. This ten doubloons is retained earnings. The WAR conversion rate is 2.4, as shown in the conversion rates table. Thus the §10 converts to $24, which then becomes retained earnings of the parent.

The WAR was 2.4 for the period and the BSR was 2.5 in the conversion rate table, leaving a gain of 0.1 (2.5 - 2.4). Thus, the net income has been overstated. The amount by which retained earnings is overstated is §10 x 0.1, or $1. This means that Intacct needs to make another conversion translation adjustment (CTA2) to compensate.

Consequently, Intacct adds a $1 journal entry to compensate, as shown in the CTA2—Net Income line in the balance sheet accounts table.

CTA2 is entered into currency exchange gain/loss on net income account, which is derived by the formula CTA2 = (Sum of income statement accounts) ꢀ (WAR § BSR).

Subsequent journal entries

After Intacct has made the above calculations, it creates journal entries in the parent as follows.

NCPB. An entry in the mapped parent account for balance sheet accounts.

NCPI. An entry in the mapped parent account for income statement accounts.

CTA1. An entry for the account defined as the Currency Exchange Gain/Loss Account on Net Assets in the Subsidiary Information page (Activities > Link Subsidiaries). Intacct also adds a memo stating 'Currency gain or loss on net assets'.

CTA2. An entry for account defined as the Currency Exchange Gain/Loss Account on Net Income in the Subsidiary Information page. Intacct also adds a memo stating 'Currency gain or loss on net income'.

The only reason the transaction might not balance is rounding errors. A rounding error will be corrected by adjusting CTA1 appropriately.

Partial ownership

When subsidiary accounts are consolidated into the parent, Intacct subtracts amount that corresponds to the percentage that you do not own.