Multi-currency consolidation for groups with foreign subsidiaries
To consolidate a foreign subsidiary, translate its books into the group's currency: closing rate for the balance sheet, average rate for profit and loss, historical rates for equity. The leftover difference is the translation reserve. Finconsol applies the right rate to each part, suggests the rates and works out the reserve.
Translate into the group currency
Zenvara UK Ltd keeps its books in pounds. The group reports in US dollars, in thousands.
The balance sheet of Zenvara UK Ltd is translated from pounds to dollars: assets and liabilities at the closing rate of 1.25, share capital at the historical rate of 1.31, and retained earnings at the opening and average rates. The translation reserve of minus 56 is the difference that keeps the balance sheet in balance, and total equity of 1,500 equals net assets.
Rupees, pounds and dirhams do not add up
A group with an Indian parent, a UK company, a Dubai company and a Singapore company has four sets of books in four currencies. The board wants one balance sheet and one profit and loss, in one currency.
Converting every line at one rate looks quick, and it leaves the balance sheet out of balance. The harder questions come next: which rate for which line, and where the leftover difference goes.
- The balance sheet does not balance. Assets, profit and equity are translated at different rates, so the totals stop agreeing.
- Rates are chased every month. Someone looks up a closing rate, an average rate and the old rates for equity, for each currency.
- Growth looks wrong. A stronger dollar makes a growing subsidiary look flat, and nobody can say how much was rates.
- One typo carries on. A wrong rate in a cell reaches the board pack unchecked.
Which rate applies to which part
Each part of a subsidiary's statements has its own rate. The group's accounts are only right when every part uses the rate that belongs to it.
| Part of the statements | Rate used | Why |
|---|---|---|
| Assets and liabilities | Closing rate | They are worth what the rate says on the last day of the period. |
| Income and expenses | Average rate | They arose across the whole period, not on its last day. |
| Share capital and equity | Historical rates | They were fixed when the money came in, and do not move with later rates. |
| The difference | Translation reserve | It is the balancing figure that keeps the balance sheet in balance. |
Why the reserve exists
Take Zenvara UK Ltd, which keeps its books in pounds. Its net assets of £1,200 thousand are translated at the closing rate of 1.25 into 1,500 thousand dollars. Its equity, built from share capital at 1.31, opening profits at 1.29 and the September profit at an average of 1.27, comes to 1,556. The balance sheet is 56 out. That 56 is the translation reserve, shown as (56), and it brings equity back to 1,500.
Where spreadsheets break
- Rates are typed in by hand and pasted over last month's.
- The historical rates for equity are kept in someone's notes, or lost.
- The reserve is worked out as a plug at the end, so nothing proves it is right.
- Last year's rates are not kept, so growth at constant currency is a separate exercise.
How Finconsol translates a group
Rates are suggested for you
For each currency and period, Finconsol suggests closing and average rates from published reference rates. You can type over any of them, and sanity checks flag a rate that looks out of line.
Each part gets its own rate
Balance sheet lines use the closing rate, profit and loss lines use the average rate and equity uses historical rates. You do not choose rates line by line.
The reserve is calculated
The translation reserve is worked out for every company, so each balance sheet balances before it is added to the group.
The group adds up in one currency
The group reports in one currency. All companies are translated into it, and every statement, dashboard and board pack shows the same currency.
Growth at constant currency
A rate move can hide real growth or invent it. The board summary shows growth at constant currency next to reported growth, so the board can see how much of the change came from the business and how much from exchange rates.
Companies in any system
Zoho Books companies are read directly. Companies on Xero or QuickBooks come in by trial balance upload today, with a direct connection coming soon, and any other system that exports a trial balance works the same way. All of them are translated by the same rules.
What you get
- Group statements in one currency: balance sheet, profit and loss, cash flow and fund flow, each with its own balance check.
- A translation reserve for every company and every period, calculated and shown on the balance sheet.
- A consolidation worksheet with a column per company in the group currency, tied to the published statements.
- Rates you can see and change, with the suggested rate beside the one in use.
- Growth at constant currency on the board summary and in board packs.
Good to know
- The group has one reporting currency. Each company keeps its own currency in its books and is translated into the group's.
- Suggested rates are a starting point. If your policy or your auditor uses another source, type your rate over the suggestion.
- Finconsol only reads from the companies' books. Rates and translation live in Finconsol, so nothing changes in a company's books.
Questions
How do you consolidate a foreign subsidiary?
What is the difference between the closing rate and the average rate?
What is the translation reserve?
Where do the exchange rates come from?
Can I use my own rates instead of the suggested ones?
Can the group report in more than one currency?
What is growth at constant currency?
Can companies on Xero or QuickBooks be translated too?
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