The implications of a foreign subsidiary on accounting consolidation

Writen by Stefan Farrugia • 20th August 2018 < back

Businesses today are not bound by national boundaries - many of these businesses do not only operate across borders, but also own subsidiaries in different countries. This, however, has implications on their accounting consolidation.

Dealing with accounting consolidation processes can sometimes be tricky. The Eurozone’s common currency, the Euro, makes life a bit easier, but what if a company is based in the EU and owns a subsidiary in Australia, for example?

Accounting Consolidation for subsidiaries

The answer is quite simple. When it comes to accounting consolidation, the subsidiary company must reconcile its books in the country that it operates in before then changing it to the presentation currency of the parent company, to be incorporated into the End of Financial Year report.

Accounting processes are almost identical, regardless of the country you are in.  Accounts payable and receivable follow the same principles regardless of country, yet a reconciliation in Australian Dollars, for example,  cannot simply be submitted to a parent company in Germany without being translated accordingly.

Subsidiary Documentation and the Accounting Process

Any subsidiaries must translate financial statements to the parent company’s presentation currency.

These subsidiaries will work throughout the year in the local currency, and once consolidation stage is reached, everything must be translated to the parent company’s presentation currency.

Presentation currency is a matter of choice. Even though a company may be German, it may choose to present its financial results in dollars instead of euro.

Day-to-Day Operations and Your Accounting Consolidation

In day-to-day operations, a subsidiary company will always work with the local currency but when it comes to submitting its financial results, to be included in the whole group’s finances, the subsidiary company must convert all results to the presentation currency of its parent company.

Once subsidiaries translate their accounts to the presentation currency and present these to the parent company, the process of consolidation can begin, in the functional currency.

An implication of this process is that the subsidiary company must either have an in-house team that can manage the conversion process, or alternatively engage the services of a third party.


Currencies and your Inter-Company Accounting

Because currencies are different, fluctuations in exchange rates are inevitable.  This could lead to instances where there are discrepancies which must be accounted for when an actual conversion takes place.

Currency exchange rates used for translating financial statements are usually obtained from banking institutions and the same source should be used annually to ensure consistent results.

The parent company’s and subsidiary’s income statements are then combined, as is the balance sheet.  Once this is done, consolidation in one currency is therefore complete.