Why Currency Translation Should Be Done in Group Reporting (GR) Instead of the General Ledger

Often on GR implementation projects, I hear statements like, “We are going to perform the currency translation in the G/L and load group currency directly into GR.”

However, this approach oversimplifies a complex scenario. While experts in corporate accounting recognize the intricacies involved, their insights are frequently overshadowed by IT counterparts who are perceived as the 'experts.'

Here's why currency translation should take place in GR rather than in the G/L:

1)      In the G/L, local currency values of transactions are translated at the daily rate. Realized and unrealized foreign exchange (FX) gains and losses result from this translation and are posted in the P&L."

2)      US GAAP/IFRS, as well as the statement for CASH FLOW, require a different approach when translating local currency to group currency:

a.      Non-Equity Balance Sheet accounts are translated at the end-of-period rate.

b.      Equity accounts are composed of the sum of monthly changes, translated at their respective monthly average rates. While we often refer to the equity section as 'historic,' there is no singular 'historical rate' per se. The historical value is the cumulative sum of each month's activity, translated at the monthly average rate for each period. Therefore, the final balance of the equity accounts cannot be recreated using a one-time historical rate.

To balance the Balance Sheet, the difference between the end-of-period rate and the historical value is posted as a currency translation difference to a dedicated Financial Statement Item (account in GR) in the equity section. This amount can vary from month to month, even if there is no new activity in the equity accounts, due to fluctuations in the end-of-period rate.

c.      Movements on Balance Sheet accounts – The statement of cash flow requires that movements on balance sheet accounts be translated using the monthly average rate. For assets and liabilities, this results in a currency translation difference because the total balance needs to be translated at the end-of-period rate, while the movements are translated at the monthly average rate. The difference between these two values is posted to a dedicated transaction type (movement type) on the account itself.

d.      P&L accounts: All P&L accounts are translated using the monthly average rate. Since this translation method is applied consistently across all P&L accounts, no currency translation differences will be generated.

Also, please see the example below for the correct translation for common stock in the equity section following US GAAP/IFRS.