Below is a comprehensive guide for SoftLedger customers operating and reporting with varying currencies, with guidance, definitions, and examples of operating with multiple foreign currencies.

First, it is important to note that Remeasurement is not about consolidation, but is the process of remeasuring any amount in the trial balance to the appropriate amount for GAAP financials

The two most common types of remeasurement are:

In regards to #1, the goal of remeasuring transactions denominated in a currency other than an entity’s functional currency is to present the financial statements of an entity as if the Functional Currency was the only currency it ever used. Assets and liabilities are split into two categories: non-monetary and monetary. Non-monetary items include PPE and equity. Monetary items include cash, receivables and payables. Before we get into the rules of what rates to use, lets walk through an example of each first:

You are a US-based company with functional currency of USD. You bought a machine in the UK for 10,000 GBP in July of 2007 when the exchange rate was 1:2 USD:GBP ($20,000 equivalent)

Now it’s 2009 and you are preparing your financial statements as of 3/31/2009, when the exchange rate was 1:1.50 USD:GBP. The cost basis of your PPE was $20,000 at the time of purchase, but is it now $15,000? The answer is no, and let’s think through why.

When an entity determines its functional currency is the US dollar, every transaction occurring in a different currency should be remeasured to USD at the point in time the transaction occurs. Think about using a payment processor to settle bills in foreign currencies. You initiate remittance, the payment processor looks at a $10,000 GBP bill and calculates the USD equivalent on that day, which is $20,000, and pulls that $20,000 from your bank account. You never saw 10,000 GBP in any of your company’s bank statements, just the $20,000. That’s how much you’re invested in this PPE, no matter what the exchange rate may be on 3/31/2009

The remeasurement of nonmonetary accounts does NOT result in gains or losses on the P&L

Assume the same scenario as above: you’re preparing the financials for your USD company on 3/31/2009. You received an invoice from a vendor in the UK for 1,000 GBP on 3/1/2009 when the exchange rate was 1:1.60 US:GBP and entered it in your system as follows:

DR: Vendor Expense $1,600

CR: Accounts Payable $(1,600)

On 3/31/2009, you would only owe the vendor $1,500 based on the exchange rate of 1:1.50 USD:GBP. Should you adjust the payable for your financial statements? Would the other side of the entry decrease your vendor expense? The answer to this is yes, you need to adjust your payable down to $1,500 in order to accurately reflect your company’s liability on the date of the financial statements. The vendor expense remains the same and the difference is booked to fx gains. It does not decrease your vendor expense as the change is due to exchange rate fluctuations, not the actual business expense you agreed to.

The remeasurement of monetary accounts DOES result in gains or losses on the P&L

Financial Statement Line Items Categorization as Monetary or Nonmonetary:

There are a couple exceptions to the rule that remeasurement adjustments get booked to the income statement:

1. Net Investment Hedges

2. Long-term intercompany transactions that are not expected to be settled in the foreseeable future.

a. Example: A Parent entity contributes equity to its subsidiary. The entry is booked as an Investment in Subsidiary on the Parent and Contribution by Parent (equity account) on the subsidiary. The parent does not expect to get that capital returned in the future.

b. Treatment: In consolidation, these are booked to the CTA in OCI instead of Forex gains/losses

In translation, the goal is to display the consolidated company in the parent’s functional currency so the reader has an accurate picture of the company's financial position. It’s not to go back in time and pretend the parent’s reporting currency was used in every transaction of its subsidiary. It’s to show the assets and liabilities of the whole company in one currency accurately as of a point in time. The only accounts that use historical rates are equity accounts, including retained earnings, since those are part of the consolidated companies historical NAV and if you don’t use historical rates, the parent's investment in its subsidiaries will not net out to zero.

Translation of an entity’s financial statements will result in a Currency Translation Adjustment (CTA) on the balance sheet of the subsidiary that was translated. The CTA is calculated as the difference between the rates used for historical line items vs weighted average vs spot rates. It will always be equal to the difference between assets and liabilities after all other line items have been translated. This amount is part of Other Comprehensive Income and broken out as its own line item on the Statement of Other Comprehensive Income if you prepare one. Otherwise, the CTA will sit as its own line item in Equity.

Often, people confuse remeasurement and translation, so here are the ways in which the two are different

Transactions between related parties that have different functional currencies, or a parent with a different functional currency adds another layer of complexity to the consolidation process. Take an intercompany entry between two subsidiaries that have a functional currency of EUR and are consolidated into a common parent that has a functional currency of USD. They translate the EUR subsidiaries using the weighted average exchange rate through the month, an accepted practice. Given the two subsidiaries are both in EUR, it should be straightforward to eliminate the intercompany balance to zero in consolidation at the USD parent at month end. But if we assume EUR Sub 1 and EUR Sub 2 have other transactions with outside parties in the given month, they would naturally have different weighted average exchange rates. See below

As you can see, when you use the weighted average rate for the period instead of translating each line, intercompany transactions will not offset. Therefore, for purposes of translating and consolidating, you must apply the transactional specific exchange rate to get the intercompany transactions to eliminate.

For payables and receivables, there can be a mismatch in open balances at month end. See below for codification and KPMG’s discussion:

ASC 830-10-55-11

Average rates used shall be appropriately weighted by the volume of functional currency transactions occurring during the accounting period. For example, to translate revenue and expense accounts for an annual period, individual revenue and expense accounts for each quarter or month may be translated at that quarter’s or that month’s average rate. The translated amounts for each quarter or month should then be combined for the annual totals.

KPMG’s interpretation: Therefore, when a difference in the exchange rate used to account for intercompany transaction results in a mismatch between the amounts recorded by entities in a consolidated group, the difference should be recorded as an intercompany receivable or payable until the intercompany transaction is settled.

Once the intercompany transaction is settled, net profits should be completely eliminated. However, if a realized foreign currency gain/loss arises from an intercompany transaction, that gain/loss survives consolidation.

Subsidiary LLC has a functional currency of EUR, but has transactions in GBP. Parent LLC, which wholly owns and consolidates Subsidiary LLC, has a functional and reporting currency of USD.

Notice that in the balance sheet, we remeasure the PPE at the historical exchange rate, or the date the equipment was purchased, and in the income statement, the same rate is used for the depreciation expense that relates to this equipment. However, when we translate the financial statements, we do not use the historical rate for the equipment or related depreciation expense.

Functional currency:

ASC 830 accounting standard states, “An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.” In SoftLedger, the Location’s standalone reporting currency is its functional currency.

All stand-alone/unconsolidated financial reports will be in a Location’s functional currency. Any transactions that occurred in a different currency will be remeasured to the Locations functional currency at the end of the reporting period.

Reporting currency:

A reporting currency is what an entity prepares its financial statements in in, which can be the same or different from its functional currency. An entity could have multiple reporting currencies depending on how the organization is structured and consolidated for financial reporting purposes. For consolidations, typically the functional currency of the Location at the top of the house (the ultimate parent to all other Locations) will be the consolidated reporting currency for all other Locations in the organization.

Transaction currency:

The currency in which a specific transaction occurs. This may be different than the functional currency or reporting currency of a given Location. The most common example of this is a bill from a vendor that’s denominated in something other than your functional or reporting currency.

Remeasurement:

Performed when transactions occur in a currency other than the entity’s functional currency (in SoftLedger, an entity’s unconsolidated/standalone reporting currency is its functional currency).

Translation:

Performed when an entity’s functional currency is different than its parent entity which it is consolidated into

Cross rate:

Deriving an exchange rate between two currencies by using the exchange rates the two currencies have with a third currency