Closing, Spot, Historical and Average rate? How do you deal with foreign currencies in the consolidation?
Closing, Spot, Historical, and Average rate? How do you deal with foreign currencies in the consolidation?
In Luxembourg, most international groups having international activities operates in different currencies.
This can make the life of the accountant difficult especially when it comes to deal between the functional currency (the currency in which the company operates) and the presentation currency (the currency in which the company presents its financial statement)
Taking the example of a US company that has subsidiaries in Europe we will go through what type of rates this company should use in order to translate the financial statements in the presentation currency (USD)
According to IAS21:
- P&L items can be translated with the actual rate but here the use of an average rate is permitted for practical reasons such as a monthly average rate.
- Assets and liabilities should be translated at the closing rate at the date of the reporting.
- Equity items should be translated either at the historical rate or at the closing rate. Here there is no strict guidance on whether the company should apply the closing rate or historical rate. But the company has to stay consistent. In my experience in most cases, the historical rate is preferred.
What about you? Which type of rate do you use for equity items and why? Answer in the comments
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