Companies that transact in foreign currencies may run into intercompany reconciliation issues. There can be many reasons for these differences, however, one of the most common causes is not denominating a single currency for an intercompany transaction. This can cause incorrect currency revaluation which ultimately impacts the financial statements at the subsidiary and consolidated level. This blog will discuss some of the considerations when running your revaluations at month end.
Understanding Foreign Currency Transactions
To begin, you need to understand how NetSuite re-measures foreign currency transactions. Foreign currency transactions are identified by comparing the source currency to the base currency of the subsidiary. When these two are different, NetSuite views the transaction as a foreign currency transaction.
The source currency is the currency found on the transaction record (Image-A) while the base currency is the currency assigned on the subsidiary record. You can check the base currency of the subsidiary by navigating to the subsidiary record and viewing the currency field (Image-B). In a multi-book accounting environment, each subsidiary within an accounting book can be assigned a different currency than the primary accounting book.
All transactions are re-measured from the source currency to the subsidiary currency (aka. base currency) using the exchange rate located on the transaction record. When you transact in a foreign currency, the exchange rate will vary based on the transaction date and the currency exchange rate table. By default, the transaction exchange rate sources from the currency exchange rate table, however, these rates can be overridden as needed on the transaction record. NetSuite stores the transaction amount in both the subsidiary currency and the source currency (also known as the foreign currency amount). In the image below, a euro invoice is shown in a subsidiary with a base currency of USD. The foreign currency amount will be €3,000, however, the amount stored on the books will be $3,338.67. For purposes of consolidation the book amount is reference, not the foreign currency amount.
NetSuite can revalue foreign currency balances based on the spot rate as of the last day of the accounting period. Revaluations can be run ad hoc or as part of the month end process. Revaluations are performed on a cumulative basis. These transactions are booked on the last day of the period and reversed on the first day of the following period. They are typically offset against an unrealized gain/loss account but can be mapped to different accounts as needed.
For the revaluation function to work properly, both sides of the intercompany transaction need to be denominated in the same currency and revalued. If a transaction is initially booked in a foreign currency and reversed in the subsidiary currency, NetSuite will only revalue the foreign currency transaction of the balance. This may result in unexpected swings in your account balances.
The scenario below provides an example where the currency was not considered upon entry of an intercompany transaction resulting in differences at the consolidated level:
Scenario: Sub A uses a base currency of the euro while and Sub B uses a base currency of the U.S. dollar. On 1/15/YY, Sub A transfers $10,000 to Sub B when the USD/EUR exchange rate was 0.85. This is stored on the Sub A’s books in the euro even though the transaction took place in U.S. dollar.
On 1/25/20YY, Subsidiary A incurred a management fee of €5,000 from Subsidiary B. Instead of paying this management fee, Sub A decided to offset their liability against their intercompany receivable balance. This reduced the intercompany receivable to €3,500. Subsidiary B entered the same transaction, in the equivalent amount of $6,000 in U.S. Dollar.
Below is the general ledger of Subsidiary-A assuming these are the only transactions:
It’s a common misconception that the balance to be revalued on Sub A books is €3,500, however, for purposes of revaluation NetSuite only considers foreign transactions. Based on the transactions shown above, the only transaction that is considered a foreign transaction in relation to Sub A is the intercompany transfer recorded on 1/15/20YY. The actual balance revalued is the $10,000. If the intercompany transaction was recorded in a single currency, the foreign currency balance would have been $4,000. Consequently, the currency revaluation ends up larger than anticipated due to the balance that is actually revalued ($10,000 vs $4,000). This will show up at the consolidated level as a difference between the two accounts. See image below.
If all transactions were denominated in the same currency in these subsidiaries, the intercompany balance would properly offset. Below is the trial balance and revaluation calculation of Sub A if the management fee was entered in U.S. dollar.
In summary, the best way to keep your intercompany balances in check is to denominate both sides of your intercompany transactions in a single currency and running the currency revaluation monthly. For revaluation purposes, NetSuite only revalues foreign currency balances so be cognizant of the source currency balance you are trying to adjust. Otherwise, you may see some unexpected fluctuations after the currency revaluation is ran. Keeping these guidelines in mind, you should expect to see intercompany balance stay in line with expectations.