Question

How do you properly eliminate foreign exchange in consolidation?

Answer 1

This answer is based on the fact that the functional currency of the holding and subsidiary company are different. In which case, the trial balance of the subsidiary company has to be translated to the functional currency of the holding/parent company.

Treatment of various type of accounts:

Type of accounts	Period	Rate of conversion
Assets and liabilities	Current period (20X1)	Closing rate (20X1)
Comparative period (20X0)	Closing rate (20X0)
Income and expenses (P/L and OCI)	Current period (20X1)	Actual rates or average in 20X1
Comparative period (20X0)	Actual rates or average in 20X0
Equity	Current and comparative period	For the share capital, the most appropriate seems to apply the historical rate applicable at the date of acquisition of the subsidiary by the parent, rather than the historical rate applicable when the share capital was issued.If the equity balances result from the transactions with shareholders (for example, share premium), then it’s appropriate to apply the historical rate consistently with the rate applied for the share capital.If the equity balances result from income and expenses presented in OCI (e.g. revaluation surplus), then it’s more appropriate to translate them at the rate at the transaction date.
Exchange rate difference	CTD (currency translation difference) = separate component in equity