Consolidating foreign subsidiary example

A company with foreign operations can protect against translation exposure by hedging.

Fortunately, the company can protect against the translation risk by purchasing foreign currency, by using currency swaps, by using currency futures, or by using a combination of these hedging techniques.

Should Company B’s functional currency be CAD or USD?

If there’s any foreign exchange differences (for example on a payment applied to an invoice), GP automatically calculates it and posts to the GL as a realized gain or loss on foreign exchange.

So, when the parent company is preparing its financial statements, it must include the assets and liabilities it has in other currencies.

Management Reporter is used to calculate the gain or loss during consolidation and to move the amount into other comprehensive income (OCI) as per IFRS standards.Therefore, foreign exchange rate fluctuations actually change the value of the parent company’s assets and liabilities.This is essentially the definition of accounting exposure.If the Company B is self-sustaining the functional currency should be set as USD.Here’s how it would work in GP: As transactions is in USD and the functional currency of the company is in USD, there is no foreign exchange gain or loss from operations.

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