- The first step in understanding financial statement consolidation for companies with multi-national operations is learning the three currency classifications.
|Local Currency||The currency in which a foreign subsidiary executes its business transactions; the local currency may or may not be the same as the functional currency.|
|Functional Currency||The currency which reflects the primary economic climate of the subsidiary’s operations; in other words, it is the currency of cash generation and expenditure. The local currency may be the functional currency, but parent company management has some degree of latitude in designating the functional currency.|
|Presentation (or Reporting) Currency||The currency in which the parent company reports its financial statements.|
- Foreign Currency Translation = the process by which a foreign subsidiary converts its financial statements to the presentation currency, in preparation for financial statement consolidation with the parent company. In conducting translation, the company must determine:
- The exchange rate to be used for translating different financial statement line items.
- The reporting location of the translation adjustment on the financial statements.