I newly work for a multinational company with a corporate structure such that during consolidation, the books need to be translated multiple times and sometimes back to the original currency. I've come across a curious issue - transactions occurring in USD are translated back to USD with a change. USD15.00 becomes USD15.12, for example.

The relevant structure of the company is like this: El Salvador - SV (USD) -> UK (GBP) -> US (USD)

My expectation is that expenses in SV denominated in USD will show up in the consolidated US books exactly as they appeared in the SV books. However that's not the case. What I discovered is that our accounting group is averaging daily exchange rates over the month and using that - which is fine. But mathematically, if you average USD-GBP, it does not equal to the inverse of the average of GBP-USD.

My accounting group is booking the difference as a translation gain/loss. But I believe that's incorrect because a transaction gain/loss is caused by differing rates over time (USD-GBP at one rate, then the USD drops and it is converted back at a different time). This change is due to differing rates over the exact same time period.

My proposed solution to accounting was to only ever translate a currency pair in one direction. For example alphabetically (aways GBP-USD or HKD-SGD, never USD-GBP or SGD-HKD) to avoid this problem, but it was rejected and I was told this is standard in accounting.

This just seems intuitively wrong. Am I correct? What's the standard remedy for this?

  • Interesting and important question, but perhaps outside the scope of this forum. It needs attention from experts in international accounting. – Alex C Oct 11 at 16:41

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