Local currency accounts conversion to foreign currency

[abanerji]

A subsidiary of a foreign holding company prepares their profit & loss statement (P&L) and balance sheet (BS) every month-end. Therafter, all the amounts (which appear in local currency) are converted into foreign currency equivalents for Group headquarters reporting purpose.

The exchange rate used for conversion every month-end is as below.
Average rate during the month, as per the subsidiary country's central bank's reference rates on the first and last days of the month averaged

However, this is creating a problem, as shown in the simple example attached.

The issue is how to deal with the difference between year-to-date (YTD) profit in P&L and YTD retained earnings in BS.

 

[bklynboy]

I see a few problems.

First balance sheet is converted at ending sopt rate and not an average.
Income statement is converyted at weighted average monthly rate (each day of the month) and not avg of beginning and ending.

Retained earnings is not reconverted but uses historical amount.

Lastly, you are missing the CTA account in Equity which represents the difference in applied FX between balance sheet and oincome statement.

Is this just an example oir are you actually doing this in the real world?

Note I am speaking in regards to US GAAP and IFRS but cant tell what country you are speaking about.

 

[abanerji]

Thanks for the informative reply.

I had created a very simplistic example, just to highlight the difference coming up.

I was not aware of the "CTA" concept, and thanks to you, I searched on the net, and found several resources. I shall study later. But, have broadly understood how to deal with the difference.

Thanks again.