What Exchange Rate to use for Intercompany

Leslie posted some excellent comments, which touched on the exchange rates to use on intercompany transactions, a very interesting and complex topic. I have discussed this at length with Seamus Moran many times, he has educated and enlightened me and I use an example of his here.

Consider Top Hat Global Corp

  • The group reports to shareholders in Monopoly Money – MYM.
  • Subsidiary N is a plant, and is located in Elbonia, where they use the Elbonian Enigmatic Krown, the EEK.
  • They sell in all of the EUR countries.
  • They ship from the plant to all of the EU countries.

On Friday 13th, they ship truckloads to each of France, Ireland, Spain and Italy. Each truck has 1 load of Pointyhaired “Boss” robot worth 1,000,000 EEK in it.

France books the intercompany at the RoyalBank rate of 1.25 to 1: 1,250,000 EUR
Ireland books it at the Ryanbank rate of 1.29 to 1: 1,290,000 EUR
Spain books it at Iberiabank rate of 1.27 to 1: 1,270,000 EUR
Italy books it at Sicilybank rate of 1.28 to 1: 1,280,000 EUR

The same thing happens when the intercompany payment happens.

Question 1:

Which of the rates should the Elbonian plant use? To balance with each sub, they must use the rate that sub used, so should they use four different rates on the same date?

Question 2:

Upon consolidation in MYM at the rate at month end on Friday 27th, how will this different euro amounts equate to the converted-to-MYM EEK amounts, all of which are 1,000,000 EEK.

Question 3:

What is the lower of cost or market for these 4 bozos in inventory? My guess is the lower est ie. 1,250,000 Euro. How many subsidiaries are reporting this value?

So this is why Top Hat Global Corp doesn’t use local bank rates for intercompany work as it impacts consolidation and GAAP. In addition to “difference management”, the GAAP principle involved is that they should be using market rates. For a big group, market rates are treasury currency contracts they’ve negotiated or should be able to negotiate, and not the rates their local subs manage to get.

Standard practice is to use (mandate) corporate “treasury” rates for all intercompany business. Local rates are a group nightmare.

In AGIS we have a system level option to specify the rate type to use, that allows you to mandate the corporate treasury rate mentioned above for all your intercompany business.

Author: David Haimes

I'm Senior Director in the Oracle Research and Development Organization, with close to 20 years working in various roles on the development of the Financial Management product suite.  Since the summer of 2016 my focus is exclusively on working with customers and longer-term design work, particularly around next-generation functional and technical architecture. My task is to figure out NOW what the financial management system of the next 3, 5 or more years should look like and start working toward it.  At the moment the majority of my time is spent working on Blockchain or Distributed Ledger Technologies (DLT), leading the effort for all of SaaS applications.  I'm also interested in AI, Machine Learning and new UX and interaction paradigms such as chat bots. I started out in Oracle UK and found my way out to Oracle's Redwood Shores, California HQ in May 2000.  My previous role was product owner for Fusion Accounting Hub, General Ledger, Intercompany and Legal Entity products in Oracle Fusion Financials and eBusiness Suite General Ledger. I have also worked on EMEA Globalizations, Federal and Public Sector Financials, XML Payments and a variety of projects on other products down the years.

3 thoughts on “What Exchange Rate to use for Intercompany”

  1. Hi David

    Using AGIS , is it possible to derive two Receiver Distribution Account lines based on two Issuer distribution lines.

    Like

    Reply

  2. Krishna,
    I’m not sure that is possible, but I’ll check with people who have more experience of Transactions Account Builder than me (this is the derivations engine we use for distribution accounts).

    I would just look to break those into 2 transactions rather than work on any complex rule.

    Like

    Reply

  3. Hi David,
    I have been searching documentation and the internet to find out at what point it is necessary to have the exchange rate entered.
    Please confirm what I think I know:
    1) If the batch/transaction is created with the currency of the initiator, the exchange rate needs to be in place at the time the transactions are pushed to the GL.
    2) If the batch/transaction is created wtih a currency other than that of the initiator, the exchange rate needs to be in place at the time the transaction is submitted.
    Please let me know if this is correct or if I have missed something.
    Kind Regards,
    Kim

    Like

    Reply

Leave a comment