In an Oracle Hyperion Financial Management (HFM) implementation, we always use the historical rate to translate the subsidiary’s equity. Historical rate means the actual exchange rate used when the transaction was consummated. For me, the most practical way of achieving this is by using equity overrides. This gives the client full control of the actual translated values that need to be reflected on their consolidated financial statements.
Why is there a need to use the historical rate to translate equity of a subsidiary? Why not just allow the natural balance sheet account translation using end of month rate?
Parent company invested USD 760,000 in a subsidiary in Australia at an exchange rate of 1AUD = 0.76 USD. The Australian subsidiary received the amount of AUD 1,000,000. In the books of the parent company there will be an investment of USD 760,000 while in the books of the subsidiary there will be an equity of AUD 1,000,000.
A year later, let us assume that the exchange rate became 1AUD=.80 USD.
If we allow the subsidiary Equity to translate, the translated subsidiary Equity value becomes USD 800,000 while the parent company still has the investment amount of USD 760,000 in its books. During elimination, the plug account for Equity/Investment will have an imbalance of USD 40,000. Note that the parent investment of USD 760,000 is the correct value because the parent investment never changed. The subsidiary equity of AUD 1,000,000 also did not change. The elimination imbalance is brought about by the change in currency exchange rate which has nothing to do with the actual transaction that occurred at the time the investment was made. Thus, the need to ensure that the values reflect the true amounts for consolidated financial statements.
We may have a rule that translates only changes in equity which takes care of reductions or additions in parent investment during the month. This will naturally use the standard end of month rate for Balance Sheet Accounts. What happens if the investment was made on the 10th day of the month when the exchange rate is not the same as end of month? There is still the need for Equity override to reflect the actual amounts involved in the transaction.