Managing Multi-Currency Intercompany Accounts

For companies operating across borders using multiple currencies, managing intercompany transactions within Workday with the foreign exchange component in mind, is vital for proper translation and elimination of financial statements.

The previous blog in our series on managing transactions in Workday, went into the details of Intercompany Balancing.

In this, the fourth blog in our series about currencies in Workday, we are focusing on consolidation mechanisms, revaluations, and managing intercompany accounts across currencies while keeping them balanced.

Key Concept 1: The Accounting Equation

Assets = Liabilities + Equity

This fundamental accounting equation is crucial when considering consolidations and understanding how intercompany out-of-balances can affect consolidation. Assets, Liabilities, and Equity are the three main categories of values on a Balance Sheet. In any balance sheet, Total Assets must equal the sum of Total Liabilities and Total Equity.

Key Concept 2: Consolidation and Elimination

A corporate structure consisting of many subsidiary companies must generally be consolidated. This means that the financial statements of all subsidiaries are “added together” to present a “consolidated” statement. In a consolidated Balance Sheet, all subsidiaries’ Assets, Liabilities, and Equity are aggregated.

However, simply adding these amounts may not correctly state the magnitude of assets and liabilities for the consolidated entity due to intercompany transactions. For example, the consolidated entity cannot report $1M of “accounts receivable” from itself offset by a $1M liability of “accounts payable” to itself, as this would overstate the total assets and liabilities. Eliminations are necessary during consolidation to remove intercompany items like these.

In the example below, eliminating the amounts in accounts 1201 and 2201 will keep the balance sheet in balance, and will achieve a proper consolidation (ignoring things like investment in subsidiary or subsidiary equity eliminations, which are outside the scope of this blog):

Here is a consolidated, eliminated balance sheet. Note the check total – it must be zero:

However, if intercompany balances are not exactly offsetting between the related entities, then an out-of-balance occurs, making the balance sheet incorrect:

In this scenario, a discrepancy arises between the two subsidiaries: the system identifies only $900,000 of liability from Company A to offset against $1M of receivables on Company B. This issue can occur in multicurrency intercompany transactions within Workday. The following concepts provide systematic solutions to address and resolve these challenges effectively.

Key Concept 3: Review of Translation in Workday

In the second blog of this series (Translation and Revaluation), we explored how Workday generates translated financial statements. At the end of each month, Workday translates all journal lines for a company from its Ledger Currency to a Translated Amount using the FX rate configured in the Translation Rule Set. For trade intercompany payable and receivable accounts, Workday applies the current rate as of the last day of the reporting period.

Consider an example: Company A sends 500 Euros of expenses to Company B through intercompany payables/receivables. Company A's ledger currency is GBP, while Company B's ledger currency is EUR. Both sides select EUR as the Transaction Currency. The entries are dated 5/15, when the EUR to GBP rate was 0.8588. By 5/31, the month-end rate for EUR to GBP is 0.8503, and for GBP to EUR, it is 1.1761.

In this scenario, Workday applies the 5/31 exchange rate to the Ledger Amounts to calculate the Translated Amount for consolidation.

Best Practices

Best Practice #1: Revalue Intercompany Accounts

Let’s examine the Intercompany accounts from the example above. For accurate consolidation, as discussed in Key Concept 2, these amounts should balance and net to zero. However, they currently do not:

This imbalance in elimination results from foreign exchange rate fluctuations between 5/15 and 5/31. To address this effectively, it's essential to follow a best practice: run revaluations on trade intercompany balances.

In this example, a revaluation will introduce an incremental FX gain/loss entry, ensuring the balances are equal and accurate during elimination:

Best Practice #2: Transaction Currencies Must Align

Revaluation can effectively balance intercompany amounts across currencies, provided there is a common Transaction Currency between both sides of the transaction. Consider the same example as above, but with Company A using GBP as the transaction currency and Company B using EUR:

A revaluation run on Company A data will NOT result in a revaluation entry in this case, because the transaction currency and ledger currency are the same. Intercompany entries posted in this manner in a multi-currency environment will result in a permanent out-of-balance between these intercompany accounts. Manual adjustments are required to fix such issues.

Best Practice #3: Reconcile Trade Intercompany Accounts in Transaction Currency as well as Reporting Currency

Examining intercompany trade payable and receivable accounts at the Transaction Currency level helps uncover any discrepancies in financial statement translation and elimination due to mismatched transaction currencies in intercompany journals. During monthly reconciliations, accountants can detect these issues and create correcting journals to align the currencies before running revaluations.

Best Practice #4: Training & Education

Consider investing in training for finance teams to ensure they understand Workday's intercompany functionality and can effectively manage multi-currency transactions. Knowledgeable teams are essential for maintaining accurate and compliant financial records.

Conclusion

Workday automates multi-currency consolidation and elimination. However, achieving seamless consolidation without foreign exchange issues disrupting intercompany eliminations requires diligence and a solid understanding of the process. By ensuring a common transaction currency in intercompany transactions and processing revaluations in the trade intercompany accounts, you can streamline your month-end close and enjoy auto-balanced, fully eliminated consolidated balance sheets.

Author: Brady from Arizona