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I came across a situation where there are intercompany transactions between the subsidiary and the parent. In a such scenario, especially when there are P&L ICO, when eliminating the transactions, the BS does not balance anymore. For example: Parent records income of 100 EUR at transaction date, and sub records 100 EUR as well at transaction date (which would be 80 USD, transaction rate = 0.8 EUR/USD). At the end of the month the average rate becomes 0.81 EUR/USD. Thus, 80 USD recorded by subsidiary at transaction date, would become 98.8 EUR. Since we eliminate 100 EUR from parent and 98.8 EUR from subsidiary, the difference of 1.2 EUR would remain as an imbalance. How this situation should be addresed?
Thank you a lot,
Inter-company with subsidiary can be a mess. I am sure the examiner won’t worry about testing this. For exam purposes both companies will translate transactions at the same transaction rate and all month end balances will be at the same closing rate, and everything will cancel out nicely.
(Please note that this facility is only for exam training purposes).