I was looking at a monthly income report for a client recently and they were querying the consolidated income figure compared to the amounts in local currency. When we investigated it I could see why the client was concerned – the closing FX and average FX rates were the same, which indicated something was not right. The client thought there was an issue with the NetSuite calculation method.
How does NetSuite calculate consolidated FX Rates?
In line with accounting principles, NetSuite translates balance sheet accounts using the closing rate, also known as the exchange rate at the reporting date. The income statement is translated using the average of the exchange rates at the dates of the transactions. Again, this is correct although if you have been doing this revaluation manually you will more like have been using the average exchange rate for the period and not just on dates where transactions occurred.
What was the issue?
The method for calculating consolidated FX rates NetSuite uses, as outlined above, is in line with accounting standards. I didn’t doubt it would be as this would mean widespread financial misstatements on a massive scale. On further investigation, we realised that it was the combination of the legal entity structure with the application of the “exchange rates on dates of transactions” that was producing a distorted income statement revaluation.
Legal Entity Structure
NetSuite sets the average rate using the average rate on days when transactions take place. In the example below the USD: EUR consolidated exchange rate will be determined by the number of days there were transactions in Midco. As MidCo is not trading there may only be transactions on the last day of the month, meaning the USD: EUR average rate will be the same as the closing rate. This rate will also be applied to transactions in TradeCo to produce a consolidated income statement.
Conclusion
It is a fine point and as FX rates are unlikely to move dramatically during a month it hopefully will not have a material impact on your consolidated reporting. Any impact it does have will unlikely justify any NetSuite customisation.
If you are having difficulty with FX rates or any processes in NetSuite then get in touch for a free conversation.
