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Unravel the mysteries around Equity Overrides

In this blog, I would like to share one of my experiences with HFM translation rules; it is still engraved, because it was a major issue that I had faced in the initial days when I had just started playing around with HFM & was keen on unravelling the mysteries that revolve around translation issues. During one of the implementations, I had a brief understanding of the historical rate concept, which we usually encounter to translate a subsidiary's equity.

So, before I proceed with the problem statement & the resolution, let me define historical rate for the beginners (especially who do not have a background in Finance, just like me) in the field of HFM. Historical rate is the exchange rate which was prevailing at the time of the transaction consummation. So, these transactions (mainly Investment & Equity) have to be translated at Historical Rate rather than using EOM Rate or AVG Rate. This is usually coming from clients who are reporting in multiple GAAPs, or I must say, US GAAP particularly.

Let me describe the issue in a practical example:

Org A invests USD 1 million in Org B, which reports in AUD, at an exchange rate of 0.7, hence making the subsidiary receive AUD 130,000. In A's books, the investment is USD 100,000; while in the books of B, there will be equity of AUD 130,000.

Now, in future, suppose the exchange rate becomes 0.8. Here, the translated equity for subsidiary, i. e, Org B becomes USD 104,000; whereas, for Org A, the investment still remains, USD 100,000 in the books. Hence, at the time of elimination the plug account will capture an imbalance of USD 4000, which actually is coming in due to the incorrect exchange rate being used for translation of the transaction. And the actual transaction is nowhere to be blamed for the mismatch. Hence, there is an urgent need for some solution to report the correct investment & equity in B's books, or else, the reported values would be incorrect.

Now the first thing, that struck me was, why don't we capture the translation through a rule which would take care of only the changes in equity & differences in A's investments during the entire month. Hence, this would automatically be taken care by standard EOM Rate, i. e, Balance Sheet rate, which is pre-defined in the application. But there was a gap here, suppose A invests in B on the tenth working day of the month. At his point of time, the rates are quite different.

Hence, the solution revolves around using Equity Overrides. But how to achieve this was another big hit. This would benefit the users, by rendering complete hold of the authentic translated values that were required to be shown in the Balance Sheets of the subsidiary organization.

We must be manually capturing the Historical rates for conversion through a separate Data Form defined in the application. The values then be translated using the historical rates using the rule file, overriding the actual rates. The difference arising  would be captured in a separate account, which we refer to as a Plug account for currency overrides, i. e, Foreign Currency Transfer Adjustments (FCTA)

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