Peeling away financial reporting issues one layer at a time

FAS 52: Forex Gains and Losses from Holding Dollars?

I noticed that 'FAS 52' has been the most popular search term leading web wayfarers to seek inner peace from the Accounting Onion (click here for my earlier FAS 52 post).  I play requests, so here's a riff on another ineffable result from applying FAS 52 (or IAS 21 if IFRS is your bag). 

As usual, let's start with a simple example:

Company Alpha is based in the U.S. and presents its financial statements in dollars.  Company Beta is Alpha's British subsidiary.  Beta holds U.S. dollars (USD); and since its books are kept in GBP, it has to remeasure its USD holdings into an equivalent amount of pounds–just as it would to record any transaction involving payments in a foreign currency.  Over time, if the value of the dollar changes, Beta must recognize foreign exchange gains or losses on its GBP standalone income statement. 

In consolidating Beta with Alpha, it wouldn't take an undergrad accounting student too long to figure out that Beta's dollar-denominated bank accounts should be treated no differently than Alpha's.  Therefore, Beta's foreign exchange losses on the USD should not be carried through to Alpha's consolidated income statement, right?  WRONG. 

Sadly, reason cannot substitute for a sleep-inducing reading of the rules.  FAS 52 requires that Beta's foreign exchange gain or loss on holding USD cash must be expressed in dollars and carried through to the consolidated income statement. The ludicrous effect is that dollars held by subsidiaries are accounted for differently (i.e., exposed to foreign currency fluctuations between the GBP and USD) than the same dollars held by a parent company. In other words, some dollars are just dollars, but dollars on a ledger over the border are … ummmm … special.  So far, not a big issue you may think, but now consider that the principle-devoid rule I have just described extends to all dollar-denominated receivables and payables booked by the subsidiary, including intercompany amounts. Yes, a company can report a profit or a loss merely by lending money to its foreign subsidiary.   (If dumbstruck, I suggest you pause to avoid permanent injury to your brain.)

So much for substance over legal form: FAS 52 rules mean that consolidated presentation for all assets and liabilities depends on whose ledger an asset or liability is booked–an unabashed departure from the most basic principles governing consolidated financial statements.  The reason for this is — never mind, there is no good reason.  The FASB's reasoning, such as it is, begins with the patently false assumption that a subsidiary may operate in a manner so disconnected with its parent that dollar exposures are no different than exposures in other currencies.  The resulting rule is so outlandish, it has shocked (but not awed) too many unwitting accountants, including `a recent client.  These gentle and smart individuals are my excuse for the gap in posting, because I spent three beautiful days indoors in New England, helping them understand (to the extent one can) FAS 52.   I'm betting this slight exposre to the massive dose of radiation I had to administer to my client has led you to question whether accounting resides in our world or Alice's Wonderland.


  1. Reply raffimax June 6, 2008

    thanks for the post.

  2. Reply Forex Tracer June 16, 2008

    Thanks for the post mate.

  3. Reply forex trading strategies October 1, 2008

    Great post, keep posting great content.

  4. Reply Brian September 26, 2011

    Great I just lost a bet on the intercompany receivable from the Foreign Sub. I didn’t think you could make a gain or loss on amounts you owed yourself when you consolidate.
    Here’s the other part that’s “strange” so you make a gain or loss on the amount the sub owes you. For us the payable if for product that the sub then sells to a third party. The sub also then has a receivable from the third party in the Foreign Currency that when consolidated back to $ picks up a gain or loss for OCI. Seeing as this is one cash flow movement ie third party owes the sub and then the sub owes the parent the financials get double dinged with a hit on income for the intercompany gain/loss and also in OCI for the subs receivable from the third parties in the sub’s B/S translation and consolidation. Doesn’t seem like this should be GAAP??

  5. Reply Question June 30, 2012

    What are the implications of FAS 52 if the subsidiary cash cannot be repatriated due to regulations? Does that change the treatment of the adjustment?

Leave a Comment