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Are short intercompany loans denominated in foreign currency subject to exchange risk from consolidation perspective?

intercompany loans foreign currency risk


Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

Are these cross currency (i.e., Pounds to USD) or same currency?

(Accountant) |

Ex. US parent company has pound denominated payable to UK Sub, on a monthly basis, US parent company must revalue the foreign currency denominated payable to P&L FX, does the P&L FX survive in the consolidation?

Shashi Chidara
Title: Controller
Company: Aris Global
(Controller, Aris Global) |

If the inter-company payables/receivables are settled in the near term, they would be considered monetary assets/liabilities. All such monetary assets/liabilities should be marked-to-market and the losses/gains should be flushed through P/L.

(Accountant) |

thanks a lot for your reply. I understand on the US side, the monetary assets/liabilities should be marked to market to P/L, by doing so, this will create inter-company difference assuming inter-company was in balance prior to the revaluation, how should this difference be cleared?

Topic Expert
David OBrien
Title: Treasury Consultant
Company: EE Treasury
(Treasury Consultant, EE Treasury) |

Dear Anonymous:

Yes, assuming that the currency of the IC loan is non-functional to one of the two legal entities that are party to the loan. The loans a subject to mark to market each accounting period with the resulting gain or loss posted to the P&L for that accounting period.

If I may, there are several best practice structures that you might consider to improve control over an inter-company loan program:
*These thoughts govern whether the IC loans are the result of an automated physical pooling structure or via ad hoc periodic lending of mines to cover shortfalls.
*It is preferable to select a central legal entity (often called an In-house Bank) to serve as the "pivot" for deposit taking and lending activity; i.e. this entity will be a party to all IC loans.
***For US HQ entities, the In-house Bank must be domiciled off-shore to minimize tax ramifications from lending activity. Other guidelines apply to other countries depending on the local tax treatment of cross border loans; i.e. are they tax as revenue, dividends, loans or what?

End of the day you want to: optimize cash and make the company currency agnostic.

Jono Tunney
Title: Director
Company: Atlas Risk Advisory LTD
(Director, Atlas Risk Advisory LTD) |

The act of making a IC loan in a non functional currency IN AND OF ITSELF will NOT *create* any new exposure. For example, a EUR functional entity makes a GBP loan to a UK (GBP functional) entity, the EUR entity will have merely changed a GBP asset (GBP cash) to a different GBP asset (IC loan receivable).

This asset will be remeasured and hit OCI regardless of it being a loan or cash.

I think the question you are trying to ask is one that touches on the difference between *re-measurement* (transactional currency <> functional currency) and *translation* (functional currency <> reporting currency).

To answer than question - Re-measurement will be booked to OCI and then will obviously impact equity via net income. Translation will book directly to equity (cumulative translation adjustment) or CTA account. So there is a very real possibility that depending on the specifics of your transaction, you will have to make a decision to hedge re-measurement (your P&L) or to hedge equity but you can't easily do both. (you can actually do both but that is beyond the scope of this answer).

Getting back to the original example - how does the GBP functional sub report the change in the value of the GBP cash it now has on its balance sheet after receiving the loan. For USD consolidated reporting purposes, it is booked directly to CTA account and doesn't pass through the P&L at all.


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