by Foreign Branch Account in the books of the Head Office (HO) records all transactions and balances related to a branch operating in a foreign country. This process involves translating the branch’s financials from the foreign currency to the reporting currency, ensuring compliance with accounting standards like IFRS or AS-11 in India.
Key Concepts
- Foreign Currency Transactions
The foreign branch operates in a different currency, so transactions must be translated into the HO’s reporting currency. - Exchange Rates Used for Translation
- Monetary items (e.g., cash, receivables, payables): Translated using the closing rate.
- Non-monetary items (e.g., fixed assets, inventory): Translated using the historical rate.
- Revenue and expenses: Usually translated at the average rate for the period.
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Recording Transactions
- All transactions are initially recorded in the branch’s functional currency and then converted for reporting purposes.
- The exchange difference resulting from currency fluctuations is accounted for in the HO’s books.
Steps to Prepare Foreign Branch Account
- Record Transactions in Functional Currency
The foreign branch maintains its books in the local currency (functional currency).
- Transfer Balances to the HO
At the end of the financial period, the branch sends a trial balance or financial statements to the HO.
- Translation of Balances
HO translates the branch’s trial balance into the reporting currency.
- Adjust for Exchange Differences
Translation differences are recorded in a separate account, often as a part of Cumulative Translation Adjustment Account (CTAA) under equity.
Journal Entries for Foreign Branch Account
| Transaction | Journal Entry in HO Books | Explanation |
|---|---|---|
| 1. Goods sent to branch | Foreign Branch A/c Dr. | To Goods Sent to Branch A/c |
| 2. Expenses incurred by HO for branch | Foreign Branch A/c Dr. | To Bank A/c |
| 3. Revenue earned by branch | Cash/Bank A/c Dr. | To Foreign Branch A/c |
| 4. Exchange difference on monetary items | Exchange Loss/Gain A/c Dr./Cr. | To Foreign Branch A/c |
| 5. Branch profit/loss transferred to HO | Profit and Loss A/c Dr./Cr. | To Foreign Branch A/c |
| 6. Closing balances of branch | Relevant Assets/Liabilities A/c Dr./Cr. | To Foreign Branch A/c |
Example
Foreign branch of a company sends its trial balance to the HO. The trial balance in the branch’s functional currency (USD) is as follows:
| Particulars | Amount (USD) |
|---|---|
| Fixed Assets | 20,000 |
| Inventory | 10,000 |
| Accounts Receivable | 5,000 |
| Bank | 2,000 |
| Accounts Payable | 3,000 |
| Sales Revenue | 25,000 |
| Cost of Goods Sold | 15,000 |
| Operating Expenses | 4,000 |
Exchange Rates:
- Historical Rate: ₹75/USD
- Average Rate: ₹78/USD
- Closing Rate: ₹80/USD
Translation into HO Books:
| Particulars | Amount (USD) | Rate (₹) | Converted Amount (₹) |
|---|---|---|---|
| Fixed Assets | 20,000 | 75 | 1,500,000 |
| Inventory | 10,000 | 75 | 750,000 |
| Accounts Receivable | 5,000 | 80 | 400,000 |
| Bank | 2,000 | 80 | 160,000 |
| Accounts Payable | (3,000) | 80 | (240,000) |
| Sales Revenue | (25,000) | 78 | (1,950,000) |
| Cost of Goods Sold | 15,000 | 78 | 1,170,000 |
| Operating Expenses | 4,000 | 78 | 312,000 |
Exchange Difference:
Exchange differences arising due to varying rates are adjusted in the CTAA or P&L as per accounting standards.
Presentation in HO Books
Foreign Branch Account (in ₹):
| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Fixed Assets | 1,500,000 | |
| Inventory | 750,000 | |
| Accounts Receivable | 400,000 | |
| Bank | 160,000 | |
| Accounts Payable | 240,000 | |
| Sales Revenue | 1,950,000 | |
| Cost of Goods Sold | 1,170,000 | |
| Operating Expenses | 312,000 | |
| Exchange Difference | 42,000 |
Net profit or loss and exchange differences are reflected in the P&L or CTAA as applicable.
Significance
- Ensures compliance with accounting standards.
- Provides transparency in the financial position and performance of the foreign branch.
- Facilitates consolidation into the parent company’s financial statements.
