Foreign Currency Translation

A multinational group often has subsidiaries that keep their books in local currencies. To prepare consolidated accounts, these must be translated into one presentation currency.

Under both IFRS and US GAAP, assets and liabilities are usually translated at the exchange rate at the balance sheet date, while income and expenses are translated at the rates on the transaction dates or an average rate for the period. Because different rates are used, translation differences arise. These are recorded in other comprehensive income, not in profit, and accumulated in a separate reserve within equity.

For example, a US parent owns a European subsidiary with net assets of 10 million euros. If the euro falls from 1.10 to 1.05 dollars during the year, the subsidiary's net assets are worth 500,000 dollars less in the group accounts. This translation loss goes to other comprehensive income.

When the subsidiary is sold, the accumulated translation differences are moved into profit. Translation differs from remeasuring individual foreign currency transactions, whose gains and losses usually go through profit.