Definition
When a foreign entity's functional currency is not the reporting currency, its statements are translated. Assets and liabilities use the exchange rate at the balance sheet date. Revenues and expenses use the rates when they were recognized or a weighted-average rate for the period. Equity accounts use historical rates. The balancing amount is the translation adjustment, reported in other comprehensive income under ASC 830-30-45-12 and accumulated in equity.
Why it matters in an audit or review
Translation errors move equity and the cash flow statement without touching earnings, so they are easy to miss. The accumulated translation adjustment is released into net income only when the investment is sold or substantially liquidated (ASC 830-30-40-1). Exchange gains and losses on foreign-currency transactions follow ASC 830-20 and generally go through net income.
Example
Illustrative: a subsidiary has net assets of 1,000,000 British pounds. The rate is $1.25 at the start of the year and $1.30 at the end, with no income or dividends. Net assets move from $1,250,000 to $1,300,000 and the $50,000 increase is a translation gain in other comprehensive income.
Common mistakes
- Putting translation adjustments through net income.
- Using the closing rate for income statement items without disclosing it.
Sources
- FASB ASC 830-30, Foreign Currency Matters, Translation of Financial Statements (including 830-30-45-12 and 830-30-40-1)
- Deloitte DART, 5.3 Accounting for Exchange Differences Arising Upon Translation and 5.4 Release of CTA (dart.deloitte.com/USDART/home/codification/broad-transactions/asc830-10)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error