foreign currency translation

Foreign currency translation

The process of restating foreign currency accounts of subsidiaries into the reporting currency of the parent company in order to prepare consolidated financial statements.

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Foreign Currency Translation

When a parent-subsidiary relationship exists between two companies in different countries using different currencies, the act or practice of changing the financial statements of the subsidiary to conform to the accounting standards of the parent's country, as well as re-denominating the subsidiary's currency into the parent's currency. According to the Generally Accepted Accounting Principles in the United States, the translation of a foreign currency to U.S. dollars must be accurate as of the date on the financial statement. If there have been substantial changes to the exchange rate since that date, the consolidated financial statement must note this.

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foreign currency translation

See translation.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

foreign currency translation

the process of denoting the assets and liabilities of a MULTINATIONAL ENTERPRISE'S foreign subsidiary's BALANCE SHEET and the revenues and expenses of the subsidiary's PROFIT-AND-LOSS ACCOUNT, which are expressed in terms of the subsidiary's local currency by translating them into the parent company's domestic currency. This is done in order to prepare CONSOLIDATED ACCOUNTS for the group.

There are two main currency translation methods:

1. the closing rate, or net investment method, or all-current method, in which all foreign currency items are translated at the EXCHANGE RATE ruling at the date of the balance sheet. With the closing rate method any gains or losses on exchange arising from translation are taken direct to the group balance sheet an dealt with as changes in RESERVES so as not to affect reported PROFIT.
2. temporal method or current/non-current method, in which fixed assets and long-term liabilities are translated at the exchange rate ruling at the date of their acquisition, and revenues and expenses at an average exchange rate for the year. With the temporal method any differences arising on translation are taken to the profit-and-loss account where they serve to affect recorded profit.

Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson