Lesson 28 - Advanced Accounting Course

Lesson 28: Foreign Currency Translation in Consolidated Financial Statements

When a company operates across borders and owns foreign subsidiaries, those subsidiaries might keep their books in different currencies (e.g., euros, yen, pounds). But when the parent company prepares consolidated financial statements, all figures need to be in one currency—usually the currency of the parent company.

🌍 This is where foreign currency translation comes in!

🤔 Why Translate Foreign Currency?

When consolidating:

• The parent company wants a unified view of performance
  
  

• Investors/readers need one currency to understand the full picture
  
  

• Accounting standards (like IFRS & GAAP) require it!
  
  

💬 Example:
A U.S.-based company owns a German subsidiary.
The German books are in euros (€), but the U.S. parent reports in USD ($).
Before consolidation, the euro financials must be translated into dollars.

🌐 What Standards Apply?

• IFRS: IAS 21 — The Effects of Changes in Foreign Exchange Rates
  
  

• US GAAP: ASC 830 — Foreign Currency Matters
  
  

Both use similar principles for translation.

📌 Key Concepts

🧾 Steps in Currency Translation (IFRS/GAAP)

🪜 1. Determine Functional Currency

• Each entity determines its own functional currency (based on where it primarily operates)
  
  

🪜 2. Translate Financial Statements

Using the current rate method:

📌 Retained Earnings are a balancing figure, affected by income and dividends.

🪜 3. Recognize Translation Differences

Any differences from currency fluctuations are recorded in a special reserve:

🧾 Other Comprehensive Income (OCI) → Cumulative Translation Adjustment (CTA)
➡️ NOT in profit & loss!

📊 Example: Translating a Foreign Subsidiary

German Subsidiary Financials (in EUR)

Rates:

• Average rate: €1 = $1.10
  
  

• Closing rate: €1 = $1.12
  
  

🧮 Translation to USD:

✅ Net income: $330,000
✅ CTA adjustment = difference that goes to OCI

⚠️ Common Mistakes

🧠 Translation vs Remeasurement

📑 Quick Recap