Translation risk
A group reporting in one currency may translate subsidiaries that operate in other currencies. Exchange-rate movements can change reported assets, liabilities, income and equity even without an immediate conversion of cash. The accounting treatment depends on the relevant reporting rules and the nature of the item. Translation exposure may still matter for performance measures, covenants or stakeholder perceptions, but a translation loss is not automatically a current cash loss. It differs from transaction exposure and from the longer-term competitive effects described as economic risk.
Worked example
A subsidiary has net assets of $1 million. A simple translation at $1.25 per £1 gives £800,000, while $1.20 gives approximately £833,333. The change in sterling representation does not by itself mean the subsidiary received an extra $41,667 of cash.
Common mistake
Assuming every reported exchange difference represents cash that has already been gained or lost.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |