# Translation reserve

> The part of group equity that holds exchange differences from translating a foreign subsidiary into the group's currency.

Source: https://finconsol.com/blog/glossary/translation-reserve/ (updated 28 October 2026)

## Definition

The translation reserve is the part of group equity that holds the exchange differences from translating a foreign subsidiary's statements into the group's presentation currency. It builds up because the profit and loss is translated at average rates and the balance sheet at the closing rate, and it moves to profit or loss only when the subsidiary is sold.

## How does the translation reserve build up?

A foreign subsidiary keeps its books in its own currency. To add it to the group, its statements are translated into the group's presentation currency. Income and expenses are translated at the average rate for each month, and assets and liabilities at the closing rate on the last day[1](#src-1).

The two rates differ, so the translated statements do not balance on their own. The gap is the exchange difference. It is recognised in other comprehensive income and collected in a separate component of equity[2](#src-2), which is the translation reserve. It rises when the subsidiary's net assets are worth more in the group's currency than before, and falls when they are worth less.

## A worked month

Palmridge Hospitality LLC keeps its books in dirhams and is translated into pounds sterling. Its net assets at the start of September were AED 12,000,000. The closing rate moved from 0.2010 to 0.2040 during the month, and the profit earned in the month was translated at the average rate of 0.2025.

*Exhibit 1. Palmridge Hospitality LLC, September 2026GBP*

| Opening net assets AED 12,000,000, rate moved from 0.2010 to 0.2040 | 36,000 |
| --- | --- |
| September profit AED 1,905,000, translated at the average 0.2025, held at the closing 0.2040 | 2,858 |
| Added to the translation reserve | 38,858 |

Example group used across Finconsol guides. Figures rounded to the pound.

The opening net assets gained 0.0030 a dirham (0.2040 less 0.2010), which is 36,000. The profit was put into the income statement at 0.2025 but sits in net assets at 0.2040, so it adds 0.0015 a dirham, which is 2,858 (1,905,000 times 0.0015 is 2,857.50, rounded). The month adds 38,858 to the reserve. The example assumes no dividends or new capital during the month.

## What happens when the subsidiary is sold?

When the group sells the subsidiary, the balance in the translation reserve for that subsidiary is moved from equity to profit or loss, as part of the gain or loss on the sale[3](#src-3). Until then the amount stays in equity, even if the exchange rate swings back. A part-sale that leaves the group in control moves a share of the reserve to the non-controlling interest instead of to profit or loss.

Related: [Closing rate](/blog/glossary/closing-rate/), [Average rate](/blog/glossary/average-rate/), [Functional currency](/blog/glossary/functional-currency/), [Presentation currency](/blog/glossary/presentation-currency/), [Net investment in a foreign operation](/blog/glossary/net-investment-in-a-foreign-operation/).

## Sources

## Sources

1. IAS 21 [The Effects of Changes in Foreign Exchange Rates](https://www.ifrs.org/issued-standards/list-of-standards/ias-21-the-effects-of-changes-in-foreign-exchange-rates/), paragraph 39 (translation of assets, liabilities, income and expenses).
2. IAS 21, paragraph 41 (exchange differences recognised in other comprehensive income and accumulated in a separate component of equity).
3. IAS 21, paragraph 48 (reclassification to profit or loss on disposal of the foreign operation). Part-disposals are covered in paragraphs 48A to 48C.