How the translation reserve appears
Because the balance sheet, the profit and loss and equity are translated at different rates, the translated figures do not balance by themselves. The difference is the translation reserve, a line in equity on the group balance sheet. Finconsol works it out every month for each foreign company.
Why there is a difference
A foreign company's assets and liabilities are translated at the closing rate, its profit at the average rate and its share capital at the historical rate. The three rates differ, so the translated equity does not equal the translated net assets. The gap is the translation reserve.
For example, a company keeps its books in euros and the group reports in US dollars. It was set up with 100,000 euros of share capital and made a profit of 20,000 euros in its first year.
| Euros | Rate | US dollars | |
|---|---|---|---|
| Share capital, at the historical rate | 100,000 | 1.05 | 105,000 |
| Profit for the year, at the average rate | 20,000 | 1.08 | 21,600 |
| Equity before the reserve | 120,000 | 126,600 | |
| Net assets at the year end, at the closing rate | 120,000 | 1.10 | 132,000 |
| Translation reserve | 5,400 |
The reserve of 5,400 US dollars is the amount that makes the translated balance sheet balance. It is a gain here because the euro strengthened during the year.
Where it appears
The translation reserve is a line in equity on the group balance sheet. Finconsol works it out every month for each foreign company. In the default group chart the line is called Currency Translation Adjustment. If the group uses its own chart, the statement shows that chart's name for the line.
A partly owned foreign company
Part of the difference belongs to the outside shareholders. Their share is recorded with its own journal template, which moves it from the translation reserve to the non-controlling interests line. How minority interest is recorded covers the other templates.