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Translation Adjustment

Question : What is a translation adjustment? How is it computed? Where should it be reported in a set of consolidated financial statements? How might it differ in different companies and in different industries? Provide examples.

Answer :

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Introduction

As the world is shrinking due to business entities working all over, foreign currency adjustments hold necessary accounting importance. Translation adjustments relate to those entries that are made in the books of accounts by converting its financial data from its functional currency to its reporting one. This is usually done by the parent organization that has its subsidiaries in other countries having different currencies. Thus, to produce consolidated financial data of the parent organization in its financial
reports, it becomes imperative to make translations so that its financial statements reflect its true position. (KYLE, 2009)

Computation

Differences arise in this context when there is a difference in historical exchange rate and the current exchange rate. Thus it likely to yield either a positive or negative translation adjustment to ensure that the accounting equation remains intact, i.e., ASSETS= LIABILITIES + OWNER’S EQUITY.

The steps involved for translation are as follows:

1. Identification of foreign currency of the subsidiary entity

2. Evaluating the financial assets as well as liabilities in its reported currency

3. Recording the gains and losses arising there from. (Accounting Tools, 2018)

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The items of the balance sheet are expressed at the current exchange rate prevailing at the end of the financial year. They are at a risk of exposing translation adjustment due to the differences in exchange rate at the end of current and previous financial year respectively. Current assets and liabilities like payables and receivables too are prone to such accounting treatment. An appreciation in current assets due to fluctuations in exchange rates shall have a positive impact on the financial statements and vice- versa. Similarly, current liabilities shall pose a negative implication due to translation if foreign currency shall appreciate and vice-versa.

Calculation shall take place as follows:

If the above accounting treatments result in translation adjustments then that is adjusted in the shareholders equity in the consolidated reports of the parent company as translation gain or loss. Further such gain is reflected in other comprehensive income statement of the parent. Differences in translation adjustment might occur from country to country and with industry to industry. The rules stated above are general and not specific. However, some countries or industries tend to follow different conversion rules and hence, such differences occur in the process of conversion.

For instance if the subsidiary company in India purchases fixed asset at 2,00,000 rupees with depreciation at the rate 10%. Its WDV shall be 1,80,0000 rupees. But the parent company in Singapore shall record the fixed asset at the historical exchange rate of INR 50 per 1 SGD. Hence, its valuation shall be at (2,00,000/50) SGD 4000 less 10 % depreciation. The balance amount of SGD 3600 shall be compared with the converted WDV in Indian currency at the current exchange rate of SGD 55. Hence, the WDV in Singapore currency shall be (1,80,000/55) SGD 3273. This will yield a translation loss SGD 327.

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