Translating foreign operations

A foreign operation — a subsidiary, associate, joint arrangement or branch — keeps its books in its own functional currency. To include it in the group's statements, its results and financial position are translated into the group's presentation currency (IAS 21.39): - Assets and liabilities at the closing rate at the reporting date — including goodwill and fair value adjustments arising on its acquisition, which are treated as the foreign operation's assets and liabilities (IAS 21.47). - Income and expenses at the rates on the transaction dates — in practice an average rate for the period if rates don't fluctuate significantly. - All resulting exchange differences in other comprehensive income, accumulated in a separate component of equity: the foreign currency translation reserve.

Equity items such as share capital and pre-acquisition reserves are commonly kept at historical rates; IAS 21 doesn't prescribe this, but it's widespread practice.

Why a difference arises. The opening net assets were translated at the opening rate and are now at the closing rate; the profit was translated at the average rate but the net assets it created are at the closing rate. So:

Exchange difference = opening net assets × (closing − opening rate) + profit × (closing − average rate) (adjusted for any dividends or capital movements at their own rates).

These differences aren't gains or losses of the period from the group's operations — they come from translating a long-term investment — so they bypass profit or loss. The NCI's share is allocated to NCI. On disposal of the foreign operation, the cumulative amount in the reserve is reclassified to profit or loss as part of the gain or loss on disposal.

The translation method for an operation in a hyperinflationary economy is covered by IAS 29 and differs. Where a currency lacks exchangeability, the 2023 Lack of Exchangeability amendments to IAS 21 (effective 1 January 2025) on estimating a spot rate also apply to translation. Separately, Translation to a Hyperinflationary Presentation Currency (amendments to IAS 21 issued November 2025, effective for annual periods beginning on or after 1 January 2027, early application permitted) specifies how to translate from a non-hyperinflationary functional currency into a hyperinflationary presentation currency. Under US GAAP, ASC 830's current rate method is equivalent (the cumulative translation adjustment sits in accumulated OCI); if an entity's books aren't kept in its functional currency, they are first remeasured (temporal method) with differences in net income.