Translation adjustment
The gain or loss from translating a foreign subsidiary under the current rate method, taken to other comprehensive income and accumulated in equity, not net income, until the subsidiary is sold.
Where you will meet it
Translation adjustment appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Contrast the current rate and temporal methods, assess the effect of each on the parent's income statement and balance sheet, and decide which method fits a given situation
“The current rate method translates all assets and liabilities at the closing rate, income and expenses at the average rate, and equity at historical rates; the translation adjustment goes to OCI and accumulates in equity.”
- Work out translation effects and assess how the income statement and balance sheet of a subsidiary are restated in the parent's presentation currency
“Under the current rate method, net assets are exposed: the translation adjustment for the year equals opening net assets times the change in closing rate, plus the effect of retained profit translated at the average rather than the closing rate.”
See also
Current rate method · Other comprehensive income
Practise it
Practise translation adjustment until it is automatic: questions that explain every wrong option.
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