Translation exposure

Definition

Translation exposure measures the impact of currency exchange rate fluctuations on a company's consolidated financial statements. It affects multinational companies when foreign subsidiaries' financials are converted into the parent company's reporting currency.

5 Must Know Facts For Your Next Test

1. Translation exposure is also known as accounting exposure or translation risk.
2. It primarily impacts a firm's balance sheet, specifically assets, liabilities, and equity reported in foreign currencies.
3. FASB 52 requires U.S. firms to use the current rate method for translating most foreign currency financial statements.
4. Translation gains and losses are typically reported in other comprehensive income (OCI) rather than net income.
5. Techniques to manage translation exposure include using forward contracts and currency swaps.

Review Questions

• What is another term for translation exposure?
• How does translation exposure primarily affect a company's financial statements?
• Where are translation gains and losses usually reported?

Related terms

Transaction Exposure:

Measures the effect of exchange rate fluctuations on individual transactions denominated in foreign currencies.

Economic Exposure:

Assesses the long-term impact of exchange rate changes on a company’s market value.

Current Rate Method: An accounting method used for translating foreign subsidiary financial statements into the parent company's reporting currency at the current exchange rate.