Translation effect
Sector Deep DivesThe impact on reported results of converting foreign subsidiary figures into the parent's reporting currency.
A group reporting in euro with a UK subsidiary must translate that subsidiary's sterling results into euro. When sterling moves, the reported euro figures move with it even though nothing about the UK business changed.
It is purely presentational in the period. No cash moved, no margin changed, and the underlying business performed exactly as it did. This is why companies report constant currency growth alongside reported growth.
It affects the balance sheet too, where the retranslation of net assets goes through other comprehensive income rather than profit, accumulating in a currency translation reserve.
It is quite different from transaction exposure, which is a real economic effect on margin. Confusing the two is common, and the distinction is exactly what an interviewer is testing when they ask about currency.
Worked example
A euro reporting group earns £100M from its UK subsidiary. At 1.15 that is €115M; at 1.05 it is €105M.
Reported euro profit falls nearly 9% with the UK business performing identically. Nothing happened operationally, and the group reports constant currency growth alongside to show it.
Contrast the transaction effect, where a weaker currency genuinely raises input costs and compresses margin. One is presentation, the other is economics.