Translation exposure

Consolidation requires one currency, so a subsidiary reporting in its own functional currency has to be translated. Balance sheet items go at the closing rate, income statement items at the rates on the transaction dates, which in practice usually means an average rate for the period.

When the subsidiary's currency moves, the translated figures move with it even though the business did exactly what it did before. Revenue, EBITDA and net assets all shift, and the group's growth rate in its presentation currency can be negative while every underlying business grew.

The gain or loss on retranslating the subsidiary's net assets does not reach profit. It accumulates in a currency translation reserve within equity, through other comprehensive income, and is recycled into profit only when the subsidiary is sold, liquidated or otherwise deconsolidated, at which point the whole accumulated balance lands at once inside the gain or loss on disposal.

Translation exposure is presentational in the period, which is why constant currency reporting exists, but it is not nothing. It changes the euro value of the assets and eventually of the cash a parent can draw out, which is why groups fund foreign operations with local currency debt or designate a net investment hedge. The realised outcome in the accounts is what is usually called the translation effect.