Foreign currency translation converts a company’s financial statements from its functional currency into another presentation currency, usually the group’s. Under IAS 21, assets and liabilities are translated at the closing rate, income and expenses at the rates on the transaction dates, and the resulting differences go to other comprehensive income.
What is foreign currency translation?
A group with a subsidiary that keeps its books in another currency cannot add those figures to its own. Translation restates the subsidiary’s statements into the group’s presentation currency, so they can be combined into the consolidated financial statements. Each company first records its own transactions in its functional currency.
Translation is different from recording foreign currency transactions. When a riyal company owes a supplier in euros, the payable is retranslated at each closing rate and the exchange difference goes to profit or loss (IAS 21, paragraphs 23 and 28). When a whole subsidiary is translated, the differences go to other comprehensive income instead, because rate changes have little or no direct effect on its operating cash flows (paragraph 41).
Which exchange rates does IAS 21 use?
| Item | Rate |
|---|---|
| Assets and liabilities | The closing rate at the date of each statement of financial position |
| Income and expenses | The rates at the dates of the transactions; an average rate for the period is often used unless rates fluctuate significantly (paragraph 40) |
| Resulting exchange differences | Recognised in other comprehensive income and held in a separate component of equity, the translation reserve |
Two follow-on rules matter. For a subsidiary that is not wholly owned, the part of the accumulated differences that belongs to non-controlling interests is allocated to them (paragraph 41). When the foreign operation is sold, the cumulative differences in the reserve are reclassified to profit or loss (paragraph 48). Different procedures apply when the functional currency is that of a hyperinflationary economy (paragraph 42).
What does a translation difference look like?
Why does currency translation matter for finance teams in the GCC?
The Saudi Central Bank has stated its commitment to the official rate of 3.75 riyals to the US dollar, so a dollar-based subsidiary in a riyal group usually produces small translation differences. Subsidiaries in currencies that move against the riyal can produce large ones, which sit in equity rather than profit and return to profit only on disposal. Keep the rate source and dates consistent every month, and read our guide to group consolidation for the wider process.
Questions people ask
Why don’t translation differences go through profit?
IAS 21 explains that rate changes have little or no direct effect on the present and future cash flows from the foreign operation’s activities, so the differences are kept in equity until the operation is disposed of.
Can we translate the income statement at the closing rate?
Not under IAS 21. Income and expenses use the rates at the transaction dates, or an average that approximates them. The closing rate applies to assets and liabilities.
What is the difference between translation and remeasurement?
Translation restates a whole set of statements into a presentation currency, with differences in other comprehensive income. Remeasurement updates foreign currency balances in a company’s own books at the closing rate, with differences in profit or loss.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.
- AASB 121 The Effects of Changes in Foreign Exchange Rates (compiled February 2016), which incorporates IAS 21: paragraphs 8, 21 to 28, 38 to 42 and 48 (read 9 October 2026)
- IFRS Foundation: IAS 21 The Effects of Changes in Foreign Exchange Rates (standard page) (read 9 October 2026)
- Saudi Central Bank (SAMA): SAMA Affirms Commitment to Exchange Rate Policy (May 2020) (read 9 October 2026)