Under FRS 102 Section 30, an overseas subsidiary’s assets and liabilities are translated into sterling at the closing rate, its income and expenses at the rates on the transaction dates or a suitable average, and the resulting exchange differences go to other comprehensive income, building up in equity. Those cumulative differences are not recycled to profit or loss when the subsidiary is sold; paragraph 9.18A sends them straight to retained earnings.
Where does translation fit in the consolidation?
Translation is a step that happens before the normal consolidation adjustments. The order is:
- Confirm the subsidiary’s functional currency, using the indicators explained in functional currency and presentation currency. If the subsidiary is really an extension of the UK parent, its functional currency may be sterling and there is nothing to translate at this stage.
- Make sure the subsidiary’s own accounts are right in its functional currency, with its own foreign currency transactions dealt with under paragraphs 30.7 to 30.11.
- Align the subsidiary’s accounting policies with the group’s.
- Translate into the group’s presentation currency under paragraphs 30.17 to 30.23.
- Carry out the usual consolidation procedures, such as eliminating intragroup balances and the investment against equity, as described in FRS 102 Section 9: consolidated and separate accounts.
This page assumes the subsidiary’s currency is not hyperinflationary. If it is, paragraph 30.21 requires the Section 31 restatement first and then translation of every amount, including comparatives, at the latest closing rate.
Which rate applies to each line?
| Item | Rate | Authority |
|---|---|---|
| Assets and liabilities, including comparatives | Closing rate at each balance sheet date | Paragraph 30.18(a) |
| Income and expenses, including comparatives | Rate on each transaction date, or an average rate unless rates fluctuate significantly | Paragraphs 30.18(b) and 30.19 |
| Goodwill and fair value adjustments on acquiring the subsidiary | Treated as the subsidiary’s own assets and liabilities, so closing rate | Paragraph 30.23 |
| Cash flows | Rate at the date of each cash flow, or an approximation such as a weighted average | Paragraph 7.12 |
Share capital and reserves at acquisition are usually kept at the rate on the acquisition date. That is not a separate rule; it is the bookkeeping that makes the translation difference appear as a single balancing figure each year. Many groups use monthly average rates rather than one annual average, which is a sensible way of meeting the paragraph 30.19 condition when the currency moves sharply during the year.
Where do the exchange differences go?
Paragraph 30.18(c) puts all differences arising on translation into other comprehensive income. Paragraph 30.20 identifies two sources: translating income and expenses at transaction or average rates while assets and liabilities are at the closing rate, and translating the opening net assets at a closing rate that differs from the previous one. Where the subsidiary is not wholly owned, the share of the accumulated differences attributable to the non controlling interest is allocated to the non controlling interest.
ICAEW’s helpsheet on foreign currency translation notes that FRS 102 does not require a separate reserve, although many groups present a translation reserve within equity, shown in the statement of changes in equity. Paragraph 30.25(b) requires disclosure of the exchange differences recognised in other comprehensive income during the period.
What does a worked example look like?
Illustration only. A UK parent sets up a wholly owned subsidiary in Ireland with share capital of €1,000,000 when the rate is €1.20 to £1. In the first year the subsidiary makes a profit of €240,000, pays no dividend, and the average rate is €1.15. At the year end the rate is €1.10.
| Item | Euros | Rate | Sterling |
|---|---|---|---|
| Share capital at the start | 1,000,000 | 1.20 | 833,333 |
| Profit for the year | 240,000 | 1.15 (average) | 208,696 |
| Net assets at the year end | 1,240,000 | 1.10 (closing) | 1,127,273 |
| Exchange difference to other comprehensive income | 85,244 |
The gain of £85,244 is the closing net assets of £1,127,273 less the capital of £833,333 and the translated profit of £208,696. It arises because the euro strengthened against sterling. Consolidated profit includes £208,696 and other comprehensive income includes the £85,244 gain. If the euro had weakened instead, the same calculation would produce a loss in other comprehensive income.
What about loans between the parent and the subsidiary?
Paragraph 30.22 says an intragroup monetary asset or liability cannot be eliminated without showing the effect of currency movements, because one party is genuinely exposed to exchange risk. If the parent lends £500,000 to a euro subsidiary, the subsidiary records an exchange gain or loss on the loan in its own profit and loss account, and that difference stays in consolidated profit or loss even though the loan itself is eliminated.
The exception is a loan that is part of the net investment. Under paragraph 30.12, a monetary item for which settlement is neither planned nor likely in the foreseeable future is in substance part of the parent’s net investment in the subsidiary; trade balances never qualify. Paragraph 30.13 then requires the exchange differences on it to be taken to other comprehensive income in the consolidated accounts. In the individual accounts of the lender or borrower they go to profit or loss, except that an unrealised gain goes to other comprehensive income. Board minutes or the loan terms should support the conclusion that repayment is not planned.
What happens when the subsidiary is sold?
This is where FRS 102 differs from what many people expect. Paragraph 9.18A says the gain or loss on losing control is the proceeds less the share of net assets disposed of, including related goodwill, and that the cumulative exchange differences on the foreign subsidiary recognised in equity are not included in that gain or loss but are transferred directly to retained earnings. Paragraph 30.13 says the same for net investment loans, and paragraph 12.24 provides that gains and losses on a hedge of a net investment accumulated in equity are not reclassified to profit or loss on disposal either. The hedge accounting conditions are covered in hedge accounting under FRS 102.
How does the cash flow statement handle it?
Paragraph 7.12 requires a foreign subsidiary’s cash flows to be translated at the rate on the date of each cash flow or an approximation, not at the closing rate. Paragraph 7.13 says unrealised exchange gains and losses are not cash flows, but the effect of exchange rate changes on cash held in foreign currency is presented separately so that opening and closing cash reconcile. Small groups applying Section 1A are not required to give a cash flow statement, because paragraph 7.1B exempts small entities from Section 7.
What mistakes come up most often?
- Translating the whole balance sheet, including share capital and opening reserves, at the closing rate, which hides the translation difference inside retained earnings.
- Translating goodwill on acquisition at the historical rate instead of the closing rate required by paragraph 30.23.
- Eliminating an intragroup loan without recognising the exchange difference that paragraph 30.22 requires.
- Treating a trading balance as part of the net investment.
- Using a single annual average rate in a year when the currency moved significantly.
- Forgetting to allocate part of the translation difference to the non controlling interest.
- Recycling the translation reserve into the gain on disposal, which paragraph 9.18A prohibits.
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Related Accountapedia entries
- Bookkeeping for foreign currency bank accounts
- Can UK company accounts be in euros or dollars
- Accounting for foreign currency transactions
- Calculating corporation tax in a foreign currency
- Selling a subsidiary: the gain in group accounts
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- ICAEW: Foreign currency translation under frs 102
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.