Translation exposure

Translation exposure is an accounting risk that emerges from currency rate fluctuations.

Translation exposure is an account risk that refers to all business entities operating in countries with different currencies. Due to the fact that transactions take place in multiple currencies, the funds eventually need to be converted into the home currency. 

There are countless aspects that can influence the exchange rate between two currencies, therefore, while financial analysts attempt to accurately forecast future exchange rates, it is impossible to remain completely accurate. If businesses haven’t hedged against currency fluctuations, it can impact their accounting measures. 

Translation exposure differs from transaction exposure in the sense that, while in transaction exposure, exchange rate fluctuations impact the value of the transaction, in translation exposure, exchange rate fluctuations impact valuations. 

For example

On 13 January 2022 the French branch of a US company acquired a house in the value of €500,000. At the time, the euro-dollar exchange rate was €1=$1.20, meaning that the value of the property amounted to €600,000. 

In half a year, the company has to submit its accounting report that also includes the value of the firm’s assets. By June, the exchange rate shifted to €1=$1.10, thus by June the value of the newly acquired property had dropped to €550,000.