1.

Translation exposure

All financial statements of a foreignsubsidiary have to be translated into thehome

currency for the purpose of finalisingthe accounts for any given period.

Translation exposure is the degree to which afirm’s foreign currency denominated

financialstatements are affected by the exchange ratechanges.

The changes in the asset valuation due tofluctuations in the exchange rate will affectthe
group’s assets, capital structure ratios,profitability ratios, solvency ratios etc

The followingprocedurehas been followed:

Assets & Liabilities are to be translated at thecurrent rate, i.e. the rate prevailing at the
time of preparation of consolidated statements.

All revenues & expenses are to be translated at theactual exchange rates prevailing on
the date of transactions.

Translation adjustments (gains or losses) are not becharged to the net income of the
reporting company.(They are accumulated & reported in a separateaccount)

Measurement of Translationexposure

Translation exposure = (Exposed assets –Exposed liabilities) * (Change in exchange

inexchange rates)

Current exchange rate: $ 1 = Rs 47.10 Liabilities

Asset Liabilities
Rs. 15,300,000 Rs 15,300,000

$ 3,24,841 $ 3,24,841

Example

In the next period, exchange rate fluctuatesto $ 1 = Rs. 47.50

Asset Liabilities

. 15,300,000 Rs 15,300,000
$ 3,22,105 $ 3,22,105

Decrease in the Book Value of the assets is $2736.