Translation risk

Foreign exchange risk

1.

Translation risk refers to foreign exchange or currency risk.

It is the risk of changes in a firm’s reported financial statements, or related financial ratios or borrowing covenant compliance, resulting from changes in the rates at which foreign currency-denominated assets, liabilities, income or costs are translated into the reporting currency.

This applies most commonly to the translation of monetary assets and liabilities and to the consolidation of non-domestic subsidiaries into group financial statements.

If the changes in exchange rates were to reverse, the effects on the related amounts in the financial statements would normally also reverse.

2.

The risks in 1. above, together with any secondary adverse effects, resulting from the changes described above.

Potential secondary adverse effects may include breach of financial ratios in loan covenants, and consequential costs.

Also known as translation exposure, translational risk or translational exposure.

See also

• Accounting exposure
• Balance sheet exposure
• Currency risk
• Current/non-current method
• Economic risk
• Financial covenant
• Foreign exchange risk
• Income statement exposure
• Pre-transaction risk
• Transaction risk

Other links

Treasury essentials: Translation Risk, Will Spinney, The Treasurer, Nov 2013