When your organization operates in multiple currencies through subsidiary companies in different countries, consolidating requires translating foreign subsidiary results to the group's reporting curre...
Last updated Feb 18, 2026 · 4 min read
Consolidation of foreign subsidiaries involves:
The result is consolidated statements in the group's reporting currency with separate disclosure of translation gains/losses.
Good to know: Translation differences are not recognized in profit/loss (they're in OCI) because they're not realized cash impacts.
Light distinguishes between two currencies for each entity:
Functional currency: The currency in which the entity operates day-to-day.
Financial statements are first prepared in functional currency.
Presentation currency: The currency in which consolidated statements are presented (group currency).
If functional and presentation currencies differ, translation is required.
Light supports two translation methods:
Current-noncurrent method:
Less common under IFRS, but required in some jurisdictions.
Temporal method (most common under IFRS):
Light defaults to temporal method, which is IFRS-compliant.
Actual daily rates (for P&L): Light uses the actual exchange rate on the date each transaction was posted, not period averages. This provides more accurate translation because each revenue or expense line is converted at the rate that applied on the day it occurred.
Period-end rate (for balance sheet): Spot exchange rate on the last day of the period.
Good to know: Many accounting systems use average rates for P&L translation. Light uses actual daily rates instead, which gives a more precise result — especially when exchange rates move significantly within a period.
When exchange rates change, translation differences arise. Example:
Foreign subsidiary starts year with EUR 100,000 equity when 1 EUR = 1.20 USD (USD 120,000 equivalent).
At year-end, 1 EUR = 1.15 USD, so EUR 100,000 = USD 115,000 equivalent.
Translation loss of USD 5,000 records as:
Dr. Other Comprehensive Income USD 5,000 Cr. Consolidated Equity USD 5,000
Light calculates and records translation differences automatically in consolidation.
For complex structures (e.g., US parent with UK and German subsidiaries):
Light manages this multi-step process automatically.
When entities transact in different currencies, consolidation must eliminate properly:
Example: UK subsidiary (GBP) sells to German subsidiary (EUR).
Light links inter-company transactions across currencies and eliminates them correctly.
After consolidation, inter-company balances are eliminated. However, during the period, FX movements on inter-company payables/receivables create gains or losses.
Example: German subsidiary owes GBP 100,000 to UK parent. At invoicing (1 GBP = 1.20 EUR), payable is EUR 120,000. At period-end (1 GBP = 1.22 EUR), payable is EUR 122,000. FX loss of EUR 2,000.
In consolidation:
Light handles this elimination automatically.
Subsidiaries pay dividends to parents in foreign currency. On consolidation:
If dividend is declared before payment and rates change, record dividend at declaration rate, recognize FX gain/loss on settlement.
Foreign subsidiaries may have different fiscal year-ends. To consolidate:
Light helps coordinate this timing.
After consolidation, P&L appears in group currency. Analysis considers translation impacts:
Reported revenue growth = Organic growth + FX impact
Example: German subsidiary's EUR revenue grew 10%, but EUR weakened against USD by 5%, so reported USD growth is 5%.
Light separately tracks:
This helps management understand true operational performance vs. currency effects.
Compare balance sheet items across currencies:
Total assets: Sum of:
Changes reflect:
Separately reporting translation differences clarifies the real impacts.
Companies sometimes hedge foreign subsidiary investments to offset translation losses.
Example: USD parent invests in EUR subsidiary. EUR weakens relative to USD. Translation loss occurs. Parent enters EUR debt (which gains when EUR weakens) to offset translation loss.
Light tracks:
This supports comprehensive reporting of hedge impacts.
Consolidated financial statements should disclose FX translation effects:
Light maintains detailed translation schedules supporting these disclosures.
Under IFRS, deferred tax on translation differences is generally not recognized (they're non-taxable). However, some jurisdictions require tax on translation differences.
Configure deferred tax treatment for translation:
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