Translation Exchange Gain or Loss
This is the profit or loss made while converting one foreign currency based on another.
How Translational Exchange Gain or Loss Works
Most organizations, especially big brands, operate in different countries across the globe and, as such, make use of various currencies. If an organization sells its products in a foreign market, it is in a foreign currency. However, the company has to convert this foreign currency into the money that the organization primarily uses. On the other hand, if an organization has a foreign branch in another country like England, for example, and the branch doesn't send money to the main company, the branch can use the British Pounds as its currency.
However, if the organization is recording its financial statements, it must convert all foreign currencies into its currency. After the currency conversion process, the company may record a gain or loss; an increase is recordable if the foreign currency converted into the currency used by the organization is of immense value. For example, if the foreign currency is 5000 and it becomes 6000 after conversion, there is a translational exchange gain.
However, a loss occurs when the currency is of lesser value than the foreign currency after the currency conversion. For example, a foreign currency of 3000 and becomes 1000 after conversion. The organization's financial statement records all the gains and losses made after a transnational conversion.
Example of Translational Exchange Gain or Loss
At the end of December 2020, Apple Incorporated recorded 64% of the revenue they got from selling products in foreign countries. For the past few years, the U.S. dollar effect, which is constantly increasing, has become a norm for Apple Incorporated and other big brands. When the U.S. dollar rises in value against other foreign currencies, it causes a positive gain in the foreign finances after converting to the U.S. dollar.
Significance of Translational Exchange Gain or Loss
Accounting reconciliation: The primary reason for a translational exchange gain or loss is to facilitate accounting. When a company possesses subsidiaries or branches in other countries operating in a foreign currency from its primary location, it will require currency translation when working on the overall books for a fiscal year.
Understanding economic stance: Currency translation is an excellent way for companies to identify every country's economic stance and growth. The better they understand this, the better services and products they can offer to the demanding customers.
Judging and weighing financial growth: Currency translation can weigh a company's financial growth. If a branch is regularly at a loss, it indicates a significant financial decline for the company. It is an excellent analysis for future operating plans.
Translational Exchange vs. Transaction Exchange
These two terms have been confused for years. Although they might seem similar, they are different in uses and duties. There are several differences between these two, but we will be naming three of the closest differences to the topic at hand.
- In gain and loss: They both show gain and losses in any company but in different ways. The translation shows loss from a change in currency, and transaction shows losses and gains from the daily activities.
- In accounting: Translation refers here to a subsidiary requiring the head office to facilitate and reconcile their books in the local operating currency. However, transaction refers to all purchases or sales made, that is including all cash flow activities.
- In foreign affiliation: Simple translation covers the difference in value from currency to currency compulsorily from a subsidiary in another country to the main office. But a transaction can conclude without a need for a foreign subsidiary with a foreign currency.