Translation Exposure – Consolidation of Foreign Financials

This is a risk for the Accountants, not the Sales team. When Tata Motors (India) prepares its Annual Report, it must include the assets of Jaguar Land Rover (UK). But JLR's assets are in Pounds (£). How to convert them?

1. The Consolidation Problem

• JLR has a factory worth £100 Million.
• Last Year Rate: 1£ = ₹100. (Value: ₹10,000 Cr).
• This Year Rate: 1£ = ₹90. (Value: ₹9,000 Cr).
• Result: Tata Motors shows a Loss of ₹1,000 Cr in its reserves, even though the factory is still the same!

2. Methods of Translation

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3. Impact on Financials

• P&L vs Reserves:
  • Under Current Rate Method, the translation loss goes to a separate line in Balance Sheet called Cumulative Translation Adjustment (CTA). It does not hit Net Profit.
  • This is preferred because it doesn't panic shareholders.

4. Exam Notes: Writing the Answer

Question: "What is Translation Exposure? Describe the Current Rate Method." (10 Marks)

Answering Strategy:

1. Define: "Also called Accounting Exposure... arises from consolidation".
2. Example: Use the Factory example (£100M).
3. Methods: Briefly explain Current Rate Method (Assets @ Closing Rate).
4. Hedging: Mention that companies rarely hedge this because it is a "Paper Loss", not a cash loss.

Summary

• No Cash Flow: Translation exposure does not mean money left the bank.
• Ratio Impact: However, it can ruin Debt/Equity ratios, making the company look risky to lenders.

Quiz Time! 🎯

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