The key when translating the accounts of foreign subsidiaries for consolidation is to identify the functional currency of the subsidiary, that of the primary economic environment in which it operates. Things to look out for are the currency that mainly influences selling prices and costs, and the country whose competitive forces and regulations are most relevant. If the functional currency is the same as that of the parent, the subsidiary is effectively just an extension of the parent's activities. Changes in exchange rates will have an immediate, item-by-item effect on cash flows rather than simply affecting net investment. Companies generally present financial statements in their functional currency, in which case no translation is necessary and the consolidation proceeds as normal. If a different presentation currency has been adopted, the temporal method of translation should be used, in other words, treat transactions as if they had been conducted by the parent. If the functional currency is different to that of the parent, the subsidiary is effectively a separate company, and is treated as a net investment. Assets and liabilities are translated at closing rates; amounts in the income statement are translated at actual transaction rates (an average is usually used for practical purposes). Send in your own queries to questions@fm-magazine.com