In many groups the foreign currency translation reserve is whatever makes the consolidated balance sheet balance. It is called a reserve, but it behaves like a suspense account, and when the auditor asks for the proof, someone loses a day building it.
Why it ends up as a plug
Translation happens at the trial balance level with one closing rate for the balance sheet and one average rate for profit and loss. Equity accounts, which should stay at historical rates, get translated at closing. Movements in reserves get mixed with movements in retained earnings. The difference lands in the reserve, and nobody can say what it is made of.
Rate types at GL level
When each GL account carries its rate type, translation follows the nature of the account:
- Closing rate for monetary and most non-monetary assets and liabilities.
- Average rate (or transaction rate where material) for income and expenses.
- Historical rate for share capital, pre-acquisition reserves and other equity.
With rates recorded and locked for the period, the movement in the reserve can be explained line by line: opening balance, the effect of retranslating opening net assets, the difference between average and closing rate on the result for the year, and the closing balance, by entity.
What the auditor gets
A schedule they can tick, produced as the consolidation runs. The share attributable to non-controlling interest is split out from the same calculation, so the NCI note and the reserve agree without a separate workbook.