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Reporting currency is the currency a company uses in its financial statements. Companies with international ties often do business in currencies outside of their home country's currency. While doing so, the company typically has different currencies than what it uses as its reporting currency.
In addition, some companies have subsidiaries located in different countries that use different currencies. A foreign subsidiary will normally report its financial statements in the currency of the country in which they are located; this is called the subsidiaries reporting currency. For example, if Dell has a subsidiary in Japan, the subsidiary's currency will most likely be the Yen. When companies consolidate, all the financial statements of the parent company's subsidiaries need to become the same of the parent company. In the example, when Dell consolidates its financial statements from its Japanese subsidiary, the reporting currency will become the United States (US) dollar.
For a subsidiary's currency to change to the parent's reporting currency, the parent company must re-measure or translate their financial statements into the currency of the parent. This allows the financial statements to be quickly added together and combined. It is impossible to add the Yen to the US dollar, so translating the currency converts the Yen to the US dollar. After conversion, the subsidiary's currency can be added to the parent’s financial statements.
The process of translation consists of multiplying accounts by either the historical exchange rate, the current exchange rate, or the average exchange rate for the year. In the Dell example, the exchange rates would be the Yen to Dell's reporting currency, the US dollar. Translating stockholder equity uses the historical exchange rate from when the account was created.
Translating assets and liabilities uses the current exchange rate at the time of the translation. Revenues and expenses are translated using the average exchange rate for the year. After completion of the translation process, similar accounts in the financial statements are combined. When the financial statements are released, the currency in which numbers are depicted is the reporting currency for the entire company.
Any net effects of the foreign currency translation enter an account titled foreign currency translation adjustment that is located in the other comprehensive income section of the financial statements. This account is a gain or loss depending on how the foreign currency performed against the reporting currency during the year. Since this gain or loss is reported in other comprehensive income, there is no effect on net income for the year because the gain or loss was solely due to translation.