Translational Exposure

Posted in Finance, Accounting and Economics Terms, Total Reads: 680
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Definition: Translational Exposure

Translational risk or exposure is defined as the risk or exposure that a firm is exposed to wherein the value of the company's assets, liabilities, equity and revenue would change as a result of fluctuations or movements in the foreign exchange rate. This is bound to occur only when a firm denominates a certain portion of its assets, liabilities, equity or income in terms of one or more other foreign currency/ currencies. That is, say, when the firm needs to convert the results of foreign operations from the local currency to the home currency.


The translational loss is a paper exchange loss and not a real loss, as the actual underlying value of the entities measured remains the same. Thus, the changes that occur are only in terms of financial reporting and consolidation. Also, the translational gains or losses are short term and retrospective in nature.

Various cost accounting evaluation procedures are used by accountants to mitigate the translational exposure fluctuations (the risk or gain/ loss being only of paper/ accounting in nature). In many cases, this exposure is recorded in the balance sheets/ income statements as an exchange rate gain/ loss.

 

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