Glosario

Translation risk is the possibility that the translation into a company’s assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies will result in foreign exchange gains and losses. Translation risk is also known as accounting risk. Unlike transaction risk, translation risk reflects paper gains and losses determined by the accounting rules that prevail in each country. It is retrospective because it is based on activities that occurred in the past.

Translation account exposure management refers to the methods used when a firm restates, in the currency in which a company presents its financial statements, of all assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies. This process of foreign currency translation results in accounting FX gains and losses. There are three main translation account exposure management methods available. With the current/noncurrent method, all the foreign exchange denominated current assets and liabilities are translated at the current exchange rate, while non-current assets and liabilities are translated at the historical exchange rate. With the monetary/nonmonetary method, monetary items such as cash, accounts receivable and payable, are translated at the current exchange rate, while nonmonetary items (inventory, fixed assets) are translated at the historical exchange rate. Finally, with the current rate method, all balance sheet and income statement items are translated at the current exchange rate. No matter what translation account exposure management method is used, the resulting FX gains and losses are paper only, and rarely affect cash flows.