Exchange rate translation effects

Translation effects are the effects of changes in exchange rates on the consolidated accounts of a company that has businesses that report in different currencies. For example, a British company that has a US operations that makes a profit of $1m two years running is likely to find that the profit in pounds sterling is different in the two years.

The main problem from and investor's point of view is that translation effects can obscure the underlying improvements or deteriorations in performance. Many companies publish CER numbers to separate the effects of currency fluctuations.

Although transaction effects can be stripped out to show the underlying performance of businesses that report in a different currency, this does not mean that they are wholly unimportant. Clearly the company is making more or less money in terms of its reporting currency as a result of fluctuations and this affects its valuation in its reporting currency.

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