Translation Risk
Short definition
Translation risk is FX differences in equity and profit when foreign-currency statements are converted into the reporting currency. It is not a cash outflow; it does not break cash covenants or dividends unless the contract says so.
Detailed explanation
IAS 21: income statement at average, balance sheet at closing; the gap sits in OCI. A net-investment hedge can damp that volatility.
If a covenant uses “reported equity”, translation moves leverage. Cash covenants (DSCR, cash) are closed to translation. Management profit should not boast translation gains.
Why it matters for the CFO
A group CFO cannot take capital and dividend decisions on an overseas unit’s “growth” in TRY until FX is stripped out.
How to read it
A translation loss is not cash until the unit is sold. The net-investment currency must not be confused with economic exposure.
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Definitions are educational. They are not investment, credit or tax advice.