- First, check the rate assignment
- These are the 5 places where mistakes are easily made
- 1. Translating retained earnings at the historical rate
- 2. Not having the yen balance carried over from the previous period
- ③ Converting dividends using the average rate for the period
- ④ Converting transactions with the parent company using the average rate for the period
- ⑤ Forgetting to translate goodwill
- The order in which to troubleshoot when things do not match
- Keep the rates used every period
- Summary
Translating foreign subsidiaries seems simple enough if you only look at the rules.
Assets and liabilities use the closing rate. Revenues and expenses use the average rate for the period. Equity uses the historical rate. It should have been as simple as dividing them into three categories.
Yet, the translated balance sheet doesn’t balance. I know the difference goes into the foreign currency translation adjustment account, but I don’t know if the resulting amount is correct. I can’t even tell if I’m trying to force it to balance or if it just happened to balance.
When this “mismatch” occurs, the cause is usually in a predictable place. Moreover, most of it is not in assets/liabilities or revenues/expenses, but around equity.
※ This article is a general summary based on information published as of September 2026. For individual judgments and processing, please check the latest standards, your company’s accounting policies, and the views of your auditors/tax accountants.
First, check the rate assignment
Let’s accurately reset the basics.
Assets and liabilities … Exchange rate at the closing date
Revenues and expenses … In principle, the average exchange rate for the period. However, using the exchange rate at the closing date is also permitted. Which one to adopt is a matter of accounting policy, so once decided, it should be applied consistently.
Equity … This is where it splits into three.
Equity at the time of stock acquisition by the parent company … Exchange rate at the time of stock acquisition Equity generated after acquisition …
Exchange rate at the time that item occurred Net income for the period … The yen-translated amount on the income statement as is
And the difference resulting from this translation is recorded as foreign currency translation adjustment in the net assets section of the balance sheet.
If you remember it simply as “equity uses the historical rate,” you will get it wrong here. This is because different rates are used for the time of acquisition and after acquisition.
These are the 5 places where mistakes are easily made
1. Translating retained earnings at the historical rate
I think this is the most common one.
Retained earnings consist of the balance at the time of acquisition and the amount accumulated thereafter. The accumulated portion is the yen-translated amount of net income for the period, meaning the amount translated from the income statement is carried over as is. If you translate the entire amount at the historical rate in one go, it naturally won’t balance.
It is safer to think of retained earnings as something to be “accumulated” rather than “translated”. Add the yen balance from the end of the previous period to the net income for the current period after yen translation, and subtract dividends.
2. Not having the yen balance carried over from the previous period
This is the flip side of point 1.
Retained earnings and foreign currency translation adjustments carry over the yen balance from the end of the previous period. If you try to create these from zero every period, they will almost certainly not match.
If you do not have the previous period’s translation table on hand, you will get stuck at this point. Keep the translation table every period. It is simple, but this is the most effective practice.
③ Converting dividends using the average rate for the period
Dividends paid are converted using the exchange rate on the dividend resolution date. It is neither the average rate for the period nor the rate at the time of closing.
The larger the subsidiary, the more this discrepancy will appear directly as a difference.
④ Converting transactions with the parent company using the average rate for the period
This is an easy point to overlook.
For transactions between a foreign subsidiary and the parent company, the yen-converted amount is applied based on the exchange rate used by the parent company for translation. Then, the difference that arises there is treated as foreign exchange gains or losses.
In other words, it does not go to the foreign currency translation adjustment account. It goes to profit or loss. If you mix this into the translation adjustment, it will look like the amounts match, but the content will be incorrect.
⑤ Forgetting to translate goodwill
Goodwill generated from the acquisition of a foreign subsidiary is tracked in that foreign currency. Furthermore, the year-end balance is translated at the exchange rate at the time of closing, and the current period amortization is generally translated at the average rate for the period.
If you leave goodwill fixed in yen, it will continue to deviate every period. Moreover, since the amount is often large, the impact is also significant.
The order in which to troubleshoot when things do not match
When a difference arises, reviewing all accounts at once will waste time. There is an effective order.
First, question the carry-over from the previous period. Check if the beginning balances of retained earnings and foreign currency translation adjustments match the yen balance at the end of the previous period. If this is off, all subsequent work will be wasted.
Next, look one by one at which rate was applied to each equity item. Those from the time of acquisition and those that occurred after acquisition. Are they mixed up?
After that, confirm dividends and parent company transactions. Are you using the resolution date rate? Have you allocated the difference from parent company transactions to foreign exchange gains or losses?
Finally, there are assets/liabilities and revenues/expenses. Since you only apply the closing rate and the average rate for the period here, this is actually where the fewest accidents occur. Yet, when things do not match, people look here first. This is the cause of wasted time.
Keep the rates used every period
Just one more thing.
Record which rate you used, at what point in time, and where you obtained it from. Currency, rate type, application date, and source.
When you open the previous period’s translation table in the next period, if the basis for the rates is not written there, you will get stuck in the same place again. The same applies when you are asked during an audit, “What is the source of this rate?”
It is not enough for the numbers to match; is there a record of why those numbers are what they are. In the end, it always comes back to that.
Summary
When the foreign currency translation adjustment account does not match, look at the equity section before the assets and liabilities. Retained earnings are accumulated, not translated. Dividends are based on the resolution date. Transactions with the parent company are at the parent company’s rate, and the difference is foreign exchange gain or loss. Goodwill is held in foreign currency, and the period-end rate is used at the end of the period.
And, keep the previous period’s translation table and the basis for the rates. Your future self in the next period will thank you.
If you find it troublesome to rebuild this translation table from scratch every period, I have prepared an Excel file that allows you to enter the period-end rate, period-average rate, and shareholder equity rate to convert the BS and PL into yen and calculate the foreign currency translation adjustment as the difference.
Retained earnings are built up by “beginning balance in yen + current net income – dividends,” and there are fields to enter the foreign currency translation adjustment at the end of the previous period, the beginning balance of retained earnings (yen), and the current period’s dividends (yen). You can also add or rename accounts.
However, capital stock and capital surplus are based on the assumption that they are translated at a single shareholder equity rate. Calculations that apply different rates to each equity item, or differences arising from goodwill or transactions with the parent company, are not handled in this Excel file (please check items ①, ④, and ⑤ in the text outside of the Excel file).
→ Foreign Subsidiary Currency Translation Template (¥3,980)
Note that if your consolidation system can automatically manage rates by currency, account classifications, and translation differences, this is not necessary.
― Accounting Template Workshop_Kounotori
