Translation of Retained Earnings

Level II 2012, Reading 24, CFA Curr. page 276

Translation of Retained Earnings:

Dear CFA colleagues,

struggling with the following: when translating B/S and I/S under either Current or Temporal Method, why would I bother what the translated Ret. Earnings were the previous year when I anyway translate each year from the scratch from the foreign B/S? Looking at the example given on p. 282/283, it shows no linkage to the previous years translated statements, but looking at page 276 / 3.2.3. it suggests we have to account for the previous year’s Ending Ret. Earnings in the Functional/Parent Currency?

i would be grateful to get some guidance.

Many thanks


well , I think you need to keep few things in mind w.r.t retained earnings

  1. Ending RE = Begining RE + Net Income - Dividends

  2. retained earnings is converted at “mixed” exchange rate under current rate method because “Net Income” is translated at average rate and Dividends are translated at Historical rate

  3. Under temporal rate the Net Income is translated at “mixed rate” because of expenses relating to non monetary assets such as Cost of sales , depreciaton are translated at historical rate

In the page number 276/3.2.3 as you said previous year RE is considered , but In the question mentioned by you in page 282 the IS and BS is only given for 1 year and hence they have taken only current year RE .

Please correct me if I have missed anything regarding the question in page 282 CFAI

Many thanks!

I still don’t understand.

A Consolidation (now moving away from the FX translation topic) is a year-end one -off exercise. Following year-end, the parent and the subsidiary perform their accounting exercises independently throughout the year. when it comes to consolidation, there is no “recon” between the last consolidation and the new consolidation.

Drawing an analogy to the FX translation: It seems that we need some sort of “recon” between the yearly Translations, because considering 3.2.3. and also the table on page 277, we would have to maintain a separate record of the R/E-at year end - in translated currency, so we can use it for next year to determine the new R/E (by adding NI + Divs).

However, the problem I have is the following:

Under Current Method, we determine the translated NI, put it in the BS and plug with the Translation G/L. If there was (assuming) a position “R/E”, then we would have taken the previous year translated R/E, used the translated NI, deducted the Divs and got the new R/E (which in turn determines together with the translated NI the final translation G/L).

But under Temporal Method, the B/S is first plugged and subsequently the NI is adjusted, so it “fits the B/S plug”. Assuming here we also have a position “R/E” from previous year, I see the problem that we cannot use the prev. year translated R/E in order to add NI (and deduct Div, but let’s ignore here because not the relevant part of the problem) in order to get the new R/E, because we don’t have Ni yet - we can only determine after translaing the whole B/S including the capital stock and R/E. This seems like a circularity.

Does anyone see the light?

Much appreciated,


Apologies, but anyone any ideas?


We’re talking about two things here:

  1. Currency translation from subs foreign currency B/S to subs parent ccompany presentation currency B/S (say euros)

  2. Consolidation of subsidiary euro (translated) B/S with parent company’s B/S

  3. In this part, the equation Ending R/E= Beginning R/E + NI - Div doesn’t hold, because there is also a foreing currency gain/loss that is taken into account already on the subsidiary’s RE, before consolidation. There is some circularity, because in order to take this into account, you need to figure out how much your R/E should be based on balance-sheet Assets = Liabilities + SE, then you calculate how much your foreign currency gain/loss should be to arrive to the right R/E figure.

Basically the R/E equation becomes Ending R/E=Beginning R/E + NI - Dividends + Foreign translation gain (loss)

  1. Then in the consolidation phase, the initial equation between beginning and ending R/E will hold.

Does this make sense? I hope I was clear.