When you consolidate a group whose subsidiaries report in different currencies, the year-to-date profit on the consolidated P&L will usually differ slightly from the current year earnings shown on the consolidated balance sheet. This difference is normal and expected — it is not a data, mapping or rounding error. This article explains why it happens, what the accounting standards say, and how to align the two figures in ScaleXP when you need to.
Why the two figures differ
The difference is caused by foreign currency translation. The P&L and the balance sheet are translated into the group reporting currency using different exchange rates, so the same underlying profit converts to two slightly different numbers.
Each account on the P&L is translated using monthly average exchange rates — every month is translated separately and the months are then added together to give the year-to-date result. The balance sheet, by contrast, is translated using the closing exchange rate on the last day of the reporting period. Because average rates and closing rates are rarely identical, the translated profit on the P&L does not exactly match the current year earnings line on the balance sheet.
The gap between the two is a foreign currency translation adjustment that belongs in equity. Both IFRS and UK GAAP expect this difference, and recognize it through other comprehensive income as a separate component of equity, often called the cumulative translation adjustment (CTA).
The table below summarizes the rates typically applied to each part of the consolidation:
Area |
Typical translation approach |
P&L revenue, costs and profit |
Transaction-date rate, usually approximated using monthly average rates |
Balance sheet assets and liabilities |
Closing rate at the balance sheet date (default), or the month-by-month P&L rates (which requires an associated equity adjustment) |
Equity and retained earnings movements |
The resulting difference is recognized in equity as other comprehensive income |
A worked example
Imagine a subsidiary that reports in euros and a group that reports in US dollars. The subsidiary earns €100,000 of profit evenly across the year.
The P&L is translated at the average rate for the year of 1.15, giving $115,000 of year-to-date profit. The balance sheet current year earnings line is translated at the closing rate on the final day of the period of 1.20, giving $120,000.
The two figures differ by $5,000. That $5,000 is the foreign currency translation adjustment. It is not missing profit and it is not an error — it is the effect of converting the same euro result at two different exchange rates, and it sits in equity as the CTA.
How ScaleXP handles this
By default, ScaleXP keeps this difference in place, using average rates for the P&L and the closing rate for the balance sheet. For management accounts this is the standard, expected treatment and needs no further action.
For year-end reporting, or any situation where you need formal alignment to accounting standards, ScaleXP lets you enter a specific rate for the balance sheet current year earnings line. This makes the balance sheet figure match the consolidated P&L year-to-date result, and ScaleXP automatically calculates the associated equity adjustment so that total equity stays reconciled and the FX difference is captured in the correct equity reserve.
Relevant accounting guidance
IFRS, US GAAP and UK GAAP all take the same approach to consolidating companies that report in different currencies:
- assets and liabilities are translated at the closing rate;
- income and expenses are translated at the rates on the transaction dates, with average rates allowed — and commonly used — as an approximation;
- exchange differences are recognized in other comprehensive income (OCI) and reported as a component of equity.
The relevant standards are:
- IFRS: IAS 21, The Effects of Changes in Foreign Exchange Rates
- US GAAP: ASC 830, Foreign Currency Matters
- UK GAAP: FRS 102, Section 30, Foreign Currency Translation
How to adjust the retained earnings exchange rate in ScaleXP
By default, ScaleXP keeps things simple by using the same exchange rate for all balance sheet accounts. When you want to separate the OCI element of year-to-date earnings in line with accounting standards, you can adjust the retained earnings rate yourself.
Adjust the exchange rate for retained earnings for each month you want to view this way. ScaleXP automatically calculates the balancing figure and adds it to equity as an adjustment — this is your cumulative translation adjustment, recognized through OCI.
For step-by-step instructions, see How to adjust foreign exchange rates: consolidated balance sheets.
Related articles
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How to adjust foreign exchange rates: consolidated balance sheets
How to set up consolidated reporting in ScaleXP
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