what is translation exposure 
translation exposure also known as translation risk is the risk that a company s equities assets liabilities or income will change in value as a result of exchange rate changes this occurs when a firm denominates a portion of its equities assets liabilities or income in a foreign currency it is also known as accounting exposure accountants use various methods to insulate firms from these types of risks such as consolidation techniques for the firm s financial statements and using the most effective cost accounting evaluation procedures in many cases translation exposure is recorded in financial statements as an exchange rate gain or loss understanding translation exposuretranslation exposure is most evident in multinational organizations since a portion of their operations and assets will be based in a foreign currency it can also affect companies that produce goods or services that are sold in foreign markets even if they have no other business dealings within that country in order to properly report the organization s financial situation the assets and liabilities for the whole company need to be adjusted into the home currency since an exchange rate can vary dramatically in a short period of time this unknown or risk creates translation exposure this risk is present whether the change in the exchange rate results in an increase or decrease of an asset s value translation risk can lead to what appears to be a financial gain or loss that is not a result of a change in assets but in the current value of the assets based on exchange rate fluctuations for example should a company be in possession of a facility located in germany worth 1 million and the current dollar to euro exchange rate is 1 1 then the property would be reported as a 1 million asset if the exchange rate changes and the dollar to euro ratio becomes 1 2 the asset would be reported as having a value of 500 000 this would appear as a 500 000 loss on financial statements even though the company is in possession of the exact same asset it had before translation risk can occur at any time a business operates in regions that use different currencies transaction vs translation exposurethere is a distinct difference between transaction and translation exposure transaction exposure involves the risk that when a business transaction is arranged in a foreign currency the value of that currency may change before the transaction is complete 