A method of currency translation.
This method distinguishes between the "straight spot-rate method" and the "modified spot-rate method":
Straight spot-rate method -All the balance sheet and income statement item amounts in foreign currency are translated into group currency on the closing reporting date using the exchange rate valid on that date.
Since this a straight translation of values from one currency to another, there are no currency translation differences.
Because of the uniform translation using the spot (current) exchange rate, the structures of the balance sheets and income statements of the consolidated individual statements remain unchanged.
Modified spot-rate method -There are several forms of the modified spot-rate method.
The most recommended modified method is where the income statement is viewed as a time period statement and is not translated using the spot rate but rather using the rate valid at the time the transaction took place or, to simplify things, an average rate on a yearly, quarterly or monthly basis.
Another modified method involves the translation of equity values.
Instead of the spot rate, a historical rate can be proposed to prevent, among other things, the translation from affecting the consolidation of investments.
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