DRS 25
Active
Currency translation in consolidated financial statements
Währungsumrechnung im Konzernabschluss
1
Scope – Confirming §308a's Own Translation Method
Adopted 8 February 2018, applicable from fiscal years beginning after 31 December 2018
DRS 25 elaborates the translation of a foreign subsidiary's own financial statements into the group's reporting currency for consolidation purposes, confirming the "modified closing rate method" (modifizierte Stichtagskursmethode) under §308a HGB – in conjunction with §310(2) for jointly-managed enterprises translated under proportionate consolidation, established in the earlier HGB poster series – as the governing approach.
2
The Modified Closing Rate Method, Explained
Balance sheet at closing rate, income statement at average rate
The method translates BALANCE SHEET items (assets and liabilities) at the CLOSING rate (the exchange rate prevailing at the balance sheet date), while translating INCOME STATEMENT items at an AVERAGE rate for the period – reflecting that revenue and expenses accrue continuously throughout the year rather than at a single point in time. The resulting translation DIFFERENCE (arising because the balance sheet and income statement use different rates) is recognised directly in EQUITY (the currency translation reserve DRS 22 requires to be shown as its own distinct component), rather than flowing through the Konzern-GuV.
3
Worked Example – Translating a Foreign Subsidiary's Accounts
A US subsidiary's balance sheet translated into euros
A US subsidiary reports total assets of $10,000,000 at year-end, when the closing rate is €0.92/$1. The subsidiary's revenue for the year was $8,000,000, translated at an average rate of €0.90/$1 for the period.
The Konzernbilanz includes the subsidiary's assets at $10,000,000 × €0.92 = €9,200,000 (closing rate), while the Konzern-GuV includes its revenue at $8,000,000 × €0.90 = €7,200,000 (average rate) – the DIFFERENT rates applied to different statement types is precisely what generates the currency translation adjustment DRS 22 requires shown separately within group equity, rather than distorting the group's own reported operating performance.
4
Relationship to IFRS (IAS 21)
A genuinely strong convergence point
DRS 25's modified closing rate method is essentially identical in mechanics to IAS 21's own translation approach for foreign operations – balance sheet at closing rate, income statement at average rate, translation differences to equity – one of the cleanest convergence points in the entire DRS library, reflecting a widely-shared international consensus on foreign currency translation methodology.