Foreign currency translation

What it means

Foreign currency translation is the conversion of an amount in a foreign currency into euros in the accounts. It happens when a transaction is booked, when it is paid and at the reporting date. Usually the European Central Bank reference rate is used, or the rate at which the bank actually bought or sold the currency.

The Accounting Act provides that ordinary transactions are translated at the ECB reference rate published on the day before the transaction date. When foreign currency is bought or sold for euros, the rate at which it was actually bought or sold is used.

Because rates move between issuing an invoice and paying it, FX differences arise. They are booked as financial income or expense and affect profit even though the commercial value of the invoice has not changed.

How it works in practice

An invoice from a German supplier in euros needs no translation, but one in US dollars or Czech crowns does. The accountant books it at the rate for the transaction date, applies the rate required by the rules when it is paid from a foreign currency account, and books the difference as an FX difference.

At the reporting date, unpaid receivables, payables and balances on foreign currency accounts are retranslated at the ECB rate for that day. The differences go to profit or loss, so the company reports FX gains or losses even on unpaid invoices.

VAT has its own translation rules, which need not match the accounting ones exactly. The tax base is translated at the rate set by the VAT Act, so for foreign currency invoices it helps if the software can handle both rates and keep the results consistent.

What to watch out for

Companies with large volumes in foreign currencies carry currency risk that can significantly affect profit. Translation only displays it; reducing it requires hedging, natural matching of income and costs in the same currency or changes to contracts.

Using the wrong rate, such as the payment date rate instead of the transaction date rate, distorts costs and income. The tax authority may challenge such errors in an audit, especially if they repeatedly reduce the tax base.