BPI Americas Inc (synthetic) is the American subsidiary of Bharat Precision Instruments Ltd (synthetic), an Indian machine-tool group presenting in rupees. BPI Americas makes and sells precision spindles in Ohio, buys its castings in Ohio, borrows from an Ohio bank and pays a dividend to Pune once a year. Its functional currency is the dollar, and nobody has ever argued otherwise.
Here's its year, in its own currency. Take a minute over it, because you'll be using these numbers again and again from here on.
| Income statement, FY26 | $ million |
|---|---|
| Revenue | 60.0 |
| Cost of goods sold | (36.0) |
| Gross profit | 24.0 |
| Selling, general and administrative | (9.0) |
| Depreciation | (3.0) |
| Operating profit | 12.0 |
| Interest | (2.0) |
| Profit before tax | 10.0 |
| Tax at 25% | (2.5) |
| Net income | 7.5 |
It paid a dividend of $2.0 million during the year. Prior-year revenue was $54.0 million, so local revenue growth is 11.1111%.
| Balance sheet | Opening $m | Closing $m |
|---|---|---|
| Cash | 5.0 | 8.0 |
| Receivables | 10.0 | 12.0 |
| Inventory | 12.0 | 15.0 |
| Property, plant and equipment, net | 48.0 | 45.0 |
| Total assets | 75.0 | 80.0 |
| Payables | 8.0 | 9.0 |
| Short-term debt | 5.0 | 6.0 |
| Long-term debt | 22.5 | 20.0 |
| Total liabilities | 35.5 | 35.0 |
| Net assets | 39.5 | 45.0 |
| Share capital | 20.0 | 20.0 |
| Retained earnings | 19.5 | 25.0 |
The net assets roll cleanly: 39.5 + 7.5 − 2.0 = 45.0. Check that before you touch any exchange rate, because a subsidiary whose net assets don't roll can't produce a translation adjustment you can trust.
The rupee weakened through the year. Opening ₹82.00 to the dollar, average ₹84.00, closing ₹87.00, and ₹83.00 on the day the dividend was declared and paid. Share capital was subscribed years ago at ₹70.00.
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How does the current rate method work?
The current-rate method has three rules and one plug. Every asset and every liability goes at the closing rate. Every income and expense line goes at the rate on the transaction date, and the average rate is the universal proxy for that. Equity components other than retained earnings stay at their historical rates. Whatever fails to balance is the cumulative translation adjustment, and it goes to other comprehensive income.
Applying that to BPI Americas, in rupee crore, where one crore is ten million rupees:
| Line | $m | Rate | ₹ crore |
|---|---|---|---|
| Revenue | 60.0 | 84.00 | 504.00 |
| Cost of goods sold | (36.0) | 84.00 | (302.40) |
| Gross profit | 24.0 | 201.60 | |
| SG&A | (9.0) | 84.00 | (75.60) |
| Depreciation | (3.0) | 84.00 | (25.20) |
| Operating profit | 12.0 | 100.80 | |
| Interest | (2.0) | 84.00 | (16.80) |
| Profit before tax | 10.0 | 84.00 | |
| Tax | (2.5) | 84.00 | (21.00) |
| Net income | 7.5 | 63.00 | |
| Dividend | (2.0) | 83.00 | (16.60) |
Notice that gross margin survives. Every income-statement line was multiplied by 84.00, so 201.60 ÷ 504.00 = 40.0000%, the same as the local figure. That's the property that makes the current-rate method feel harmless. It only holds within a single statement.
The balance sheet:
| Line | $m | Rate | ₹ crore |
|---|---|---|---|
| Cash | 8.0 | 87.00 | 69.60 |
| Receivables | 12.0 | 87.00 | 104.40 |
| Inventory | 15.0 | 87.00 | 130.50 |
| PP&E, net | 45.0 | 87.00 | 391.50 |
| Total assets | 80.0 | 696.00 | |
| Payables | 9.0 | 87.00 | 78.30 |
| Short-term debt | 6.0 | 87.00 | 52.20 |
| Long-term debt | 20.0 | 87.00 | 174.00 |
| Total liabilities | 35.0 | 304.50 | |
| Net assets | 45.0 | 391.50 | |
| Share capital | 20.0 | 70.00 | 140.00 |
Where does the translation adjustment come from?
Opening net assets, as first translated, were 39.5 × 82.00 = ₹323.90 crore. Add the year's translated profit of ₹63.00 crore and subtract the translated dividend of ₹16.60 crore and you would expect closing net assets of ₹370.30 crore. The balance sheet says ₹391.50 crore. The plug is
₹391.50 − ₹370.30 = ₹21.20 crore, credited to other comprehensive income.
You can't defend a plug you can't explain, so break it down. Three things were translated at three different rates, and every one of them is now on the balance sheet at the closing rate:
- Opening net assets were carried in at ₹82.00 and are now worth ₹87.00: 39.5 × (87.00 − 82.00) = ₹19.75 crore.
- Profit came in at ₹84.00 and is now worth ₹87.00: 7.5 × (87.00 − 84.00) = ₹2.25 crore.
- The dividend left at ₹83.00 and would otherwise have been worth ₹87.00: −2.0 × (87.00 − 83.00) = −₹0.80 crore.
19.75 + 2.25 − 0.80 = ₹21.20 crore, agreeing with the plug to the paisa. Run this decomposition every time. The plug tells you the number. The decomposition tells you which movement produced it, and if the two don't match, an item was translated at the wrong rate.
The equity block now closes. Bharat Precision carried forward retained earnings of ₹158.40 crore and a foreign currency translation reserve of ₹25.50 crore from earlier years, which with share capital of ₹140.00 crore gives the opening ₹323.90 crore. Closing retained earnings are 158.40 + 63.00 − 16.60 = ₹204.80 crore. The reserve becomes 25.50 + 21.20 = ₹46.70 crore. Total: 140.00 + 204.80 + 46.70 = ₹391.50 crore.
What happens to the translation reserve on disposal?
That reserve is the interesting number. It has grown for years and never touched profit. On the day the subsidiary is sold it all arrives in profit at once, because both rulebooks recycle the accumulated translation reserve to profit or loss on disposal of the operation. A group that has run a depreciating-currency subsidiary for two decades carries a large negative reserve that nobody has priced. If you haven't read the equity note, the disposal gain will look inexplicable.