## Translation of FS of a Foreign Branch / Operation
When a company has a foreign branch or subsidiary, it must translate (convert) that entity's financial statements into the reporting currency before consolidation.
The translation method depends on whether the foreign operation is Integral or Non-Integral.
---
### Classification
| Feature | Integral Foreign Operation (IFO) | Non-Integral Foreign Operation (NIFO) |
|---|---|---|
| Independence | Extension of head office operations | Operates independently |
| Transactions with HO | High proportion | Very low proportion |
| Financing | From HO | From own operations or local borrowings |
| Labour / Materials | Paid in HO currency | Paid in local currency |
| Sales | In HO currency | In local currency |
| Sales price set by | HO / global competition | Local competition |
| Local sales market | Weak/non-existent | Active local market |
---
### Translation Methods
_(Detailed translation entries are covered in Branch Accounts chapter)_
- Integral operation → Translate as if transactions were done by head office directly
- Non-Integral operation → Translate using closing rate for Balance Sheet; average/actual rate for P&L; differences go to Foreign Currency Translation Reserve (FCTR)
---
### Change in Classification
| Change | Treatment of Exchange Difference |
|---|---|
| Integral → Non-Integral | Exchange differences from date of reclassification onwards → transferred to FCTR |
| Non-Integral → Integral | Old exchange differences remain in FCTR (not recycled to P&L) |