You perform reference translations and record translation differences at differential accounting objects to make currency-related effects visible and to ensure the accounting consistency of the translated data (for example, the matching of retained earnings in the balance sheet and annual net income in the income statement).

The system carries out the reference translation in parallel with the specific translation. The reference translation is run globally for all accounting objects (independent of the selections) using a fixed exchange rate type (such as the current rate) and the currency translation key "cumulative".

Currency translation differences result when the selections use different translation keys and exchange rate types. When individual financial statements are translated two types of translation differences can occur: translation differences in the balance sheet and translation differences in the income statement:

• Balance sheet differences occur, for example, if you translated investment and investee equity values using historical exchange rates and the remaining balance sheet items using the current rate.
• Income statement differences occur, for example, if the appropriation of retained earnings is reported on the income statement, and you translate revenue and expense using an average exchange rate and the appropriation of retained earnings values using the current rate.

Because it is not usually possible to identify the FS items from which currency translation differences originate, the system translates all selections into the target currency using a reference exchange rate, in addition to the specific translation. The system uses the reference values to calculate the translation differences. These are then posted to the differential accounting objects. When the translation differences are recorded, the financial statement in the target currency is balanced again.

The system calculates translation differences as follows:

1. Reference translation of all selections with a fixed currency translation key and exchange rate type
2. Translation of the selections you specified (with a fixed currency translation key and exchange rate type per selection)
3. Calculation of the currency translation differences per selection
4. Posting of values in target currency
5. Posting of the currency translation difference to the differential accounting object per selection

Following is an example of a selection showing the reference translation and the calculation of currency translation differences (CTD).

The following conditions are assumed for the translation:

• Specific translation: periodic, with the average exchange rate
• Reference translation: cumulative, with the current exchange rate