This type of reserve is intended to provide information to investors and does not result in the acceleration of unrealized losses. If the reserves represent unrealized losses that have been charged against income, then adjustments should be made to restore the losses. The taxpayer should be asked to provide documentation to establish when the losses were actually recognized so that offsetting adjustments can be made in subsequent years. Translation practices vary from country to country, but it is common for unrealized translation losses to be reported in net income. If the financial statements do not disclose the amounts of unrealized translation losses, the auditor should request the figures from the taxpayer.
Many countries use current exchange rates instead of historical rates to translate assets.
Although this difference will not usually create a large tax effect, it could be material if significant changes in the exchange rates have occurred. California translation rules are covered in MATM 5320. Therefore, the auditor can not necessarily assume that the foreign financial statements include the income of all unitary affiliates. The financial statements may disclose the non-consolidated subsidiaries. As a standard audit procedure, the auditor should identify which entities have been included, and conduct a search for other majority-owned affiliates.