A foreign currency translation reserve forms part of a company’s equity section on the balance sheet. It represents the cumulative effect of exchange rate movements when a parent company consolidates the financial statements of subsidiaries operating in other countries. These differences arise from fluctuations between the subsidiary's local currency and the parent company's reporting currency as exchange rates vary over time.

For example, if a company has a subsidiary in Europe and prepares its consolidated financial statements in U.S. dollars, it translates the subsidiary's euro transactions and balances to the U.S. dollar. Any resulting differences due to exchange rates are recorded in this reserve. The foreign currency translation reserve helps separate these translation effects from primary operating results, giving a clearer picture of financial performance and currency impact.

This reserve is often adjusted each reporting period as exchange rates change, and adjustments to it do not directly affect net income for the period. Instead, they are generally reported within other comprehensive income. When the foreign subsidiary is sold or liquidated, the balance in the reserve may be transferred to profit or loss.