1. What is currency translation and how it affects a firm's balance sheet if the reporting currency differs from the functional currency?

Currency Translation is used when an organization has operations (e.g. foreign subsidiary, branch, Joint venture etc...) in another country. Financials of foreign operations are translated into consolidated or combined financials of corporate office using the average or current exchange rate or other appropriate methods allowed by IAS at balance sheet date.

Net exchange differences are reported in "Other Comprehensive Income" accumulated in separate component of Equity.

Translation Currency is used at the time of consolidating foreign subsidiary, and if any difference will come you have to recorded to Other Comprehensive Income (as equity transaction)