Hi Ankit,
The translations would be possible to use in scenario 2. However you are correct about reporting. This will be more cumbersome.
XDS would not be an option if the same user has access to multiple legal entities as it is restricting the list per user, not per company. If you want to hide not used dimensions, you should go for a customization. In any way if you set the accounting structures to include only ABC or XYZ per legal entity, a wrong entry of the dimension will not be posted as this is not allowed then.