How do I record the cumulative translation adjustment when consolidating a foreign subsidiary after translating their FS into the reporting currency?

Stephen Helfrich's Profile

cumulative translation adjustmentI recently started working for a company that has a Mexican Mequilladora operation and they have not been correctly implementing FAS 52 as it applies to financial statement translation, so when I translated the Mexican operation's financial statements from Pesos to Dollars and went to record the translation loss to equity, I realized I had a one-sided adjustment that was needed in order to bring the Mexican dollar statements back into balance, which I guess means that the foreign currency translation adjustment must only be cumulative translation adjustments for reporting purposes and that it doesn't get recorded in the accounts; or am I doing something wrong?

Answers

Proformative Advisor
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Hi Stephen,

The cumulative translation adjustment(CTA) for a foreign currency translation adjustmetn arises as the all of the monetary assets (cash, financial assets, etc.) are translated at the current rate, but the non-monetary assets are translated at the historical rate. The CTA account captures the difference between these two exchange rates in US$. Hence, the CTA amount is the balancing amount so you can consolidate and report the Mexican operations in US$.

So what happens to the accumulated CTA balance? The CTA balance accumulated over the years is recorded in the Accumulated Other Comprehensive Income (AOCI), which is a component of equity.

Stephen.....let me know if the above helps. If not please feel free to contact me and I can walk you with a working example that is more specific to your situation as I have worked with a lot of complex foreign exchange related issues.

Please note that you might need to also need to consider some other accounting issues, such as is the net investment in the Mexican operations hedged? If yes, was it hedged using a derivative or non-derivative. Also CTA is only released through the income statement under very specific situations.

Best regards,
Sunil

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Proformative offers 400+ business courses with free CPE, many on accounting and FX.

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I agree with Sunil!

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Sunil:
Thank you for answering my question and for making the offer to contact you with additional questions, I appreciate the assistance. What really has me curious is that as you state "the CTA amount is the balancing amount so you can consolidate and report the Mexican operations in US$" but as I think through the statement translation process the CTA by definition seems to be a one-sided balancing amount and therefore by deduction I think only an amount used for reporting purposes "a balancing amount to make the consolidation process work" and therefore it doesn't get recorded in any GL accounts. Is this thinking correct?

Proformative Advisor
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Hi Stephen - This is the same email I had sent you last night - posting it here as it might be helpful for the others in the group.

The CTA is recorded in consolidated financial statements. It is not a single entry.

The double entry is will be as follows:

Assume you invested an amount of US$100 million in the foreign (Mexican) operation - a separate legal entity. Further assume that your US$ investment has appreciated to US$120 million, only due to the change in the foreign exchange rate. So how do you record the US$20M unrealized gain in your books.

DEBIT: Increase in foreign assets (investment) US$20M
CREDIT: Cumulative Translation Adjustment account (CTA) US$20M

You will record the following journal entry when you liquidate your foreign subsidiary (certain conditions apply - refer to guidance in FIN 37):

DEBIT: Cumulative Translation Adjustment account (CTA) US$20M

CREDIT: Income Statement US$20M

The above is a simple example - but possibly acts more clarity for you.

It is better to work with a practical example. The above is a very simple example, but in real accounting world you might have more follow-up questions.

Please feel free to connect with me if you have any additional questions.

Cheers,
Sunil

P.S.: The foreign exchange guidance is now contained in ASC 830, Foreign Currency Matters (formerly FAS 52 and FIN 37).

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Another reason for CTA balance is typically Income statement accounts, because transactions happen through out the month are converted at the average currency exchange rate for the month while balance sheet accounts are "as of"/balance accounts and currency is calculated at the month end rate. This creates an out of balance situation in the balance sheet similar to what Sunil outlines because two different rates are used. We see about 95% of our customers using average rate for income statement accounts and end of month currency rates for balance sheet about 5% use the same rate for both balance sheet and income statement accounts.

When I used to be responsible for world wide financial consolidations I used to also reconcile the CTA account every month by applying a YTD average rate to the income statement and take the difference to the income statement at the MTD average rate and get it to equal CTA. When I worked on European financial consolidations we did this at the account level and even stored the difference so we had a virtual reconciliation. The point is there is a way to reconcile what is in the CTA account. I will try to dig out (or create) an excel file that shows the reconciliation.

Proformative Advisor
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Hi Ric,

You are correct in stating that the CTA is also created due to the difference in the foreign exchange rates for recording the P/L items and the closing rate (that is the period end rate/ balance sheet rate). The more complex the organization, the more assumptions are made as to what should be the average rate to be used to record these transactions.

For the P/L transactions, companies might either use start of the month rate or the month-end rate.

U.S. GAAP allows you to use the average rate of the month, however, what if there is a material transaction during the month that will skew the foreign exchange rate. So I know companies have a policy to exclude these material transactions in the determination of their average rates. These material transactions are recorded at their actual rate as of the date of the transaction.

By the way, the CTA number can be mathetically be verified and it is NOT A PLUG number, but anyone who has actually tried to verify the CTA number will agree with me that it is a very cumbersome exercise. I look forward to hearing from your experiences on how your companies make assumptions on the average rates and if you ever reconcile the CTA number for reasonableness.

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Ric,
I know this is an old post of yours, but I wanted to ask if you ever found the excel spreadsheet you mention you would look for? I am dealing with this CTA reconciliation issue right now.

Thanks,
Mark

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Hi Ric,

Would you be able to explain a bit more on the CTA of the income statement items with a simple example? I am a bit puzzled on the CTA of the income statement item in that I was under the impression that once revenue and expenses are recognized in the accounting period, they should not fluctuate anymore?

One of the example I can think of is that: Let's say a company recognized GBP 200 revenue in month 1 and it was worth $180 (month 1 avg rate). Even in the following month the rate changes, the revenue should stays at $180 isn't it? Logically I don't know if I am missing any point or something.

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Mark,

Probably too late to help but here is a Journal of Accountancy article on CTA from 2008. It includes an Excel file download.

http://www.journalofaccountancy.com/Issues/2008/Jul/CurrencyTranslationAdjustments.htm

http://media.journalofaccountancy.com/JOA/Issues/2008/07/SorensenExhibits345WEB.xls

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Hi,
can anyone elaborate on what items related to CTA on translation impacts a cash flow and what's the appropriate treatment.
Thanks,
Mass.

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Almas - According to U.S. GAAP (ASC 830-230-45-1) the statement of cash flows should report the changes for items are reported in the currency of the company preparing the cash flow statement, then the CTA is added as an additional line items on the Statement of Cash Flows. I have provided a link below for you to see what the FASB shows. Check out the link, I hope it is helpful.

http://goo.gl/tnBsbD

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Good morning guy's, I am new to this forum.

I actually found it in my search for some science to support the calculation of the various elements of the CTA.

Sunil, I am please to read your comment that the CTA is not a "plug". I know I am coming in late but I am grappling with this right now and would appreciate the spread sheet you referred to in your response.

Regards
Arthur

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Hi Sunil
I am faced with the question of
how to deal with the amount in CTA when the foreign entity is liquidated or the loan is written off.
My understanding is that the amount in CTA will be flushed through the income statement.
Will this be within EBITA?
Thanks for your help?

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I have a similar issue to Andy - we are wanting to strike off a UK subsidiary company that has an intercompany loan balance with another UK company that will be waived prior to strike off. Because a significant CTA has built up on the loan balance in the US consolidated accounts, the waiver of this loan is causing concern in the US for the impact on the EPS of the group. How can the negative impact on the income statement be mitigated? Will there not be an equal and opposite impact in the other UK company the loan is held with?
Thanks in advance for any guidance.

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All,

I have a related inquiry and found this forum's Q&A very helpful; thank you all for contributing.

Last year (2013) our firm (US based C Corp) opened a Ltd in the UK as a wholly owned subsidiary. Both firms use QuickBooks to maintain their accounts in their functional currency and the group consolidation occurs offline in excel; we do not record the consolidating entries into the parent firm's QB file.

As this is the second year I am in the process of translating the UK accounts into our reporting currency and consolidating the accounts, however, I am having trouble figuring out how to account for the AOCI balance as last year's close in our statements this year. Since both trials balances (parent/subsidiary) are particular to the individual firms neither TB has the AOCI balance from 2013 for the group accounts. How do I incorporate last year's ending AOCI into this year statements?

NOTE: Last year I setup a workbook which had the parent's trial balance in two columns (Debits/Credits), then the subsidiaries translated TB (D/C), then eliminating adjustments (D/C), and finally consolidated accounts (D/C). Following such, there had been a CTA on the subsidiary TB to balance the P&L accounts recorded at the 2013 average exchange and the BS accounts at the year-end; also a CTA at the group level following the consolidation due to the loans to subsidiaries and due from subsidiaries and from the P&L eliminations. If I do the same thing this year then we would not be accounting for the previous year's AOCI balance as it is not recorded in the G/L for either company but only calculated offline so not factored into either TBs.

Currently, I have the previous years (PY) CTA in the consolidated statement of stockholders' equity with the beginning year's balance for retained earnings and AOCI (retained earnings before AOCI + AOCI = total retained earnings) but the PY AOCI it is not factored into the current year's BS, so I am concerned that I am missing something and not calculating the total correct AOCI on the BS, or calculating the total AOCI right at all for that matter.

Any help anyone can offer would be much appreciated.

Thanks,