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21.4 Cumulative translation adjustments
Publication date: 31 May 2022
us Financial statement presentation guide
Cumulative translation adjustment (CTA) results from the process of translating financial statements from a foreign entity’s functional currency into the reporting currency of the reporting entity. As discussed in ASC 830-30-45-12, unlike foreign currency transaction gains and losses, which are recorded in net income, CTA should be reported in OCI.
21.4.1 Presentation
When presenting CTA in the financial statements, the title of the line item should be clear so the reader understands that the balance is due to foreign currency translation. As discussed in ASC 830-30-45-19, the FASB has recommended the title “Equity Adjustment from Foreign Currency Translation” for this account.
ASC 830-30-45-18 indicates that an analysis of the changes in the CTA account during the period can be included in any of the following.
- A separate financial statement
- The footnotes
- The statement of changes in stockholders’ equity
In the statement of stockholders’ equity, CTA can be shown individually or aggregated with other items that affect OCI such as unrealized gains and losses on available-for-sale investments. Figure FSP 5-1 in FSP 5.3 presents an example statement of stockholders’ equity with OCI as one line item.
If aggregated as in Figure FSP 5-1 in FSP 5.3, the reporting entity should present a detailed break-out of all components of other comprehensive income in the statement of comprehensive income or the footnotes.
In the statement of stockholders’ equity, CTA may be included as its own line item or aggregated with other items in AOCI, with the detail presented in the statement of comprehensive income or the footnotes.
21.4.1.1 Release of CTA
ASC 830-30 precludes the release of CTA for derecognition events that occur within a foreign entity (i.e., when a reporting entity ceases to have a controlling financial interest in a subsidiary or a group of assets that by itself was not a foreign entity) unless such events represent a complete or substantially complete liquidation of the foreign entity. As discussed in ASC 830-30-40-1, the release of CTA is generally recorded as part of the gain or loss on sale, which is a component of operating income, although presentation in nonoperating income may also be acceptable. See FX 8 for more information on accounting for the release of CTA.
21.4.2 CTA disclosure
ASC 830-30-45-20 details what should be included in the CTA disclosure.
At a minimum, the analysis shall disclose all of the following:
- Beginning and ending amount of cumulative translation adjustments
- The aggregate adjustment for the period resulting from translation adjustments (see paragraph 830-30-45-12) and gains and losses from certain hedges and intra-entity balances (see paragraph 830-20-35-3)
- The amount of income taxes for the period allocated to translation adjustments (see paragraph 830-30-45-21)
- The amounts transferred from cumulative translation adjustments and included in determining net income for the period as a result of the sale or complete or substantially complete liquidation of an investment in a foreign entity (see paragraph 830-30-40-1).
Reporting entities should also consider disclosing a description of the translation principle employed in the financial statements. Figure FSP 21-1 includes a sample disclosure of a translation principle.
Figure FSP 21-1
Sample disclosure—translation principle
Sample disclosure—translation principle
Note X—Significant accounting policies—Foreign currency
Assets and liabilities are translated into the reporting currency using the exchange rates in effect on the consolidated balance sheet dates. Equity accounts are translated at historical rates, except for the change in retained earnings during the year, which is the result of the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rate during the period. The cumulative translation adjustments associated with the net assets of foreign subsidiaries are recorded in accumulated other comprehensive income/loss in the accompanying consolidated statements of stockholders’ equity.
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