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5.6 Cumulative translation adjustment
Publication date: 31 May 2022
us Foreign currency guide
ASC 830-30-45-12 provides guidance on recording the translation adjustment that arises from translating a foreign entity’s financial statements.
If an entity’s functional currency is a foreign currency, translation adjustments result from the process of translating that entity’s financial statements into the reporting currency. Translation adjustments shall not be included in determining net income but shall be reported in other comprehensive income.
The periodic translation adjustment should be recorded, net of related tax effects, in the CTA account, which is a separate component of other comprehensive income. This treatment differs from the foreign exchange gains and losses that are recorded in net income as a result of the measurement and remeasurement processes.
For information on when to release CTA, see FX 8.
5.6.1 CTA attributable to translating a noncontrolling interest
A noncontrolling interest account should be translated as if it were an equity account. That is, it should be translated at the exchange rate in effect when the noncontrolling interest was created. ASC 830-30-45-17 indicates that a proportionate share of the CTA account should be allocated to and reported as part of the noncontrolling interest account in proportion to the noncontrolling interest’s ownership percentage.
5.6.2 CTA attributable to an equity method investee with a functional currency other than the reporting currency
When a reporting entity’s reporting currency is different than the functional currency of an equity method investee, the equity method investment must be translated into the reporting currency.
First, determine the carrying value of the investment in terms of the investee’s functional currency.
Second, the reporting entity’s proportionate share of the investee’s undistributed net income is translated using the average exchange rate during the period.
Third, the ending foreign currency investment balance is translated using the exchange rate at the end of the reporting period. This produces the period-end reporting currency balance.
Lastly, the difference between the period-end reporting currency balance and the sum of the reporting currency investment balance at the beginning of the period and the translated proportionate share of the investee’s undistributed earnings, is recorded in CTA.
We believe that this is an acceptable method of translating an equity method investment into the reporting currency. However, there may be other acceptable methods.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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