Foreign currency transaction gains and losses related to intercompany loans or advances that have been asserted by management to be of a long-term-investment nature should be accounted for as translation adjustments.

Therefore, when management asserts that an intercompany balance will not be settled in the foreseeable future, the gains and losses from measuring the intercompany balance should be removed from the income statement and recorded in the CTA account upon consolidation (i.e., the gains and losses are recorded in the same manner as translation adjustments).

This accounting is appropriate only when management expects and intends that the loan will not be repaid in the foreseeable future, and only when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting entity’s financial statements.

No. We believe the phrase “not planned or anticipated in the foreseeable future” does not include a loan which is intended to be repaid, but for which the timing is uncertain. Rather, the guidance is intended to apply only to loans for which there is no current intention to repay.

It depends. A long term intercompany note with a specified maturity would not be considered of a long-term-investment nature under ASC 830, unless management’s expressed intent is to renew the note at maturity. Absent management’s intention to renew, the note’s maturity date, regardless of the duration, implies that its settlement is planned in the foreseeable future.

Yes, an intercompany loan that requires periodic payments of interest may be considered long term in nature if settlement of the principal balance is not anticipated or planned in the foreseeable future. Remeasurement gains and losses associated with the corresponding interest receivable or payable would not be considered to be of a long-term-investment nature, and therefore the impact of changes in the exchange rate should be recorded in the income statement as foreign currency transaction gains and losses. These gains and losses survive consolidation.

ASC 830 requires that the accumulated translation adjustment attributable to a foreign entity that is sold or substantially liquidated be removed from equity and included in determining the gain or loss on sale or liquidation. An intercompany loan, while considered a long-term-investment, is essentially a capital contribution, and repayment of the loan is essentially a return of capital or a dividend. Such repayment transactions do not cause a release of CTA, unless they effectively constitute a substantial liquidation of the foreign entity. The characterization of an intercompany loan as being of a long-term-investment nature must be periodically reassessed.

Management’s expectations and intent may change due to a change in circumstances; however, such change in circumstances should be carefully evaluated to determine whether management’s previous assertions were appropriate. Once repayment of an intercompany loan is contemplated in the foreseeable future, the intercompany loan is no longer viewed as, effectively, a capital contribution. Any exchange gains or losses included in CTA (applicable to the period for which settlement was not planned or anticipated) should remain in CTA. Foreign exchange transaction gains and losses in subsequent periods should be recorded in the income statement. A reporting entity should be cognizant that there is an expectation that there is a period of time between the determination that a loan will be repaid, and the actual date when the loan is repaid.

The facts and circumstances at the time of settlement should be carefully evaluated and compared to those that existed or could have been known at inception. If a reporting entity could have anticipated such a circumstance occurring, it may not have been appropriate to initially classify the balance as being of a long-term-investment nature. Since classification under ASC 830 is primarily based on management’s intent about settlement in the foreseeable future, the following factors may support a settlement in subsequent periods:

Transaction gains and losses on intercompany balances of a long-term-investment nature should be recognized in net income in a foreign entity’s separate financial statements.

No. The FASB staff has indicated that it did not intend for gains and losses on intercompany trading account balances to be deferred. Rather, each individual transaction should be viewed as a separate unit of account. Under such a perspective, gains and losses on active accounts as described above would not qualify for deferral treatment because settlement of each individual transaction is contemplated.

Management’s stated intentions used to determine the appropriate accounting for US GAAP purposes should be consistent with those used to determine the appropriate tax treatment. For example, it would be inconsistent for management to assert that an intercompany loan will be continually renewed at maturity for US GAAP purposes (i.e., repayment is not planned or anticipated), yet issue a written representation letter to the tax authorities stating that the intercompany loan will be repaid at maturity.

Example FX 7-3 illustrates the accounting for an intercompany foreign currency denominated loan of a long-term-investment nature.

EXAMPLE FX 7-3
Intercompany loan of a long-term-investment nature

USA Corp is a US registrant that uses the US dollar (USD) as its reporting currency.

Mexico SA is a wholly-owned subsidiary of USA Corp located in Tijuana, Mexico. It is a distinct and separable operation of USA Corp and has a functional currency of the Mexican peso (MXN); therefore, it meets the definition of a foreign entity of USA Corp.

On January 15, 20X1, USA Corp loans USD 50,000 to Mexico SA. USA Corp management has asserted that settlement of the intercompany loan is not planned or anticipated in the foreseeable future. Consequently, management has determined that the intercompany payable is of a long-term-investment nature.

The relevant exchange rates are shown in the following table.

How should USA Corp account for the long term intercompany loan in its consolidated financial statements for the quarter ended March 31, 20X1?

Because the loan is denominated in a currency other than Mexico SA’s functional currency, it is a foreign currency transaction. Accordingly, Mexico SA should measure and record the loan in its functional currency, MXN, using the exchange rate on the date the loan is funded.

USD 50,000 × (10/ 1) = MXN 500,000

The loan is denominated in USA Corp’s functional currency; therefore, USA Corp will record the loan and the payment of cash for USD 50,000.

The USD loan is a monetary liability for Mexico SA. To prepare its March 31, 20X1 financial statements, Mexico SA will first measure the foreign currency loan using the exchange rate on that date.

USD 50,000 × (13/ 1) = MXN 650,000

Mexico SA records an entry to recognize the difference between the MXN balance on March 31, 20X1 and the MXN balance on January 15, 20X1, the date the loan was recognized. The offsetting entry is recorded in the income statement as a foreign currency transaction loss.

USA Corp will need to translate the financial statements of Mexico SA before including them in its consolidated financial statements. The following table shows the effect of the USD denominated receivable on USA Corp’s consolidated USD financial statements for the period ended March 31, 20X1.

The CTA balance results from USA Corp’s exposure to MXN and represents the impact of the change in foreign currency (between January 15 and March 31, 20X1) on the beginning balance plus the impact of the difference between the average exchange rate for the period and the exchange rate at March 31, on the transaction loss. It is calculated as follows:

[(MXN 500,000/10) – (MXN 500,000/13)] + [(MXN 150,000/11) – (MXN 150,000/13]