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8.4 Impairment calculations that should consider accumulated CTA
Publication date: 31 May 2022
us Foreign currency guide
ASC 830-30-45-13 through 45-15 provide guidance on when a reporting entity should include the CTA account balance attributable to a foreign entity in an impairment assessment. This guidance applies to situations when accumulated CTA will be released to income upon the disposition of an investment in a foreign entity. This guidance does not apply to situations involving an investment within a foreign entity.
Based on the guidance in ASC 830-30-45-13 through ASC 830-30-45-15, a reporting entity that has committed to a plan that will result in the reclassification of a CTA account related to an equity-method investment or a consolidated investment in a foreign entity being reclassified to net income should include the CTA account balance in the carrying amount of the investment when evaluating that investment for impairment. Given that the guidance focuses on planned sale transactions of a foreign entity and the CTA relates to the reporting entity’s outside basis investment in a foreign entity, the impairment assessment must be performed in terms of a reporting entity’s reporting currency. This is in contrast to the accounting performed on the individual assets and liabilities within the foreign entity, which must be performed in terms of the foreign entity’s functional currency.
An entity that has committed to a plan that will cause the cumulative translation adjustment for an equity method investment or a consolidated investment in a foreign entity to be reclassified to earnings shall include the cumulative translation adjustment as part of the carrying amount of the investment when evaluating that investment for impairment. The scope of this guidance includes an investment in a foreign entity that is either consolidated by the reporting entity or accounted for by the reporting entity using the equity method. This guidance does not address either of the following:
- Whether the cumulative translation adjustment shall be included in the carrying amount of the investment when assessing impairment for an investment in a foreign entity when the reporting entity does not plan to dispose of the investment (that is, the investment or related consolidated assets are held for use)
- Planned transactions involving foreign investments that, when consummated, will not cause a reclassification of some amount of the cumulative translation adjustment.
In both cases, paragraph 830-30-40-1 is clear that no basis exists to include the cumulative translation adjustment in an impairment assessment if that assessment does not contemplate a planned sale or liquidation that will cause reclassification of some amount of the cumulative translation adjustment. (If the reclassification will be a partial amount of the cumulative translation adjustment, this guidance contemplates only the cumulative translation adjustment amount subject to reclassification pursuant to paragraphs 830-30-40-2 through 40-4.)
An entity shall include the portion of the cumulative translation adjustment that represents a gain or loss from an effective hedge of the net investment in a foreign operation as part of the carrying amount of the investment when evaluating that investment for impairment.
Example FX 8-10 illustrates the concepts discussed in ASC 830-30-45-13 through ASC 830-30-45-15 when a reporting entity has committed to a disposal plan resulting in the reclassification of the CTA account to net income. It also addresses the long-lived asset impairment analysis.
EXAMPLE FX 8-10
Cumulative translation adjustment impairment assessment
Cumulative translation adjustment impairment assessment
USA Corp is a reporting entity located in the United States that has a reporting currency of the US dollar.
Britannia PLC is a wholly-owned subsidiary of USA Corp located in the United Kingdom. It is a distinct and separable operation of USA Corp and has a functional currency of the British pound sterling (GBP). Britannia PLC represents USA Corp’s only foreign entity.
On December 31, 20X1, USA Corp contracts to sell 90% of its interest in Britannia PLC, for USD 100, on January 15, 20X2. USA Corp has an accumulated CTA balance related to its investment in Britannia PLC. Britannia PLC qualifies as an asset held for sale and, based on the guidance in ASC 360, Britannia PLC should be recorded at the lower of its cost or fair value less costs to sell; therefore, an impairment test needs to be conducted as of December 31, 20X1.
How should USA Corp perform the long-lived asset impairment analysis of Britannia PLC?
Analysis
By selling 90% of its ownership interest in Britannia PLC, USA Corp will lose control and deconsolidate Britannia PLC, which results in 100% of the accumulated CTA balance being reclassified to net income upon sale. Accordingly, USA Corp includes 100% of the CTA balance in the Britannia PLC carrying amount when evaluating it for impairment, which necessitates performing the impairment test in USD instead of GBP.
Britannia PLC’s translated USD balance sheet prior to the impairment test (and before classification of the subsidiary as held for sale) is as follows.
Working capital |
USD 20 |
Retained earnings/APIC |
USD 140 |
|
Long-lived assets |
USD 100 |
CTA |
(USD 20) |
|
Total assets |
USD 120 |
Total liabilities and equity |
USD 120 |
For simplicity, any control premium is ignored and the total fair value of the remaining 10% interest is USD 11. The simplified impairment test is calculated as follows:
Working capital |
USD 20 |
Long-lived assets |
USD 100 |
CTA |
USD 20 |
Total carrying value |
USD 140 |
Sale consideration for 90% interest |
(USD 100) |
Fair value of noncontrolling interest retained |
(USD 11) |
Loss upon classification as held-for-sale |
USD 29 |
The entries to record the loss upon classification as held for sale as of December 31, 20X1 are as follows:
To classify subsidiary as held for sale:
Dr. Assets held for sale |
USD 120 |
|
Cr. Working capital |
USD 20 |
|
Cr. Long-lived assets |
USD 100 |
To record the loss upon classification as held for sale:
Dr. Loss |
USD 29 |
|
Cr. Assets held for sale |
USD 29 |
At January 15, 20X2, to record the sale and deconsolidation:
Dr. Cash |
USD 100 |
|
Dr. Noncontrolling investment |
USD 11 |
|
Cr. CTA |
USD 20 |
|
Cr. Assets held for sale |
USD 91 |
In some situations, when the CTA account balance must be included in the carrying amount of the assets held for sale when evaluating the investment for impairment, the difference between the carrying amount (including CTA) and the fair value less cost to sell of the assets held for sale (i.e., the implied loss on disposal) may exceed the actual carrying amount (excluding CTA) of the assets held for sale. This can happen when the cumulative CTA balance is a significant debit. In these situations, the SEC staff has indicated there are two acceptable interpretations of the literature for accounting for the impairment loss on the held-for-sale date. The first is to recognize an impairment loss in excess of the carrying amount of the assets held for sale (excluding CTA). Under this interpretation, a valuation allowance on the assets held for sale would be established until such time as the CTA account balance can be released (i.e., upon the actual sale occurring). The second interpretation is to limit the impairment loss to the carrying amount of the assets held for sale (excluding CTA). See PPE 5.3 for more information on accounting for long-lived assets to be disposed of by sale.
8.4.1 Abandonment of a foreign entity
If a reporting entity determines that its best course of action is to abandon a foreign entity, the concepts put forth in ASC 830-30-45-13 continue to apply. We have occasionally observed reporting entities take this course of action in countries with severe exchange controls. In these situations, if a reporting entity has committed to a plan to abandon a foreign entity, the cumulative translation account must be included in the carrying amount of the investment when considering impairment. Essentially, the abandonment is similar to a sale of the investment for zero proceeds. In these situations, the amounts recorded as cumulative translation adjustments would not be released until the foreign entity’s operations have ceased, by analogy to ASC 360-10-35-47, “…a long-lived asset to be abandoned is disposed of when it ceases to be used…” There is a considerable judgement involved in determining when a plan to abandon has been established.
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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