5.3 Accounting for Exchange Differences Arising Upon Translation
ASC 830-30
45-12 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.
After performing the translation process, an entity records the resulting
translation adjustments within the currency translation adjustment, a separate
component of OCI. The translation adjustment is initially deferred through OCI,
since it is akin to an unrealized gain or loss that would only be realized under
certain circumstances, as discussed in Section 5.4.
If it is assumed that no equity transactions occurred during the year, the
currency translation adjustment would equal the sum of (1) beginning net assets
multiplied by the difference between the end-of-year foreign currency exchange rate
and the beginning-of-year foreign currency exchange rate and (2) net profit/loss for
the year multiplied by the difference between the end-of-year foreign currency
exchange rate and the average foreign currency exchange rate (used to translate the
income statement).
The following is a simplified example illustrating a currency translation
adjustment. If, for example, there were dividends issued, a recognized impairment,
or other one-time transactions, an entity would need to consider the impact of these
transactions in calculating the rollforward of net assets for the period.
Example 5-7
Calculation of Currency Translation Adjustment
Assume the same balance sheet
as in Example 5-5.
Further assume the following facts for Company A:
-
Beginning net assets: €10,000.
-
20X1 net income: €1,000.
-
January 1, 20X1, rate: €1 = $1.10.
-
December 31, 20X1, rate: €1 = $1.30.
-
Weighted-average exchange rate during 20X1: €1 = $1.25.
As of December 31, 20X1, A
reports a CTA of $2,050 in AOCI. The CTA
calculation consists of two components: (1)
beginning net assets multiplied by the difference
between the end-of-year rate and the
beginning-of-year rate [€10,000 × (1.30 – 1.10)]
and (2) 20X1 net income multiplied by the
difference between the end-of-year rate and the
weighted-average exchange rate [€1,000 × (1.30 –
1.25)].
5.3.1 Allocation of CTA to Noncontrolling Interest
ASC 830-30
45-17 Accumulated translation adjustments attributable to noncontrolling interests shall be allocated to and reported as part of the noncontrolling interest in the consolidated reporting entity.
In determining whether a CTA can be attributed to NCI holders, the reporting entity should note that the CTA exists at the consolidated level as a result of differences between the subsidiary’s functional currency and the reporting currency. Accordingly, the CTA is directly related to the parent entity’s reporting currency and may not reflect the reporting currency of the NCI holders.
In light of these factors, in a manner consistent with the guidance in ASC
830-30-45-17 and the attribution guidance in ASC 810-10, a CTA should
nonetheless be attributed to the partially owned subsidiary’s NCI that gives
rise to the adjustment. That is, the objective of NCI is to give investors of
the consolidated entity visibility into how their claim on the net assets of a
partially owned subsidiary changes from period to period.
Accordingly, it would be misleading to allocate to the controlling interest 100
percent of a CTA associated with a foreign,
non-wholly-owned subsidiary that reflects the
impact of changing currency rates on the
subsidiary’s total net assets. Thus, it would be
appropriate to allocate a proportionate amount of
the CTA to NCI. For additional discussion, see
Deloitte’s Roadmap Noncontrolling
Interests.
Example 5-8
Allocation of CTA to NCI
Parent Co is a multinational
financial services company with global operations
whose functional currency is the USD. Parent Co
holds a controlling interest of 60 percent in
Company ABC. The remaining 40 percent is held by a
third party and represents an NCI.
Company ABC, which is located
and operates in Germany, uses the EUR as its
functional currency. Parent has determined that
ABC is a foreign entity. There are no agreements
in place that would govern allocations of ABC’s
income, loss, or OCI between Parent Co and the NCI
in a manner that differs from their proportionate
ownership interests.
At the end of 20X1, the
translation of ABC’s assets, liabilities, and
operations from the EUR to the USD results in a
CTA of $100 million. Of the $100 million, $40
million is allocated to the NCI in Parent Co’s
consolidated financial statements.