5.4 Release of CTA
ASC 830-30 includes guidance on the circumstances under which a CTA
may be released, such as scenarios involving (1) full and substantially complete
liquidations and (2) partial sales and liquidations. To apply the guidance in ASC
830-30, an entity needs to identify whether the sale or liquidation is related to an
investment in a foreign entity or an investment within a foreign
entity as well as whether the investment is consolidated or accounted for under the
equity method. An investment in a foreign entity is typically reflected via a
direct ownership interest in the foreign entity. By contrast, an investment
within a foreign entity reflects the net assets or ownership of the
foreign entity and is indirect.
Example 5-9
Distinguishing Between an Investment in and an Investment
Within a Foreign Entity
Company A owns 80 percent of the equity
interest in Company B, a foreign entity that owns various
real estate properties.
Company A has an 80 percent investment
in B, whose real estate properties represent an
investment within B. Upon a disposition of B’s real
estate properties, while there would be a change in the
investment within B from A’s perspective, the
investment in B (i.e., the 80 percent ownership
interest) would remain unchanged. Conversely, if A sold its
direct equity interest in B, there would be a change to the
investment in B.
The table below provides an overview of these distinctions and the
related impact on the treatment of a CTA. The transactions will be discussed further
below in the sections indicated in the table.
Transaction | Change | Treatment
of CTA | Section |
|---|---|---|---|
When the foreign
entity is consolidated or combined: | |||
Sale of
an investment in a foreign
entity | Loss of
control. | CTA is
released. | |
Sale of
part of an investment in a foreign
entity | Ownership
is reduced but control is maintained. | CTA is
not released. Allocation of CTA to NCI may change and is accounted for in accordance with ASC
810-10-45-23 and 45-24. | |
Sale of
an investment within a foreign
entity | Reduction
of the foreign entity’s net assets. | CTA is
not released unless the sale results in a complete or
substantially complete liquidation. | |
When the foreign
entity is accounted for as an equity method
investment: | |||
Additional investment in a foreign entity, which
qualifies as a step acquisition (see ASC 805-10-25-9 and
25-10). | Control
is obtained. | CTA is
released. | |
Sale of
an equity method investment in a
foreign entity | Ownership
is reduced and significant influence is
maintained. | CTA is
released on a pro rata basis. | |
Sale of
an investment, or part of an investment, in a foreign entity | Ownership
is reduced and significant influence is lost. | For those equity instruments that must be measured at fair value, the release of
CTA would flow through earnings. | |
Sale of an investment within a foreign entity | Reduction
of the foreign entity’s net assets. | CTA is
not released unless the sale results in a complete or
substantially complete liquidation. | |
5.4.1 Sales and Liquidations of Investments in a Foreign Entity
ASC
830-30
40-1 Upon sale or upon complete
or substantially complete liquidation of an investment
in a foreign entity, the amount attributable to that
entity and accumulated in the translation adjustment
component of equity shall be both:
- Removed from the separate component of equity
- Reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs.
40-1A A sale shall include:
- The loss of a controlling financial interest in an investment in a foreign entity resulting from circumstances contemplated by Subtopic 810-10 (see paragraph 810-10-55-4A for related implementation guidance)
- An acquirer obtaining control of an acquiree in which it held an equity interest, accounted for as an equity method investment that is a foreign entity, immediately before the acquisition date in a business combination achieved in stages (see paragraphs 805-10-25-9 through 25-10).
5.4.1.1 Loss of Control of an Investment in a Foreign Entity
A loss of control of an investment in a foreign entity would
trigger a deconsolidation in accordance with ASC 810-10. In a manner
consistent with ASC 830-30-40-1A, such a deconsolidation would be treated as
a sale of the investment in the foreign entity and a release of the CTA
would be required irrespective of whether an NCI is retained.
Example 5-10
Sale of a Wholly Owned Investment in a Foreign
Entity in Which the Parent Ceases to Have a
Controlling Financial Interest
Company Z, a parent company, has
held a 100 percent ownership interest in Company X
for a number of years. Company X is a foreign
entity, and a $4 million CTA related to X has been
recognized in OCI and accumulated.
On December 31, 20X1, Z sells a 60
percent ownership interest in X. As a result of the
sale, Z’s ownership interest is reduced to 40
percent and Z ceases to have a controlling financial
interest in X. Company Z accounts for its remaining
40 percent ownership interest in X under the equity
method, since it has retained significant influence
over X.
When an entity loses control of a
subsidiary that includes an investment in a foreign
entity, such a loss of control is accounted for as a
“sale” under ASC 830-30 irrespective of whether the
entity retains an interest in the former subsidiary.
Consequently, the CTA related to X, previously
recognized in OCI and accumulated in equity, is
fully reclassified from equity to gain or loss at
the time of deconsolidation.
Example 5-11
Sale of a Partially Owned Investment in a Foreign
Entity in Which the Parent Ceases to Have a
Controlling Financial Interest
Company Z, a parent company, has
held an 80 percent ownership interest in Company X
for a number of years. Company X is a foreign
entity, and a $4 million CTA related to X has been
recognized in OCI. Of this balance, $3.2 million was
attributed to the controlling interest and $0.8
million was attributed to the NCI holders.
On December 31, 20X1, Z sells a 40
percent ownership interest in X. As a result of the
sale, Z’s ownership interest is reduced to 40
percent and Z ceases to have a controlling financial
interest in X. Company Z accounts for its remaining
40 percent ownership interest in X under the equity
method, since it has retained significant influence
over X.
As illustrated in Example
5-10, regardless of Z’s continuing
influence over X, all of the CTA associated with X
must be released from AOCI. Therefore, in accordance
with ASC 830-30-40-1A, the CTA associated with Z’s
ownership of X ($3.2 million) is reclassified from
equity to gain or loss. The CTA attributable to the
NCI holders ($0.8 million) would already have been
reflected as part of the NCI in the consolidated
financial statements and would therefore be included
in the gain or loss calculation on disposal of X (in
accordance with ASC 810-10-40).
5.4.1.2 Gain of Control of an Investment in a Foreign Entity
Under ASC 830-30-40-1A(b), a CTA is released when an
acquirer obtains “control of an acquiree in which it held an equity
interest, accounted for as an equity method investment that is a foreign
entity, immediately before the acquisition date in a business combination
achieved in stages.” ASC 805-10-25-10 also discusses this concept, stating
in part:
If the business combination achieved in stages
relates to a previously held equity method investment that is a
foreign entity, the amount of accumulated other comprehensive income
that is reclassified and included in the calculation of gain or loss
shall include any foreign currency translation adjustment related to
that previously held investment. For guidance on derecognizing
foreign currency translation adjustments recorded in accumulated
other comprehensive income, see Section 830-30-40.
Therefore, a business combination achieved in stages is
viewed as the equivalent of a disposition of the equity method investment in
a foreign entity and the acquisition of a controlling financial interest in
a foreign entity. By contrast, a release of an existing CTA would not be
permitted for acquisitions that increase the ownership interest of (1) an
already consolidated foreign entity or (2) a foreign-entity equity method
investee in the absence of a change of control.
Example 5-12
Obtaining a Controlling Financial Interest in a
Foreign Entity Through a Step Acquisition
Company A, a U.S. company, holds a
45 percent ownership interest in B, a foreign
entity, which it accounts for under the equity
method. After its initial investment, A acquires an
additional 40 percent ownership interest — and
therefore obtains a controlling financial interest —
in B. As of the acquisition date, A’s CTA recorded
in AOCI for its investment in B is $100,000.
Upon obtaining a controlling
financial interest in B, A should release 100
percent of the CTA balance into earnings. The
accounting for obtaining the controlling interest is
based on a view that the transaction reflects two
separate and distinct events: (1) the disposition of
A’s equity method investment and (2) A’s acquisition
of a controlling financial interest. When a
reporting entity disposes of a foreign entity, it
must reclassify any related CTA in earnings, as
contemplated in ASC 830-30. In this example, A
“disposed of” its equity method investment in B; all
of the related CTA therefore would be released into
earnings.
5.4.1.3 Partial Sale of an Investment in a Foreign Entity
ASC 830-30
40-2 If a reporting entity
sells part of its ownership interest in an equity
method investment that is a foreign entity, a pro
rata portion of the accumulated translation
adjustment component of equity attributable to that
equity method investment shall be recognized in
measuring the gain or loss on the sale. If the sale
of part of an equity method investment that is a
foreign entity results in the loss of significant
influence, see paragraphs 323-10-35-37 through 35-39
for guidance on how to account for the pro rata
portion of the accumulated translation adjustment
component of equity attributable to the remaining
investment. For guidance if an entity sells a
noncontrolling interest in a consolidated foreign
entity, but still retains a controlling financial
interest in the foreign entity, see paragraph
810-10-45-23 through 45-24.
For the sale of an NCI in a foreign entity that is combined
or consolidated and for which the parent does not lose control as a result
of the partial sale, the change in ownership interest should be accounted
for in accordance with ASC 810-10-45-23 and 45-24. Accordingly, an
acquisition or sale of any NCI should be accounted for as an equity
transaction, with any difference in price paid, and the carrying amount of
the NCI reflected, directly in equity and not in net income as a gain or
loss. (For more information, see Deloitte’s Roadmap Noncontrolling
Interests.) Further, the CTA should be reallocated
between controlling interest and NCI to reflect the revised ownership
interest.
Example 5-13
Sale of an Equity Method Investment in a Foreign
Entity in Which Significant Influence Is
Retained
Company I has held a 40 percent
interest in an equity method investee, Company B,
for a number of years. Company B is a foreign
entity, and a $1 million CTA related to B has been
recognized in OCI.
Company I disposes of 25 percent of
its interest in B but retains significant influence
through its remaining holding. Under ASC
830-30-40-2, when an investor disposes of part of
its interest in an equity method investee that is a
foreign entity but retains significant influence
over that investee, the investor must reclassify to
earnings the pro rata share of the CTA deferred in
AOCI.
Consequently, in this example, 25
percent of the CTA (i.e., $250,000) must be
reclassified from CTA to earnings on the transaction
date.
Example 5-14
Partial Sale of an Investment in a Foreign Entity
in Which the Parent Retains a Controlling
Financial Interest
Company P, a parent company, has
held a 100 percent interest in a subsidiary, Company
S, for a number of years. Company S is a foreign
entity, and a $2.5 million CTA related to S has been
recognized in OCI. Company P sells 20 percent of its
ownership interest in S but retains control over S.
Under ASC 810-10-45-24, when a
parent disposes of part of its interest in a
subsidiary that is a foreign entity but retains
control of that subsidiary, “the carrying amount of
[the CTA must] be adjusted to reflect the change in
ownership interest . . . through a corresponding
charge or credit to equity attributable to the
parent”; in such cases, the CTA would not be
released into earnings.
Consequently, in this example, 20
percent of the CTA (i.e., $500,000) is transferred
within equity from CTA to the NCI on the transaction
date. No amounts are reclassified to earnings.
Example 5-15
Impact of a Change in Functional Currency on
Release of CTA
Parent Co is a U.S. entity that has
investments in various foreign entities. Each
foreign entity has determined that its local
currency is its appropriate functional currency,
while Parent Co’s functional currency is the USD.
If, during the year, the functional
currency of one of the foreign subsidiaries changes,
a release of the CTA into earnings would not be
triggered. A change in functional currency does not
trigger a release of the CTA into earnings
regardless of whether the change is to the reporting
currency or another foreign currency. As noted in
ASC 830-30-40-1, only the sale, or complete or
substantially complete liquidation, of a foreign
subsidiary would trigger a release of the portion of
the CTA attributable to that subsidiary into
earnings (as part of the gain or loss on sale or
liquidation of the investment in the subsidiary).
See Section 2.4 for
additional discussion of the accounting for a change
in functional currency.
5.4.1.3.1 Treatment of CTA Associated With Retained Interest When Significant Influence Is Lost
For partial sales of an investment in a foreign entity
that is accounted for as an equity method investment, when an investor
retains an interest in, but loses significant influence over, the
foreign entity, the CTA should be released on a pro rata basis into
earnings and the CTA remaining after this release should be recorded as
an adjustment to the carrying value of the remaining interest. If the
investor loses significant influence, the equity method investment will
generally be measured at cost and subsequently at fair value, with
changes in fair value recognized in net income. An exception to this
requirement is that ASC 321 permits entities to measure certain
qualifying equity securities without a readily determinable fair value
at cost minus impairment, adjusted for changes in qualifying observable
prices. Accordingly, upon a loss of significant influence, the impact on
net income for instruments that must be subsequently measured at fair
value would effectively be the same as it would be if the entire amount
of CTA was recognized through earnings.
Example 5-16
Sale of an Equity Method Investment in a
Foreign Entity (Loss of Significant
Influence)
Company K has held a 40 percent
interest in an equity method investee, Company A,
a foreign entity, for a number of years. On
September 15, 20X9, the equity method investment
in A has a book value of $1 million, and a
$100,000 CTA related to A has been recognized in
OCI.
On September 15, 20X9, K
disposes of 75 percent of its interest in A for
$900,000. Company K has determined that it no
longer has significant influence over A and will
account for it under ASC 321 as an equity
instrument measured at fair value.
On the date of the sale, $75,000
($100,000 × 75%) will be released through earnings
and the remaining CTA of $25,000 should be
recorded as an adjustment to the carrying value of
the remaining interest, resulting in a carrying
value of $275,000 [($1,000,000 × 25%) + $25,000].
The fair value of the retained
investment is $300,000; therefore, K would
subsequently recognize a $25,000 gain ($300,000 –
$275,000) in earnings in accordance with ASC 321.
5.4.2 Sales and Liquidations of Investments Within Foreign Entities
ASC
830-30
40-3 Although partial
liquidations by a parent of net assets held within a
foreign entity may be considered similar to a sale of
part of an ownership interest in the foreign entity if
the liquidation proceeds are distributed to the parent,
extending pro rata recognition (release of the
cumulative translation adjustment into net income) to
such partial liquidations would require that their
substance be distinguished from ordinary dividends. Such
a distinction is neither possible nor desirable. For
those partial liquidations, no cumulative translation
adjustment is released into net income until the
criteria in paragraph 830-30-40-1 are met.
When a parent liquidates net assets within a foreign entity, the
appropriate accounting depends on whether the derecognition results in a
complete or substantially complete liquidation of the foreign entity. To qualify
as a substantially complete liquidation, generally 90 percent or more of the net
assets of a foreign entity should be liquidated. Further, the term “liquidate”
implies that proceeds received have been transferred out of the liquidated
foreign entity. However, there may be instances in which the proceeds have not
been transferred out (e.g., they are legally retained by the subsidiary as cash
in the bank account of the liquidated subsidiary). In those circumstances, the
subsidiary could be deemed to become an extension of the parent and a
substantially complete liquidation may still occur. Furthermore, if an entity’s
sale of substantially all the net assets of one foreign entity is followed by a
reinvestment in the same type of business and in the same location, the
transaction would not qualify as a liquidation.
If the transaction results in a complete or substantially
complete liquidation of a foreign entity, 100 percent of the CTA should be
released into earnings even if certain assets are retained. If the transaction
does not result in a complete or substantially complete liquidation of a foreign
entity, no adjustments to the CTA should be recorded. The examples below
illustrate the application of this guidance.
Example 5-17
Sale of a Second-Tier Subsidiary
Company A, a U.S. entity, has a wholly
owned subsidiary, B, that is located in the United
Kingdom. In turn, B has a wholly owned subsidiary, C,
that is located in the same country. Subsidiaries B and
C are considered to be a single foreign entity in
accordance with ASC 830. On December 1, 20X1, C is sold
to Company D, an unrelated third party, and the proceeds
from the sale are remitted to A.
The CTA balance related to A’s
investment in C should not be released into earnings
unless the sale represents a substantially complete
liquidation of the foreign entity that C had previously
been part of. Therefore, if C represents 90 percent or
more of the total net assets of the entire foreign
entity, it would be appropriate to release the CTA
related to the foreign entity into earnings.
Example 5-18
Sale of an Asset Group Within a Foreign Entity
Company A has a wholly owned subsidiary,
B, that is located in the United Kingdom and is
considered a foreign entity under ASC 830. On December
1, 20X1, B sells an asset group that represents 95
percent of B’s total net assets. The proceeds received
from the sale of the asset group are retained and
reinvested in B.
In this scenario, although the asset
group disposed of constitutes over 90 percent of the net
assets of B, no CTA should be released into earnings
because the proceeds were reinvested in the foreign
entity. Therefore, B’s assets were merely
recharacterized as a result of the disposition and the
transaction would not be considered a substantially
complete liquidation. Further, while the asset group
sold by B may represent a business as defined in the
Codification, this is irrelevant (i.e., business versus
asset) to the determination of whether a CTA should be
released to earnings upon the sale. Rather, as noted
above, the determining factor is whether the transaction
results in a sale or a complete or substantially
complete liquidation of the foreign entity.
Example 5-19
Annual Dividends Equal to Foreign Subsidiary’s Net
Income
Company A has a wholly owned subsidiary,
B, that is a foreign entity under ASC 830. Company B
makes a dividend payment to A that is equal to B’s net
income on an annual basis.
The payment of an annual dividend that
is equal to the foreign subsidiary’s net income does not
qualify as a sale or a complete or substantially
complete liquidation of the foreign entity in accordance
with ASC 830-30-40-1. Therefore, the payment does not
trigger a release of the CTA to earnings.
Conversely, if B had paid a dividend
that resulted in its complete or substantially complete
liquidation, the reclassification of the CTA to earnings
would be appropriate.
Example 5-20
Determining Whether Reduction of a Long-Term Advance
Triggers Recognition of a CTA in Earnings
A U.S. company, A, has an investment in
a wholly owned U.K. subsidiary, B, to which it has made
certain intercompany advances. The intercompany advances
are denominated in GBP, the functional currency of B,
and are considered a long-term investment under ASC
830-20-35-3(b). Company A, therefore, has not recognized
transaction gains or losses related to the intercompany
advances for the differences in the exchange rate
between the USD and GBP; instead, A has recorded these
differences in the same manner as translation
adjustments (i.e., as a CTA).
For reasons that were previously not
planned or anticipated, B wishes to reduce the amount of
the long-term advances; however, A is not completely or
substantially liquidating its investment in B.
A reduction in the long-term advance
will not affect the CTA already recorded by A. The CTA
balance should not be released into earnings until A’s
investment in B is sold or substantially or completely
liquidated.
If the remaining advance continues to be
long-term (i.e., only the amount of the intercompany
advance has changed), A would continue to recognize
exchange rate gains or losses associated with that
investment in CTA for the portion of the advance that is
considered long-term. If, after modification, the
long-term advance no longer meets the requirements in
ASC 830-20-35-3(b) for a long-term investment, future
exchange rate gains or losses related to the advance
will be recognized in earnings along with any other
transaction gains or losses associated with any of A’s
foreign-currency-denominated receivables or
payables.
For additional information on qualifying
and accounting for a long-term investment, see Section
6.4.
Example 5-21
Changing the Form of a Long-Term Investment in a
Foreign Subsidiary
Company O, a U.S. company, has a
Canadian subsidiary to which it has made advances that
are denominated in CAD. Company O has previously
asserted that the advances are intended to be a
long-term investment; therefore, in accordance with ASC
830-20-35-3, exchange rate gains and losses related to
the advances have been recorded in the same manner as
translation adjustments. There have been no previous
repayments of the advances.
Because the value of the CAD has
decreased against the USD, the value of the advances has
also declined. To receive a tax deduction in the United
States for the decrease, the advances would need to be
repaid. Accordingly, O proposes to make a capital (cash)
contribution to its Canadian subsidiary that the
subsidiary can use to repay the advances.
In the proposed transaction, O would not
release the CTA that pertains to the advances into
earnings. In the proposed transaction, O essentially is
replacing one form of long-term investment with another
form of investment. In accordance with ASC 830-30-40-1, the translation adjustment attributable to the long-term intercompany advances should remain a component of CTA until the Canadian subsidiary is sold or is completely or substantially liquidated. The settlement of intercompany transactions for which settlement was previously not planned or anticipated was addressed by the FASB 52 Implementation Group at its December 21,
1981, meeting. The group stated:
If a transaction is settled for
which settlement was not planned or anticipated,
the amount included in the special component of
equity (applicable to the period for which
settlement was not planned or anticipated)
probably should remain there.
Further, the FASB staff has agreed with
the conclusion that the translation adjustment included
in equity should remain there until the foreign entity
is sold or is completely or substantially
liquidated.
For additional information on qualifying
and accounting for a long-term investment, see Section
6.4.
5.4.3 Common-Control Transactions
While neither ASC 805 nor ASC 830 specifically addresses how to
consider CTAs in the context of a common-control transaction, the release of
CTAs through earnings related to such a transaction would generally be
inconsistent with the principles of ASC 805-50-30-5.
The principles of ASC 805 imply that to release a CTA into
earnings on a consolidated basis, the requirements of ASC 830-30 need to be met
from the consolidated perspective of each reporting entity. Accordingly, the
common-control principles may have a greater effect on multinational
corporations that contain multiple reporting entities; in such cases, an entity
may be required to track CTAs by originating foreign entity.
Additional complexity may arise when a common-control
transaction, such as a restructuring or spin-off, results in a change in the
functional currency of the foreign entity. When the functional currency changes,
an entity would consider the guidance in ASC 830-10-45-10. In such cases, a
freeze of the CTA would be required and its release would not be triggered (see
Section 2.4.2
for additional discussion), potentially resulting in a scenario in which a
frozen CTA is recognized on a consolidated basis for a now domestic currency
entity. Accordingly, it is important to track the CTA and the foreign entity
that originated it.
Example 5-22
Effect of Restructuring on CTA
Parent Co conducts its European
operations through a U.S. legal entity. The European
operations are segregated as a separate division (the
“Division”) that is accounted for as a separate foreign
entity under ASC 830. Parent Co’s functional currency is
the USD, and the Division’s functional currency is the
EUR. Parent Co has recognized a CTA balance of $3
million related to the Division in its consolidated
financial statements as of December 31, 20X1.
Subsequently, Parent Co restructure its
operations. As a result, the Division’s operations will
be sold from the U.S. legal entity to a newly created
and wholly owned Swiss legal entity. This new Swiss
legal entity will continue the Division’s
operations.
In this example, since the new wholly
owned Swiss legal entity continues the same operations,
the reorganization is a change in legal organization but
not a change in the consolidated entity (i.e., the
entity is still owned and operated by Parent Co).
Therefore, the CTA balance associated with the Division
would not be released into earnings, since Parent Co has
neither sold nor completely or substantially liquidated
its investment in the Division.
5.4.4 Timing of Gain and Loss Recognition
ASC
830-30
40-4 Under Subtopic 220-20, a
gain or loss on disposal of part or all of a net
investment may be recognized in a period other than that
in which actual sale or liquidation occurs. Paragraph
830-30-40-1 does not alter the period in which a gain or
loss on sale or liquidation is recognized under existing
generally accepted accounting principles (GAAP).
An entity determines the timing of the CTA release in accordance
with the guidance in ASC 830-30. However, the timing for the CTA release does
not affect when gains or losses related to a sale or liquidation are recognized
in accordance with other GAAP, nor does it affect when impairment losses are
recognized, as discussed in Section 5.5.
Example 5-23
Discontinued Foreign Entities — Timing of Recognition
of Foreign Currency Translation Adjustments in Net
Income
Company A has plans to sell its foreign
subsidiary that represents a foreign entity. On December
31, 20X1, A’s investment in the foreign subsidiary is
appropriately classified as HFS and reported as a
discontinued operation in accordance with ASC 205-20.
The disposal of the foreign subsidiary is expected to
occur in 20X2. On December 31, 20X1, there is an
accumulated CTA balance of $1 million related to the
foreign subsidiary.
While the subsidiary is classified as
HFS and reported as a discontinued operation, since the
foreign subsidiary has neither been sold nor completely
or substantially liquidated as of December 31, 20X1, it
is not appropriate to reclassify any related CTA to
earnings until such a sale or liquidation occurs in
accordance with ASC 830-30-40-1.
However, A should consider the guidance
in ASC 830-30-45-13 through 45-15 when analyzing its
investment in the foreign subsidiary for potential
impairment. See Section 5.5 for
further discussion.