Chapter 5 — Foreign Currency Translations

5.5 Impairment Considerations Related to CTA

5.5.1 Impairment and CTA

ASC 830-30

45-13 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.

45-14 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.)

45-15 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.

In accordance with the guidance above, a reporting entity would not consider a CTA balance in an impairment assessment unless it has a clear plan to sell or liquidate the investment in a manner that would trigger the CTA release into earnings, as outlined in Section 5.4. In the absence of such a plan, the realization of the CTA would not be expected and the entity would therefore have no basis for including the CTA balance when assessing the impairment loss. Further, while the above guidance may indicate that the CTA balance should be included in the measurement of the impairment loss in certain situations, such amounts recorded in CTA would not be released into earnings until the conditions noted in Section 5.4 have been met.

Connecting the Dots

When the CTA associated with a foreign entity is included in the measurement of an impairment loss and is in a cumulative loss position (i.e., cumulative debit CTA), questions have arisen regarding whether the loss that is recognized on the impairment should be limited to the carrying amount of the investment (i.e., excluding amounts in AOCI) given that the CTA cannot be reclassified to earnings until the sale or substantial or complete liquidation of the foreign entity.

Two approaches have been accepted in practice by analogy to a speech by Adam Brown, then a professional accounting fellow, at the 2008 AICPA Conference on SEC and PCAOB Developments. By analogy to Mr. Brown’s speech, the use of either of the following two approaches may be considered in a scenario in which a loss in excess of an asset’s carrying amount is expected: (1) recognize an impairment loss in excess of the carrying value of the disposal group, thereby establishing a valuation allowance until the CTA may be released into earnings, or (2) limit the impairment loss to the carrying value of the disposal group. The selected approach should be applied consistently as an accounting policy election to all similar transactions.

Example 5-24

Treatment of AOCI in Impairment Test for the Disposal of a Foreign Entity

Company P, the parent company, has a wholly owned subsidiary, Company S, that is a foreign entity. Company P has unrealized CTA gains of approximately $90 million that are reported in AOCI in relation to S and carries its investment in S at $386 million.

Company P has initiated a plan to sell its investment in S for $261 million. While the transaction is expected to close in January 20X2, P has determined that its investment in S meets all of the criteria in ASC 360-10-45-9 through 45-11 for classification as HFS and for the results of its operations to be reported as a discontinued operation in P’s consolidated financial statements as of December 31, 20X1.

In this example, P would include the unrealized CTA gain in the carrying amount of its investment in S when evaluating S for impairment in accordance with ASC 360-10-35-38 through 35-49; however, the balance recorded in CTA would not be released into earnings until the sale occurs and the conditions under ASC 830-30 are met. The following calculations illustrate the impairment loss assessment and subsequent accounting effects of this example in accordance with ASC 830-30-45-13:

5.5.2 Abandonment and CTA

In the context of a plan to abandon a foreign entity, the principles of ASC 830-30 continue to apply to the determination of whether the criteria allowing for the inclusion of the CTA in the impairment assessment are met. Accordingly, it is necessary to consider what is being abandoned in the context of the foreign entity as well as what the abandonment would entail, which would further affect the timing of the CTA release, as noted in Section 5.4.

Example 5-25

Accounting for CTAs in Abandonment of an Investment in a Foreign Entity

Company A has a wholly owned foreign subsidiary that is a foreign entity, Company X. In connection with its investment in X, A has unrealized translation gains and losses within CTA in its consolidated financial statements. In the fourth quarter of 20X1, A states its intent to abandon its investment in X as soon as practicable in 20X2 and has a plan in place to have all of X’s facilities and offices closed by March 1, 20X2. Concurrently with this decision, A records an impairment loss for its investment in X in accordance with ASC 360.

In this scenario, the CTA balance should not be released from AOCI into earnings until X’s facilities and offices have been closed (i.e., on March 1, 20X2) and, in essence, abandoned. ASC 360-10-35-47 states, in part, that a “long-lived asset to be abandoned is disposed of when it ceases to be used.” Before this time, it would not be appropriate to recognize the release of CTA associated with the abandoned investment, in accordance with ASC 830-30-40-1, which states that CTA is released into earnings “[u]pon sale or upon complete or substantially complete liquidation of an investment in a foreign entity.” The abandonment of X is akin to a sale or liquidation of X, since X would cease to exist as an operating subsidiary of A and would no longer provide future benefits to A after the abandonment.

The CTA should be included in the carrying amount of A’s investment in the foreign subsidiary in the evaluation of that investment for impairment under ASC 830-30-45-13.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.