Chapter 5 — Foreign Currency Translations
Chapter 5 — Foreign Currency Translations
5.1 Overview
ASC 830-10
10-1 Financial statements are
intended to present information in financial terms about the
performance, financial position, and cash flows of a
reporting entity. For this purpose, the financial statements
of separate entities within a reporting entity, which may
exist and operate in different economic and currency
environments, are consolidated and presented as though they
were the financial statements of a single reporting entity.
Because it is not possible to combine, add, or subtract
measurements expressed in different currencies, it is
necessary to translate into a single reporting currency
those assets, liabilities, revenues, expenses, gains, and
losses that are measured or denominated in a foreign
currency. Paragraph 830-10-55-1 discusses the meaning of
measurement in a foreign currency.
This chapter focuses on ASC 830-30, which “provides guidance for translating foreign currency statements that are incorporated in the financial statements of a reporting entity by consolidation, combination, or the equity method of accounting.” An entity applies the translation guidance in ASC 830-30 to translate the functional-currency-denominated financial results of foreign entities into a common reporting currency when combining the results of domestic and foreign entities.
The concept of measuring foreign currency transactions under ASC 830-20 is distinct from the concept of translating financial statements under ASC 830-30. This distinction is important since the applicability of the two concepts differs, as does the treatment of the resulting gains and losses. The following diagram summarizes the difference between the two concepts:
5.2 Translation Process
ASC 830-30 defines foreign currency translation as the “process of
expressing in the reporting currency of the reporting entity those amounts that are
denominated or measured in a different currency.” The translation guidance outlined
in this chapter applies to an entity’s functional-currency-based results.
Example 5-1
Translating Financial Statements
Company B, a Polish company that has
identified the local currency (PLN) as its functional
currency, is a subsidiary of Parent Co, a U.S. parent that
uses the USD for reporting purposes. Company B has debt on
its books that is denominated in USD and EUR.
Before translating its financial statements,
B is first required to recognize transaction gains or losses
related to its foreign-currency-denominated debt. To do so,
B measures (1) the USD-denominated debt by using the
exchange rates existing as of the balance sheet date for the
PLN and the USD and (2) the EUR-denominated debt by using
the exchange rates existing as of the balance sheet date for
the PLN and the EUR. The offset to each of these entries is
recorded in earnings as a transaction gain or loss.
Next, Parent Co translates the
functional-currency (local-currency) financial statements of
B into USD. As discussed in Section 5.2.1, the
current exchange rate as of the balance sheet date is used
to translate assets and liabilities while an appropriate
rate (e.g., weighted-average exchange rate for the period)
is used to translate revenues, expenses, and other income
statement items. The translation adjustments are recorded as
a CTA, a separate component of OCI.
While not specifically addressed in ASC 810 or ASC 830, multitiered
organizations typically apply the translation process in the same sequence as the
consolidation process (on a step-by-step basis).
Example 5-2
Multilevel Consolidation
A U.S. parent wholly owns a second-tier
German subsidiary, which in turn wholly owns a third-tier
British subsidiary. The German subsidiary and British
subsidiary are separate foreign entities under ASC 830. The
local currency is the functional currency for all entities,
and the reporting currency of the consolidated entity is the
USD.
When preparing the financial statements for
the consolidation of the subsidiaries with the U.S. parent,
the entities would do the following:
-
The German subsidiary would translate the British subsidiary’s GBP-denominated financial statements (i.e., the functional-currency financial statements) into EUR-denominated financial statements. The GBP-to-EUR translation adjustment would be recorded in the CTA of the German subsidiary’s financial statements.
-
The U.S. parent would then translate the EUR-denominated, consolidated financial statements of the German subsidiary into USD. The EUR-to-USD translation adjustment would be recorded in the CTA of the U.S. parent’s financial statements.
5.2.1 Effecting a Translation
When applying the guidance in ASC 830-30 to translate functional
currency statements into a single reporting currency, an entity needs to
identify the appropriate exchange rate to use for this purpose.
In addition to applying the appropriate exchange rates, when
translating foreign currency statements of foreign entities that are
consolidated, combined, or accounted for under the equity method, an entity may
need to consider whether it needs to make additional adjustments to the
translated balances for items such as intra-entity eliminations as well as
goodwill and purchase price adjustments (i.e., basis differences), as discussed
below. Timing differences between the investee’s reporting periods and those of
the reporting entity (i.e., reporting time lags) should also be taken into
account in the determination of the exchange rate to be applied for translation,
as discussed in Section
3.3.1.
The following diagram illustrates the key factors an entity
should consider when translating foreign currency statements:
5.2.1.1 Exchange Rate
ASC 830-30
45-3 All elements of
financial statements shall be translated by using a
current exchange rate as follows:
- For assets and liabilities, the exchange rate at the balance sheet date shall be used.
- For revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized shall be used.
This guidance also
applies to accounting allocations (for example,
depreciation, cost of sales, and amortization of
deferred revenues and expenses) and requires
translation at the current exchange rates applicable
to the dates those allocations are included in
revenues and expenses (that is, not the rates on the
dates the related items originated).
Under ASC 830-30, all financial statement elements must be
translated by using a current exchange rate, which ASC 830-30-45-4 defines
as “the rate as of the end of the period covered by the financial statements
or as of the dates of recognition in those statements in the case of
revenues, expenses, gains, and losses.” As noted in Section 3.2.1, for
practicality reasons, ASC 830 permits the use of weighted-average exchange
rates or other methods that provide a reasonable approximation of the rates
in effect on the date of recognition.
The following is a summary of the exchange rates used in the
translation process, as outlined in Section
3.2.1:
Further, as outlined in Section 3.2.1, while ASC 830 does not
provide specific guidance on which rate should be used to translate a
foreign entity’s equity accounts, it would be appropriate to translate
equity accounts at historical rates, except changes to retained earnings for
current-period net income.
5.2.1.1.1 Translation of Balances Reclassified From AOCI
The accounting literature is not explicit on the
exchange rate that applies to the translation of amounts reclassified
from accumulated other comprehensive income (AOCI) to earnings.
Accordingly, questions have been raised regarding whether the
translation of such balances should be based on (1) the historical
exchange rate or (2) the current average exchange rate. The following
graphic summarizes the difference between the two approaches:
For pension and other postretirement-related balances
originally recognized in OCI and reclassified from AOCI to net periodic
benefit cost in subsequent periods, both of these approaches are
considered acceptable in practice. The selection of either approach
would be viewed as an accounting policy election.
Under the historical exchange rate approach, AOCI is
viewed as akin to retained earnings. Accordingly, since amounts
accumulated in retained earnings are not translated at a current rate
under ASC 830 (i.e., retained earnings do not fluctuate as a result of
subsequent changes in exchange rates), the amounts reclassified from
AOCI to net periodic benefit cost should not be retranslated. Similarly,
since the amounts in AOCI have been previously recognized in
comprehensive income,1 the reclassification from AOCI to earnings should not be viewed as
a new recognition event from a translation perspective. Therefore, the
amounts initially recognized in OCI and translated at the rate in effect
at that time would reflect the balance subject to reclassification from
AOCI to net periodic benefit cost.
Under the current average exchange rate approach, the
reclassification of amounts in AOCI is viewed as akin to newly
recognized earnings. Accordingly, the rate in effect at the time of
reclassification, which will often be an average rate for the period as
the pension and other postretirement amounts are released over time,
would be used to determine the amount that is reclassified from AOCI to
net periodic benefit cost. This treatment would be consistent with the
ASC 830 approach for the initial recognition of income statement
items.
While the historical exchange rate approach may be viewed as the more supportable of the two approaches, the current average exchange rate approach is considered acceptable in practice as an alternative for pension and other postretirement-related balances. Initially, the objective of permitting the use of the current average exchange rate approach for applicable pension and other postretirement amounts was to allow for consistency with the approach used before the adoption of FASB Statement 158 (codified in ASC 715), since the
amendments were not intended to change the measurement of the applicable
pension and other postretirement balances.2 Before FASB Statement 158, unrecognized prior service
costs/credits, net gains or losses, and translation obligations/assets
remained off-balance-sheet and were translated at the average exchange
rates for the period when these amounts were recognized in net periodic
benefit cost.
For other balances deferred in AOCI (e.g., AFS
investments, amounts related to certain hedging instruments), ASC 830
similarly does not address the exchange rate applicable to translation
of amounts reclassified from AOCI to earnings. In such cases, while it
may be more supportable under ASC 830 to use the historical exchange
rate approach than it is to use the current average exchange rate
approach, an entity may elect either approach as an accounting
policy.
5.2.1.2 Intra-Entity Transactions
ASC 830-30
45-10 The elimination of
intra-entity profits that are attributable to sales
or other transfers between entities that are
consolidated, combined, or accounted for by the
equity method in the reporting entity’s financial
statements shall be based on the exchange rates at
the dates of the sales or transfers. The use of
reasonable approximations or averages is
permitted.
In a manner consistent with the accounting for
consolidations, combinations, and the equity method of accounting,
intra-entity profits are generally eliminated. For transactions that are
eliminated, ASC 830-30-45-10 prescribes the use of the sale or transfer date
exchange rate, or approximation thereof, which is consistent with the
exchange rate applicable to income statement items (as discussed in
Section
5.2.1.1). This requirement results in the application of an
exchange rate to items subject to elimination that is consistent with the
rate applicable to items that are not eliminated.
However, intra-entity foreign-currency-denominated
transactions may not be eliminated in all cases, as discussed in Chapter 6.
Accordingly, such transactions would result in earnings volatility, in the
absence of qualifying as a long-term investment, since the transaction would
be remeasured to the functional currency through earnings while the
translation to the reporting currency would be deferred through OCI.
Example 5-3
Exchange Gain or Loss Related to Intra-Entity
Loan
A U.S. parent, Company X, has a
wholly owned subsidiary, Company Y, in the United
Kingdom. Company X’s functional currency is the USD,
and Y’s is the GBP. Company X has provided a loan in
USD to Y. The loan is not considered part of X’s net
investment in Y.
No transaction gain or loss is
recorded in the separate financial statements of the
U.S. parent because the loan receivable is
denominated in X’s functional currency. In the
subsidiary’s separate financial statements, the loan
payable is a monetary item and the transaction gain
or loss related to remeasurement in Y’s functional
currency of the GBP is recognized in earnings in
accordance with ASC 830-20.
Upon consolidation, although the
intra-entity loan is eliminated from the statement
of financial position, the related transaction gain
or loss recognized in Y’s separate financial
statements for the USD loan payable survives the
consolidation process; thus, the gain or loss is
also recognized in consolidated earnings.
Further, in certain situations, the use of differing
translation rates may result in residual intra-entity receivables and
payables, as discussed in Section 6.2.1.
5.2.1.3 Goodwill and Purchase Price Adjustments
ASC 830-30
45-11 After a business
combination, the amount assigned at the acquisition
date to the assets acquired and the liabilities
assumed (including goodwill or the gain recognized
for a bargain purchase in accordance with Subtopic
805-30) shall be translated in conformity with the
requirements of this Subtopic.
ASC 830-30-45-3 and ASC 830-30-45-11 require that an entity
translate all elements of its financial statements, including goodwill and
other basis differences. Therefore, in the determination of the currency
translation adjustment in the acquirer’s consolidated financial statements,
the individual assets (including goodwill) of an acquired foreign entity
whose functional currency differs from its parent’s reporting currency must
be translated on the basis of the amounts recognized by the acquirer under
ASC 805-10, ASC 805-20, and ASC 805-30, even if that foreign entity elects
not to apply pushdown accounting in its separate financial statements.
An entity can either record the amounts in the foreign
entity’s books (i.e., actual pushdown accounting) or maintain the records
necessary to adjust the consolidated amounts to what they would have been
had the amounts been recorded in the foreign entity’s books and records
(i.e., notional pushdown accounting).
Example 5-4
Foreign Currency Translation for an Acquired
Foreign Entity
Company A acquires Company B in a
business combination. Company B is in a foreign
jurisdiction, and B’s functional currency, the USD,
differs from A’s reporting currency, the EUR. Assume
that the carrying value of all of B’s assets and
liabilities equals their fair values except for an
intangible asset that was unrecognized in B’s books
but will be recognized in A’s consolidated financial
statements at its fair value of €1,000. Company A
also recognizes goodwill of €150 from the
acquisition of B in its consolidated financial
statements. Company A has determined that B is a
foreign entity. Company B has elected not to apply
pushdown accounting in its separate financial
statements. Therefore, B’s assets are recognized at
A’s consolidated level by using A’s basis in the
assets, even though A’s basis was not pushed down to
B’s separate financial statements.
As of the acquisition date, the
intangible asset of €1,000 was the equivalent of
$1,200 and the goodwill of €150 was the equivalent
of $180 in B’s functional currency (exchange rate of
$1.20 to €1). Although B did not elect pushdown
accounting, when A translates B’s assets and
liabilities from B’s functional currency to A’s
reporting currency, A will translate B’s assets and
liabilities into A’s reporting currency by using A’s
basis in B’s assets and liabilities (i.e.,
stepped-up values) rather than the carrying values
of B’s assets and liabilities in B’s separate
financial statements. At the end of the reporting
period, the carrying values of the intangible asset
and goodwill in B’s functional currency are $1,080
($1,200 less amortization of $120) and $180 and the
exchange rate is $1.25 to €1. Therefore, in its
consolidated financial statements, A recognizes B’s
intangible asset of €864 ($1,080 ÷ 1.25) and
goodwill of €144 ($180 ÷ 1.25). Because B did not
elect pushdown accounting, separate accounting
records will need to be maintained to adjust A’s
consolidated amounts to what they would have been
had the amounts been recorded in B’s separate
financial statements (i.e., notional pushdown
accounting).
The preceding is a simplified example in which a single
foreign entity is acquired. In a multinational acquisition that includes
multiple foreign and domestic entities, the application of ASC 830 may be
complex depending on whether the acquirer needs to determine the amount of
goodwill for each foreign and domestic entity acquired. An entity may need
to use judgment in making such determinations.
In the measurement of a goodwill impairment charge,
a reporting unit’s carrying amount should only include the currently
translated assets and liabilities and would not contain any allocated CTA
from an entity’s AOCI. However, some or all of the CTA should be included in
the carrying amount of an investment in a foreign entity when that
investment is tested for impairment if the entity has committed to a plan to
dispose of that investment (see further discussion in Section 5.5.1). Investment impairment
testing differs from goodwill impairment testing; therefore, the CTA
generally would not meet the criteria for inclusion in a reporting unit in
accordance with ASC 350-20-35-39.
5.2.2 Equity Method Investments
ASC
830-10
15-5 The functional currency
approach applies equally to translation of financial
statements of foreign investees whether accounted for by
the equity method or consolidated. Therefore, the
foreign currency statements and the foreign currency
transactions of an investee that are accounted for by
the equity method shall be translated in conformity with
the requirements of this Topic in applying the equity
method.
In a manner consistent with ASC 830-10-15-5 above, ASC 323
requires that an investee’s income accounted for under the equity method be
determined as if the investee were a consolidated subsidiary. Accordingly, after
the adjustments to the foreign investee’s financial results, as outlined in ASC
323-10-35-5, the reporting entity should recognize and adjust its equity
investment carrying amount for its share of the foreign investee’s translated
net income and OCI (including its share of the CTA). The recognition date
exchange rates, as discussed in Section 5.2.1, would be used to translate
an investor’s share of the net income of a foreign currency equity method
investee into the investor’s reporting currency (or a weighted-average exchange
rate if appropriate). The historical rate would be applied to the existing
investment balances.
Example 5-5
Translation of an Equity Method Investment
On January 1, 20X1, Company A, a U.S.
entity whose functional currency is USD, acquires a 40
percent equity interest in Company B for €4 million.
Company B is located in Germany, and its functional
currency is the EUR.
Assume the following facts:
-
Company A accounts for its investment in B as an equity method investment.
-
Company A has determined that B is a foreign entity.
-
Company B is in its first year of operations and generated net income of €1 million during 20X1.
-
Company A did not recognize goodwill or other purchase price adjustments in relation to B, since B is a newly formed entity and the fair value of B was equal to the carrying amount at the time of acquisition by A.
-
The following exchange rates were in effect during the period:
-
Spot rate on January 1, 20X1: €1 = $1.1.
-
Spot rate on December 31, 20X1: €1 = $1.3.
-
Weighted-average exchange rate during 20X1: €1 = $1.25.
-
-
Company B’s statement of financial position on December 31, 20X1, denominated in euros and translated to U.S. dollars, is shown below.
Company A would record the following
journal entries during 20X1, all denominated in USD:
The preceding is a simplified example illustrating an equity
method investment in a newly formed, single foreign entity. If, at the time of
acquisition, A had recognized goodwill or other fair value adjustments, such
basis differences would be viewed as denominated in the foreign entity’s (B’s)
functional currency. Thus, such amounts would be subject to translation and
would affect the equity method investment balance the investor recognizes for
the foreign entity.
In applying the equity method, an investor may have to perform a
purchase price allocation when the purchase price for its share of the
investee’s net assets differs from the carrying amount in the investee’s
separate financial statements. If the investee’s functional currency differs
from that of the investor, this process could be complex, especially when there
may be multiple assets and liabilities for which there is a basis difference
between the carrying amount and the fair value of the asset or liability as of
the investment’s acquisition date. In such situations, one approach that an
investor uses in practice is to recast the investee‘s books to reflect the
investor‘s basis in the assets based on its purchase price, provided that the
investee is 100 percent owned. The example below illustrates this scenario.
Example 5-6
Translation of an Equity Method Investment With a
Different Basis
Assume the following:
- Investor C, which is based in the United States, invests $495 million to have a 25 percent interest in Investee D, an entity that operates a commercial real estate asset in Ireland, at the beginning of 20X1.
- Investor C’s functional and reporting currency is the USD.
- Investee D’s functional currency is the EUR.
- Investee D’s net book value as of the investment date is €1,500 million, and its only asset is a shopping mall; D has no liabilities.
- The shopping mall has no salvage value and a remaining depreciable life of 20 years.
- Investee D’s net income from the shopping mall’s operations at the end of 20X1 is €40 million, which includes €75 million of the depreciation expense related to the shopping mall.
- The exchange rate on the date C made the investment is $1.1 = €1.
- The end-of-year exchange rate for 20X1 is $1.2 = €1.
- The weighted-average exchange rate for 20X1 is $1.15 = €1.
Investor C has a €75 million ($82.5
million) basis difference as of the acquisition date,
which consists of the difference between C’s cost of
acquisition ($495 million ÷ 1.1 EUR to USD = €450
million) and C’s share of D’s net book value (€1,500
million × 25% = €375 million). As discussed in Section
5.2.1.3, the basis difference would be
viewed as denominated in the foreign investee’s (D’s)
functional currency. Thus, such amounts would be subject
to translation and would affect the equity method
investment balance the investor recognizes for the
foreign entity.
Investor C has determined that the basis
difference is attributable to the depreciable asset (the
shopping mall) and that, accordingly, the basis
difference should be depreciated over its remaining
useful life (20 years).
To recast D’s financial statements, C
first computes D’s overall net book value as of the date
of the investment on the basis of the cost paid by C.
That amount is €1,800 million, computed as the €450
million investment multiplied by 4. (For tracking
purposes and ignoring any control premium, if a 25
percent investment is worth €450 million, a 100 percent
investment is worth four times that amount.) Investor C
would then allocate the €1,800 million to D’s assets and
liabilities in a manner consistent with a business
combination. In this example, D’s only asset is the
shopping mall. Depreciation on the €1,800 million
shopping mall is computed as €90 million per year
(€1,800 million divided by 20 years; zero salvage
value). That is, if C owned 100 percent of D, the
“deemed depreciation expense” would be €15 million
higher than what the investee would present in its
separate financial statements.
The following table depicts the
translation of D’s financial information from EUR to
USD:
When an investor tracks the investment
in an equity method by using the total recast investee
values, in determining the amounts that would need to be
recognized in its financial statements, the investor has
to adjust the balances by its share of the investee’s net assets to properly
reflect the carrying amount.
Investor C can compute its share of D’s
net income from operations by using the weighted-average
exchange rate for the period as follows:
Similarly, in determining the amount of
the change in CTA for the period that is related to its
equity method investment, C will recognize its share of
the recast CTA as follows:
Investor C can compute the ending
carrying amount of its equity method investment by
translating its share (25
percent) of the recast net book value at the end-of-year
exchange rate as follows:
The following table shows the financial
statement impact (in millions) of the adjustments
described above on C’s financial statements:
Footnotes
1
The glossary in ASC 220-10 indicates that the
term “comprehensive income” encompasses all components of net
income as well as all components of OCI and that OCI refers to
“revenues, expenses, gains, and losses that [under GAAP] are
included in comprehensive income but excluded from net
income.”
2
Upon adopting FASB Statement 158 (codified in
ASC 715), companies and their subsidiaries (domestic and
foreign) were required to recognize the funded status of their
defined benefit plans. Accordingly, previously unrecognized
amounts (including gains or losses, prior service costs or
credits, and transition assets or obligations) were recorded,
net of tax, as a component of AOCI. However, FASB Statement
158’s recognition provisions did not change how net periodic
benefit cost is measured or recognized in an entity’s financial
statements.
After adoption of FASB Statement 158, ASC
715-30-35 and ASC 715-60-35 required that prior service costs or
credits, and gains or losses, respectively, that arise during
the period, and that are not immediately recognized as a
component of net periodic benefit cost, be recognized as a
component of OCI. Such amounts will ultimately be reclassified
to net periodic benefit cost in subsequent periods. Accordingly,
upon consolidation, parent companies with foreign subsidiaries
that sponsor defined benefit plans will need to consider the
impact of ASC 830 on the amounts recorded in, and reclassified
from, AOCI.
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 CTA, 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 CTA 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 CTA. 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 CTA
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.
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.
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, 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 OCI 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 Currency Translation Adjustments 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.