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Foreign Currency Financial Reporting from Euro to Yen to Yuan: A Guide to Fundamental Concepts and Practical Applications by Robert Rowan

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CHAPTER 10

Cumulative Translation Adjustment

The Algebraic Plug

[T]he art of calculation considers not only the quantities of odd and even numbers, but also their numerical relations to themselves and to one another.1

—Plato

Assuming for a moment that you know nothing about financial statements, deconstruct a balance sheet. First, the title implies that it should balance. The three main components are assets, liabilities, and equity. The equation that balances the three components is

c10ue001

Equity has among its components the results of income and expense, usually referred to as retained earnings.

Both IAS 21’s paragraph 392 and ASC 830-45-3 provide guidance on translation to the presentation currency. Translation of assets and liabilities occurs using the closing rate at the date of the balance sheet.3 Items of income and expense use exchange rates at the dates of the transaction, with use of averages permitted for practical reasons, provided the exchange rates do not fluctuate significantly.4 Based on the information in the preceding two paragraphs, assets and liabilities undergo translation at a different exchange rate than items of income and expense. That means that a balance sheet that balanced in the functional currency does not balance in the presentation currency.

Cumulative translation adjustment (CTA) addresses the out-of-balance state in the presentation currency. Both standards ...

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