The FASB issued guidance that addresses diversity in practice related to the threshold for recognition in net income of cumulative translation adjustments (CTA) in March 2013. Prior to the issuance of this guidance, the release of CTA into earnings was permitted only upon a complete or substantially complete liquidation of a foreign entity.
Key developments in foreign currency reporting and CTA
- The FASB issued guidance that addresses diversity in practice related to the threshold for recognition in net income of cumulative translation adjustments (CTA) in March 2013. Prior to the issuance of this guidance, the release of CTA into earnings was permitted only upon a complete or substantially complete liquidation of a foreign entity. The new guidance now requires the recognition in net income of CTA upon the occurrence of a “deconsolidation event” related to an investment in a foreign entity.
- The new guidance also addresses “step acquisitions” involving the acquisition of a controlling financial interest in an equity method investment in a foreign entity. In that situation, all of the previously accumulated translation adjustment related to the foreign entity would be released into earnings as part of the remeasurement gain or loss on the previously held equity interest. If the previously held equity investment was only part of a foreign entity (i.e., an investment in another entity by a consolidated a foreign entity), no CTA would be released into earnings.
- For changes in interest that do not result in a change in control, the new guidance clarifies the existing guidance that requires a pro rata release of CTA when a reporting entity sells part of its ownership interest in an equity method investment that is a foreign entity. If the reporting entity sells part of its ownership interest in an equity method investment that is part of a larger foreign entity, no CTA should be released into earnings, unless the disposition represented the complete or substantially complete liquidation of the foreign entity that contained the equity method investment.
- The new guidance is effective for fiscal years beginning after December 15, 2013 for public entities, and a year later for nonpublic entities. The guidance should be applied prospectively, and prior periods should not be adjusted. Early adoption is permitted as of the beginning of the entity's fiscal year.
Why the new cumulative translation adjustments (CTA) standard is important
- The new standard resolves diversity in practice by way of a compromise between the derecognition principles in the foreign currency guidance and the loss of control concepts in the more recently updated consolidations guidance. That diversity became more acute in 2010 when entities began applying deconsolidation guidance at the subsidiary and business units of account. Those units of account are inconsistent with the foreign entity unit of account described in the foreign currency guidance.
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