The FASB issued guidance in March 2013 that addresses diversity in practice related to the release of cumulative translation adjustments (CTA) into earnings upon certain derecognition events. For derecognition events within a foreign entity, the release of CTA into earnings is now prohibited unless such events represent a complete or substantially complete liquidation of a foreign entity. For deconsolidation events related to investments in a foreign entity, all CTA related to the derecognized foreign entity would now be released into earnings.
Key developments in Foreign currency reporting and CTA
- The new guidance also covers step acquisitions involving an equity method investment that is a foreign entity. If the previously held equity investment represented an entire foreign entity (i.e., an investment in a foreign entity) all of the CTA related to that foreign entity would be released into earnings as part of the remeasurement gain or loss. If the previously held equity investment was only part of a foreign entity (i.e., an investment within a foreign entity), no CTA would be released into earnings.
- The new guidance also 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 for nonpublic entities is effective for fiscal years beginning after December 15, 2014. 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 standard is important
- The new standard solves the 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 consolidations guidance. That diversity began in 2010 when entities applied existing deconsolidation guidance, which is based on the units of account of a "subsidiary" and a "business." These units of account are inconsistent with the "foreign entity" unit of account included in the foreign currency guidance.
- As a result, some entities applied the deconsolidation guidance and released CTA into earnings upon the loss of a controlling financial interest in a business or subsidiary within a foreign entity and events involving an investment in a foreign entity. Others continued to apply the foreign currency guidance and released CTA into earnings only if the sale or transfer represented the sale or complete or substantially complete liquidation of a foreign entity. This diversity should no longer be the case, thus improving comparability among reporting entities.
Venezuela exchange rates
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Special edition video: PwC's Stephanie Stewart, John Bishop and John Horan discuss the reporting implications of three legal exchange mechanisms in Venezuela, each with a different exchange rate. ================== Watch the video
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