Many business owners run their companies worldwide and operate in different countries, using various currencies. When these companies prepare to combine their financial statements, they need to convert whole of foreign currency transactions into a single currency.
These differences are recorded as Cumulative Translation Adjustment (CTA). CTA helps Companies present their true financial position by accounting for the impact of currency fluctuations. It is an important concept for accountants, auditors, finance students, and businesses with international operations. This article explains what is CTA in accounting, its purpose, examples, and how it is calculated, in simple language.
What is CTA in Accounting?
CTA means Cumulative Translations Adjustments, and it helps companies to manage their financial statements. And shows the real impact of converting the foreign transaction currency and exchange rates. It is an account that accumulates foreign exchange gains and losses from translating a foreign subsidiary’s financial statements into the parent company’s reporting currency. It is a component of Other Comprehensive Income on the consolidated balance sheet and helps to ensure financial accounting balance across different currencies.
Key Feature of CTA
Break down the feature of CTA in accounting
Parts of the OCI(Other Comprehensive Income)
- CTA is recorded in the equity section of the balance sheet under Accumulated Other Comprehensive Income (AOCI).
- It is not included in profit or loss unless certain conditions are met (e.g., disposal of a foreign operation).
Become from Foreign Currency Translation
- It occurs when converting the financial statements of a foreign subsidiary into the parent company’s reporting currency.
- Translation differences arise because exchange rates change over time.
Reflects Unrealised Gains and Losses
- CTA captures unrealised currency gains/losses. That do not impact earnings immediately.
Used in Combined Financial Statements
- CTA appears only in group accounts. It’s never in standalone financial statements. Always Required under both IFRS (IAS 21) and US GAAP.
Reclassified of Foreign Operation
- When a parent company sells or liquidates a foreign subsidiary, the related CTA balance is recycled from equity to profit or loss. And it depends on the translation method
Under the current rate method
- Their assets and liabilities are translated at the closing rate, Equity is translated at the historical rate, and Income and expenses are translated at the average rate
- Then CTA become due to these mixed rates, like closing, historical, and average rates.
Helping to Reflect True Economic Impact
- Separates foreign exchange volatility from operational performance, giving a clear financial picture.
How CTA is used in Financial Statements?
- Reflect Currency Fluctuations: CTA helps to adjust to the impact of changing exchange rates on foreign assets, liabilities, and equity.
- Preserve Income Stability: It stops the currency changes from affecting the net income and keeps them in Other Comprehensive Income (OCI).
- Adjusts in Equity: CTA recorded under equity (OCI) on the balance sheet, not in the income statement, to show unrealised currency effects.
- Compliance: It aligns with IFRS and US GAAP to maintain consistent financial reporting across global businesses.
- Transparency: Provide help to stakeholders to see how foreign exchange impacts the company’s long-term financial position.
Real-Life Example of CTA in Accounting
One real-world example of a CTA is a scenario in which a company based in the U.S. has a manufacturing subsidiary in Europe that makes its financial statements in euros. When the parent company combine their books, it has to convert the subsidiary’s assets, liabilities, income, and expenses into USD. If the exchange rate changes, for example, from $1.05 per euro to $1.12 per euro, the dollar value of the subsidiary’s net assets will be different as well.
This change in currency does not give you a rise in your business like profit or loss. Instead, the change is recognised in Other Comprehensive Income as a Cumulative Translation Adjustment (CTA) to indicate the effect of the foreign currency translation.
How to Calculate the CTA in Accounting?
To calculate the CTA, you need to compare the net translated assets with the translated equity of a foreign subsidiary. You can translate assets and liabilities at the current rate, income statement accounts at the average rate, and equity accounts at historical rates. The difference between the translated assets and the sum of translated liabilities and equity is the CTA, which is recorded in equity to balance the combination of the balance sheet.
Translate the Foreign Subsidiary’s Financial Statements
- Assets and Liabilities: Translate at the current exchange rate (the rate at the end of the reporting period).
- Income Statement: Translate using the average exchange rate for the period.
- Shareholders’ Equity: Translate using historical exchange rates based on the date each equity transaction occurred.
- Retained Earnings: Use the prior period’s translated retained earnings, and then add the current period’s translated net income and subtract any translated dividends.
Calculate the CTC
- First step is you have to sum the translated assets to get the total translated assets.
- The second step is to now sum the translated liabilities, shareholder equity, and retained earnings to get the total sum of liabilities and equity.
- The formula for calculating CTA is Translated Net Assets – (Translated Liabilities + Translated Equity + Translated Retained Earnings)
- This CTA is called plug. Because it’s an amount needed to make a balance sheet to balance.
Conclusion
CTA is a straightforward process to help know the actual position of companies after the currency change. We understand this is an important concept for an accountant. You can use the CTA to reflect the currency fluctuations and transparency, and learn a real-life example.
You can easily calculate the CTC with the help of a formula and implement it to ensure your financial currency transactions.