Multi-currency businesses deal with countless tasks during their month end close. One of these tasks relates to entering Average and End of Month FX rates for all of their currencies into their Consolidation System. In addition to ensuring accurate translation of their functional currency, businesses must account for CTA, or Cumulative Translation Adjustment. What does this term mean and what importance does it have in the actual close process?
Required by the Financial Accounting Standards Board (FASB) as part of Statement 52, the CTA entry sits within the Equity section of the Balance Sheet. Over the normal course of business operations, fluctuations in FX rates occur, often resulting in a different rate being used at the time of the balance sheet translation (current rate). This current rate is different than the rate at the time the original transaction occurred (historical rate). For instance, the value an investment in a subsidiary must be held constant at the rate of the transaction date, rather than continually translating at the current month rate. The difference between these rates is captured within the Cumulative Translation Adjustment account. The balance in the account captures all of the gains and losses directly related to the fluctuations of the FX rates.
Oracle’s Financial and Consolidation Close (FCC) application offers out-of-the-box CTA calculation to help ease the pain points of calculating CTA. The multi-currency option must be enabled in order for the feature to be utilized. During application creation, both the FCCS_CTA and FCCS_CICTA accounts are created. FX will be redirected from the source historical accounts to the CTA account when the consolidation rule is kicked off. The calculation logic is included in the consolidation script.
During application creation, the design can include the CTA Account in the Balance Sheet or in Comprehensive Income. When CTA – Balance sheet is enabled, the out-of-the box member will sit on its own as a sibling of Retained Earnings. When CTA – Comprehensive Income is enabled, CTA will sit under the parent FCCS_Total Other Comprehensive Income. Both are shown in the subsequent s.
When building out the Chart of Accounts in FCC, any account with the “historical” rate type enabled (Historical, Historical Rate Override, Historical Amount Override) will calculate the FX translation and then transfer the FX Impact that is calculated to the CTA or CICTA account, depending on the initial set up. All accounts that are within the Net Income/Total Comprehensive Income hierarchies are assumed to be Historical accounts. This means they are translated at Average Rate and any amounts attributed to FX fluctuations are transferred to the CTA or CICTA account.
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How is CTA used in financial statements?
Currency trade adjustments are important to include in international companies financial statements to count any difference in foreign currency changes. If a company buys or sells products or services abroad, it could cost more or less in other countries depending on the value of their currency. The company then tracks and records this information on its balance sheets, on its own line item in the assets section, and they typically use the ALOE formula:
Assets = Liabilities + Owners Equity
In these financial statements, businesses must report their transactions in a currency called the functional currency. This is the currency most frequently used by the company or the currency of the companys native country. Currency translation, converting one to another, is vital in this process, as companies report all figures on their financial records in the same currency. Here are two primary ways to translate currency:
Current rate translation
Current rate translation is when a company converts the financial records with its rate at the current exchange rate, even if a company made these purchases earlier. If you acquired assets abroad months earlier but there were a lot of changes in the international market, this could produce a misleading figure.
Temporal rate translation
The temporal method, or historical method, uses the exchange rate at the time of the purchase. This ensures the company accurately reports any of the gains or losses associated with exchange rates. This may overlook certain factors like appreciation and depreciation in relation to market changes, but thats why its important to calculate a cumulative trade adjustment.
What is CTA accounting?
A CTA is a currency trade adjustment found on translated balance sheets, usually in the accumulated other comprehensive income section (OCI). This is the number of gains and losses that a company might experience from exchange rates over a specific period. This also helps investors identify if the exchange rate has any effect on the profits or losses of a company doing international business. Companies should calculate this frequently and create a cumulative adjustment. The cumulative translation adjustment is the combination of currency trade adjustments made over a specific financial period, like a fiscal year.
Examples of when to calculate CTA
A company may include a currency trade adjustment for several reasons. Here are a few examples:
Opening an office abroad
If your company plans to open an office location abroad, you might use that countrys currency to purchase a building or supplies and pay for advertisements and employee wages. Besides this, consider each customer and their currency used in order to account for revenue properly. If the net earnings of that location after deducting expenses yield a profit loss or gain, the CTA would be the difference in amount when converting to your native countrys rate. You then might add this to your balance sheet for financial reporting. Its important to calculate this regularly, as exchange rates can change often.
International purchases often account for the exchange rate at the point of sale. If you buy or sell goods or services internationally, you might record any exchange rates that arent immediately converted. This can include additional costs, such as shipping and handling. Asset acquisition might only require a one-time currency adjustment.
You might include a CTA in your financial reports if you outsource services to other countries. You can get paid with the currency where you live which might be higher or lower than your currency value. Since you pay for these services with your countrys currency, youre expected to calculate and add or subtract any adjustments for the exchange rate from your net income.
How to calculate CTA
There are a few steps you might follow when calculating CTA:
1. Identify your international assets
Identify what assets within your organization you gained abroad. You may only need to translate these into your functional currency. Be sure to keep records of when these acquisitions happened and how much you paid so you can calculate using the correct exchange rates.
2. Translate the currency
Translate the currency once youve identified your international assets and their cost. You might translate using both the current rate and temporal methods. This can give you an idea of how much the market might have changed since your purchase and may inform potential future purchases.
3. Calculate the difference
The difference between the current rate and the rate at the time of the purchase can tell you your cumulative trade adjustment number. If the number shows that your assets have increased in value, you might log this as a financial gain on your financial report. Its still important to record numbers if the currency rate change has devalued some assets to provide investors and other financial professionals honest reporting. Also, consider calculating the currency trade difference more frequently, which can help create trends and provide more accurate averages to forecast future market changes.
4. Add to your financial statements
Once youve calculated the adjustment, you can add it to your financial statement as a single line item. You can either add or subtract from your overall equity under retained earnings. You might then calculate further by using the ALOE accounting formula.
5. Contact an accountant
CTA is a required field for financial reporting and theres a lot to consider with exchange rates. If youre unsure of exchange rates, how often you might calculate a CTA or want to verify your work, an accountant specializing in international purchases can help. This is the best way to ensure youve included the right information.
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