Question

How is cumulative translation adjustment calculated? And how are net assets calculated that plays a part in this?

Answer 1

A cumulative translation adjustment (CTA) is calculated in accumulated other comprehensive income section of a translated balance sheet summarizing the gains and losses resulting from change in exchange rates over time. A CTA representation is required under the Financial Accounting Standards Board (FASB) as part of Statement 52 for the purpose of reporting to investors to enable them to differentiate between actual operating gains and losses and those generated through currency translation.

How are net assets calculated

The translation of financial statements begins with translating the income statement. FASB ASC Topic 830, Foreign Currency Matters, requires that all income transactions be translated at the rate that existed when the transaction occurred. In most cases the use of an average rate is acceptable where transactions occur uniformly throughout the year. In our case, we will use an average rate based on the average annual rate, but businesses that are seasonal or transact business in currencies that fluctuate widely may want to translate using rates based on monthly weighted averages.Calculation of cumulative translation adjustment could be understood from the given example.

For example, if a U.S.-based company wishes to operate in United Kingdom, it must convert some of its U.S. dollars to GBP for purposes of purchasing or renting property, paying employees, paying HMRC (tax authority in UK) taxes, etc. In addition, UK citizens or businesses that work with this U.S.-based company will pay with GBPs. The company will report its financial statements in one currency, the dollar. It must convert the value of its business activities conducted in Uk with the GBPs back to dollars via an exchange rate.