What is a 'Cumulative Translation Adjustment - CTA'
A cumulative translation adjustment (CTA) is an entry in the comprehensive income section of a translated balance sheet summarizing the gains/losses resulting from varying exchange rates over the years. A CTA entry is required under the Financial Accounting Standards Board (FASB) No.52 rule as a means of helping investors differentiate between actual operating gains/losses and those generated via translation.
BREAKING DOWN 'Cumulative Translation Adjustment - CTA'By knowing what a company has earned or lost through its day-to-day business operations, rather than from an accounting practice, investors are better able to make sound financial decisions. Cumulative translation adjustments are an integral part of the financial statements for firms with international market exposure.
The CTA is a line item within an accounting statement or balance sheet that handles any gains or losses that have occurred by participation in foreign currency markets or activities. The line item is clearly noted, separating the information from that of other gains or losses. The CTAs give additional information regarding the current state of the business, providing valuable information to both internal employees and shareholders.
Requirement in International Business
In most cases, international businesses record and must report all of their transactions in a single currency. The currency used in their home country is most often chosen, though another nation’s currency may be selected for a business based in an unstable market.
As part of converting all transactions to the selected currency, whether the transactions are for the purchase of services, the acquisition of assets or the value of currently held assets, the need to exchange currency for use in the foreign market can result in various gains and losses. Currency values shift regularly, changing how one currency is valued against another. To account for these changes, the CTA is used to account for the gains or losses solely related to changes in the exchange rate.
Gains and Losses in Currency Exchange
When a business’ home currency increases in value over the secondary currency, this results in a functional gain due purely to the change in rate, as the home currency can be converted into a larger number of the foreign currency. When the home currency decreases in value against the second, this results in a loss.
For example, if the home currency is the U.S. dollar, but the company operates internationally in euros, it has to record the CTA to compensate for value changes. If the starting rate between U.S. dollars and euros is 1:1 respectively, a change to 1:1.50 results in a gain, and a change to 1.50:1 results in a loss.