Cumulative Translation Adjustment - CTA

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.

RELATED TERMS
  1. Commodity Trading Advisor - CTA

    An individual or firm who provides individualized advice regarding ...
  2. Currency Translation

    The process of quoting the amount of money denominated in one ...
  3. Translation Exposure

    The risk that a company's equities, assets, liabilities or income ...
  4. Current Rate Method

    A method of foreign currency translation where most items in ...
  5. International Currency Exchange ...

    The rate at which two currencies in the market can be exchanged. ...
  6. Foreign Exchange Risk

    1. The risk of an investment's value changing due to changes ...
Related Articles
  1. Trading

    An Introduction To Managed Futures

    Their inverse correlation with stocks and bonds make these alternative investments worth getting to know.
  2. Markets

    Hotshots Needed For Commodity Trading Advisor Positions

    If you can multi-task and you enjoy a good challenge, this lucrative career could be a perfect fit.
  3. Trading

    Corporate Currency Risks Explained

    Transaction, translation and economic risks can affect a company's balance sheet.
  4. Trading

    Profiting From A Weak U.S. Dollar

    Learn how to allocate your investments when the U.S. dollar is down.
  5. ETFs & Mutual Funds

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  6. Markets

    What Happens in a Currency Crisis?

    A currency crisis comes from a decline in the value of a country’s currency.
  7. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  8. Trading

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  9. Markets

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  10. Trading

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
RELATED FAQS
  1. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
  2. What types of companies benefit from reporting results utilizing constant currencies ...

    Understand constant currency figures, and explore some of the reasons why a company is likely to benefit from reporting using ... Read Answer >>
  3. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
  4. Why do forex traders use a currency converter?

    All currencies are quoted in pairs - one country's currency against another country's currency. A currency converter is used ... Read Answer >>
  5. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
  6. How can I invest in a foreign exchange market?

    The foreign exchange market, also called the currency market or forex (FX), is the world's largest financial market, accounting ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center