What is a Cumulative Translation Adjustment (CTA)?
A cumulative translation adjustment (CTA) is an entry in the accumulated other comprehensive income section of a translated balance sheet summarizing the gains and losses resulting from varying exchange rates over time. A CTA entry is required under the Financial Accounting Standards Board (FASB) as part of Statement 52 as a means of helping investors differentiate between actual operating gains and losses and those generated via currency translation.
- Cumulative translation adjustments (CTA) are presented in the accumulated other comprehensive income section of a company's translated balance sheet.
- The CTA line item presents gains and losses due to foreign currency exchange rate fluctuations over fiscal periods.
- It is separated out to distinguish between currency exchange gains and losses and actual operational gains and losses.
Understanding Cumulative Translation Adjustments (CTA)
Cumulative translation adjustments (CTAs) are an integral part of the financial statements for companies with international business operations. The CTA is a line item within the balance sheet's accumulated other comprehensive income section that reports any gains or losses that have occurred because of exposure to foreign currency markets through normal business activities. The line item is clearly noted, separating the information from that of other gains or losses.
The need to exchange currency for use in a foreign market can result in various gains and losses. In most cases, international businesses record and must report all of their transactions in a single currency, referred to as the functional currency. The functional currency is most often the one used in the company's home country, though another nation’s currency may be selected for a business based in a country with unstable currency.
Example of a Cumulative Translation Adjustment (CTA)
For example, if a U.S.-based company wishes to operate in Germany, it must convert some of its U.S. dollars to euros for purposes of purchasing or renting property, paying employees, paying German taxes, etc. In addition, German citizens or businesses that work with this U.S.-based company will pay with euros. The company will create its financial statements in one currency, the dollar. It must convert the value of its business activities conducted in Germany with the euro back to dollars via an exchange rate.
Currency values and exchange rates shift regularly, and the value of the dollar relative to the euro may fluctuate over fiscal periods. For example, a company may convert dollars into euros during one fiscal period and purchase assets or pay other operating expenses with those euros in another fiscal period. To account for these fluctuations over fiscal periods, the CTA is used to identify the gains or losses solely related to changes in the exchange rate.
When a company's functional currency, the dollar in our example, increases in value relative to the secondary currency, the euro in our example, a U.S.-based company will experience a functional gain due purely to the change in the exchange rate, as the functional currency can now be converted into a larger number of the foreign currency. When the functional currency decreases in value against the second, this results in a loss.
This gain or loss is not directly due to the company's core operations, and it should neither be viewed as a benefit nor a penalty when analyzing the company in terms of its financial stability. By knowing what a company has earned or lost through its day-to-day business operations, investors are better able to evaluate the state of the business itself.