Cumulative Translation Adjustment (CTA): Definition, Calculation

Cumulative Translation Adjustment

Investopedia / Zoe Hansen

What Is a Cumulative Translation Adjustment (CTA)?

A cumulative translation adjustment (CTA) summarizes the gains and losses resulting from varying exchange rates over time. It is an entry in the accumulated other comprehensive income section of a translated balance sheet. 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.

Key Takeaways

  • 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.
  • Currency values and exchange rates shift regularly, and the value of one currency relative to another may fluctuate over fiscal periods.
  • 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.
  • It is separated out to distinguish between currency exchange gains and losses and actual operational gains and losses.

What Are Cumulative Translation Adjustments Used For?

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 typically the company's home currency, though another nation’s currency may be selected for a business based in a country with an unstable currency.

Cumulative Translation Adjustment 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 a 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. However, the company will create its financial statements in one currency, the dollar. Correspondingly, 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. This is because the functional currency can now be converted into a larger number of the foreign currency. On the other hand, 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.

How Do You Calculate the Cumulative Translation Adjustment?

To calculate the cumulative translation adjustment (CTA), businesses can first identify assets that were acquired in another country. Using records from these acquisitions, companies can then translate these into their functional currency—the primary currency the company conducts business in. To compare how the value of these assets may have changed over time due to exchange rate fluctuations, they can convert their financial records with the current exchange rate minus the exchange rate during the time the assets were acquired.

The CTA indicates the difference between these two numbers. A gain may be reported if the assets have increased in value since the time of purchase. The reverse is true if the assets declined in value. This adjustment is then added as a single line item to the financial statement, typically under retained earnings.

Where Does the Cumulative Translation Adjustment Journal Entry Occur?

The CTA entry goes in a translated balance sheet under the accumulated other comprehensive income section. Its purpose is to show the gains and losses from different exchange rates over time when business is conducted in another currency.

What Does a Debit Balance In a Cumulative Translation Adjustment Mean?

When a foreign currency has appreciated relative to the functional currency—the currency a business typically conducts business in—it can result in a debit balance in the cumulative translation adjustment.