cumulative translation adjustment

This subtopic governs deferred tax accounting for basis differences that arise in foreign operations when tax or financial reporting bases are restated — because of a change in functional currency, general price-level (inflation) indexing, or a functional currency that differs from the local currency. Its core rules: when an economy ceases to be highly inflationary and new functional currency bases are established for nonmonetary items, the resulting differences from local currency tax bases are temporary differences requiring deferred taxes recognized in other comprehensive income as an adjustment to cumulative translation adjustments (830-740-45-2); by contrast, no deferred taxes are recognized for nonmonetary assets remeasured at historical exchange rates whose differences arise from exchange rate changes or tax indexing (740-10-25-3(f)).

ASC 815-35 governs the subsequent measurement of hedges of a net investment in a foreign operation (designated under 815-20). The effective portion of the gain or loss on the hedging derivative — or the foreign currency transaction gain or loss on a nonderivative hedging instrument such as foreign-currency debt — is reported the same way as a translation adjustment, i.e., in the cumulative translation adjustment (CTA) section of other comprehensive income (815-35-35-1). An entity elects either the spot method or the forward method to assess effectiveness and must apply that choice consistently to all derivative net investment hedges (815-35-35-4).

ASC 830-30 governs how a reporting entity translates the financial statements of a foreign entity whose functional currency is not the reporting currency, when those statements are consolidated, combined, or accounted for under the equity method. Assets and liabilities are translated at the balance sheet date rate and revenues, expenses, gains, and losses at the rates on the dates recognized; the resulting translation adjustments go to other comprehensive income (accumulated as the cumulative translation adjustment, or CTA) rather than net income. The CTA is released into earnings only upon sale or complete or substantially complete liquidation of the investment in the foreign entity.