Description
Cumulative Translation Adjustment arises for organizations that have an entity structure that includes entities with varying reporting currencies (e.g. one entity reports in USD and another in EUR). This articles details the methodology and walks through an example to understand that methodology in which the Cumulative Translation Adjustment (CTA) is treated and booked within SoftLedger.
The Cumulative Translation Adjustment is similar to the Currency Translation Difference included on the Financial Statements, but slightly different in that the value for CTA is a booked Journal Entry rather than a report only calculation. During the Year Close process the Currency Translation Difference(CTD) will need to be booked into the Closing Ledger to account for the foreign currency difference when booking the Retained Earnings entry in a consolidated ledger. Learn more about the Currency Translation Difference here -->
- Cumulative Translation Adjustment Methodology
- Cumulative Translation Adjustment Example
Cumulative Translation Adjustment Methodology
The Cumulative Translation Adjustment (CTA) is an accumulation of the Currency Translation Difference for the parent Locations in your entity structure that require CTD captured at fiscal accounting year end. Starting at the lowest parent level in the Location hierarchy, when closing the Accounting Year, the SoftLedger system automatically books the following Journal Entry(ies):
Convert all child CTD balances to this Location's currency using the weighted average consolidation rate for the last period in the fiscal year.
Sum all converted child CTD balances and subtract them from this Location's CTD balance.
Book a CTA entry for this location with the following details:
| Field | Value |
|---|---|
| Currency | Location's reporting currency |
| Reference | Cumulative Translation Adjustment |
| Dates | First day of next fiscal year |
| Ledger | Closing |
| Debit Account | User Set Other Comprehensive Income |
| Credit Account | User Set Accumulated Other Comprehensive Income |
The Currency Translation Adjustment entries are done by the system when closing the Accounting Year. These entries use the Ledger Accounts set for Other Comprehensive Income and Accumulated Other Comprehensive Income in the Financial Close section under Settings>Accounts.
Cumulative Translation Adjustment Example
See an example below to better illustrate how the Cumulative Translation Adjustment calculation and Journal Entries are produced. The example will review a Location Structure that includes three levels of Locations in a hierarchy that need to translate balances up in from 3 different subsidiary Location reporting currencies into the parent Location reporting currency. The example has a sample set of Journal Entries and simple versions of unconsolidated Balance Sheets used with a set of Consolidation Rates to move Ledger Account balances up the entity structure and the required CTD values along the way.
Location Structure
For this example, suppose a company has the below entity structure:
| Location | Currency | Parent Location |
|---|---|---|
| Global Holdings | USD | None |
| Continental Corp | EUR | Global Holdings |
| National Ltd | GBP | Continental Corp |
| Asia Pacific Inc | JPY | Continental Corp |
Journal Entries
For the 2023 year, this entity structure has the below basic Journal Entries:
| No. | Debit Ledger Account | Credit Ledger Account | Location | Currency | Amount | Dates |
|---|---|---|---|---|---|---|
| 1 | Cash | Revenue | Global Holdings | USD | 500.00 | 2023-12-31 |
| 2 | Expense | Cash | Global Holdings | USD | 200.00 | 2023-12-31 |
| 3 | Cash | Revenue | Continental Corp | EUR | 200.00 | 2023-12-31 |
| 4 | Expense | Cash | Continental Corp | EUR | 80.00 | 2023-12-31 |
| 5 | Cash | Revenue | National Ltd | GBP | 100.00 | 2023-10-10 |
| 6 | Expense | Cash | National Ltd | GBP | 50.00 | 2023-12-31 |
| 7 | Cash | Revenue | Asia Pacific Inc | JPY | 10,000.00 | 2023-09-10 |
| 8 | Expense | Cash | Asia Pacific Inc | JPY | 5,000.00 | 2023-12-31 |
Unconsolidated Balance Sheets
With the above Journal Entries, the unconsolidated Balance Sheet for each Location would appear as below as of 2023-12-31:
National Ltd (GBP)
Account | Amount (GBP) |
|---|---|
Cash | 50.00 |
Current Period Income | (50.00) |
Asia Pacific Inc (JPY)
Account | Amount (JPY) |
|---|---|
Cash | 5,000.00 |
Current Period Income | (5,000.00) |
Continental Corp (EUR)
Account | Amount (EUR) |
|---|---|
Cash | 120.00 |
Current Period Income | (120.00) |
Global Holdings (USD)
Account | Amount (USD) |
|---|---|
Cash | 300.00 |
Current Period Income | (300.00) |
Consolidation Rates and Consolidated Balance Sheets
To create the consolidated Balance Sheets from the above unconsolidated Balance Sheets, the below Consolidation Rates are used to produce the consolidated Balance Sheets at each level.
| Currency Pair | Spot Rate | Weighted Average Rate |
|---|---|---|
| GBP → EUR | 1.200 | 1.1500 |
| JPY → EUR | 0.008 | 0.0075 |
| EUR → USD | 1.100 | 1.0500 |
Consolidated Balance Sheet for Continental Corp
Account balances as of 2023-12-31:
| Account | Amount (EUR) |
|---|---|
| Cash | 220.00 |
| Current Period Income | (215.00) |
| Currency Translation Difference | (5.00) |
Calculation Breakdown (Continental Corp)
Cash Consolidation
| Entity | Original Amount | Exchange Rate | EUR Amount |
|---|---|---|---|
| Continental Corp | EUR 120.00 | 1.000 | 120.00 |
| National Ltd | GBP 50.00 | 1.200 (spot) | 60.00 |
| Asia Pacific Inc | JPY 5,000.00 | 0.008 (spot) | 40.00 |
| Total Cash | 220.00 |
Current Period Income Consolidation
| Entity | Original Amount | Exchange Rate | EUR Amount |
|---|---|---|---|
| Continental Corp | EUR (120.00) | 1.000 | (120.00) |
| National Ltd | GBP (50.00) | 1.1500 (weighted avg.) | (57.50) |
| Asia Pacific Inc | JPY (5,000.00) | 0.0075 (weighted avg.) | (37.50) |
| Total Income | (215.00) |
Currency Translation Difference (CTD)
The CTD of EUR (5.00) balances the consolidated Balance Sheet:
Total Assets (Cash) - Total Liabilities and Equity (Income + CTD) = 0 220.00 - (215.00 + 5.00) = 0
Consolidated Balance Sheet for Global Holdings
Consolidated Account balances as of 2023-12-31:
| Account Balance | Amount (USD) |
|---|---|
| Cash | 542.00 |
| Current Period Income | (525.75) |
| Currency Translation Difference | (16.25) |
Calculation Breakdown (Global Holdings)
Cash Consolidation
| Entity | Original Amount | Exchange Rate | USD Amount |
|---|---|---|---|
| Global Holdings | USD 300.00 | 1.000 | 300.00 |
| Continental Corp | EUR 220.00 | 1.100 (spot) | 242.00 |
| Total Cash | 542.00 |
Current Period Income Consolidation
| Entity | Original Amount | Exchange Rate | USD Amount |
|---|---|---|---|
| Global Holdings | USD (300.00) | 1.000 | (300.00) |
| Continental Corp | EUR (215.00) | 1.0500 (weighted avg.) | (225.75) |
| Total Income | (525.75) |
Currency Translation Difference (CTD)
| Entity | Original Amount | Exchange Rate | USD Amount |
|---|---|---|---|
| Continental Corp | EUR (5.00) | 1.100 (spot) | (5.50) |
| Adjustment Needed | (10.75) | ||
| Total CTD | (16.25) |
The CTD of USD (16.25) balances the consolidated balance sheet:
Total Assets (Cash) - Total Liabilities and Equity (Income + CTD) = 0 542.00 - (525.75 + 16.25) = 0
Retained Earnings Journal Entries
From the above conversion of unconsolidated Balance Sheets into a Consolidated Balance Sheet, along with the CTD calculation, when closing the accounting year at end of the fiscal year, the below Retained Earnings entries are done automatically by the SoftLedger system.
National Ltd (GBP)
| Account | Debit (GBP) | Credit (GBP) |
|---|---|---|
| Revenue | 100.00 | |
| Retained Earnings | 50.00 | |
| Expense | 50.00 |
Asia Pacific Inc (JPY)
| Account | Debit (JPY) | Credit (JPY) |
|---|---|---|
| Revenue | 10,000.00 | |
| Retained Earnings | 5,000.00 | |
| Expense | 5,000.00 |
Continental Corp (EUR)
| Account | Debit (EUR) | Credit (EUR) |
|---|---|---|
| Revenue | 200.00 | |
| Retained Earnings | 120.00 | |
| Expense | 80.00 |
Global Holdings (USD)
| Account | Debit (USD) | Credit (USD) |
|---|---|---|
| Revenue | 500.00 | |
| Retained Earnings | 300.00 | |
| Expense | 200.00 |
Cumulative Translation Adjustment (CTA) Entries
Continental Corp CTA
The consolidated Balance Sheet for Continental Crop has a CTD of EUR (5.00), and no child CTD balances. Therefore, the Journal Entry booked for this Location:
Date: 2024-01-01 | Reference: Cumulative Translation Adjustment | Ledger: Closing Ledger | Currency: EUR
| Account | Debit | Credit |
|---|---|---|
| Other Comprehensive Income | 5.00 | |
| Accumulated Other Comprehensive Income | 5.0 |
Global Holdings CTA
The consolidated Balance Sheet for Global Holdings has a CTD of USD (16.25). Since Global Holdings has children Locations, and therefore those child Location CTD balances must be considered for the CTA Journal Entry for Global Holdings. CTD balance from Continental Corp, which was EUR (5.00). The steps below are required when booking the Journal Entry for CTA at the Global Holdings level:
- Convert Continental Corp CTD to USD: EUR (5.00) * 1.0500 (weighted average rate) = USD (5.25)
- Calculate Global Holdings' own CTA: Total CTD - Child CTD = USD (16.25) - USD (5.25) = USD (11.00)
With the above information, the Journal Entry booked at Global Holdings:
Date: 2024-01-01 | Reference: Cumulative Translation Adjustment | Ledger: Closing Ledger | Currency: USD
| Account | Debit | Credit |
|---|---|---|
| Other Comprehensive Income | 11.00 | |
| Accumulated Other Comprehensive Income | 11.00 |
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