A Cumulative Translation Adjustment (CTA) is a line in an accounting statement that addresses gains and losses created by exchange rate changes. This ensures that financial reports are as accurate as possible, and reflect the true economic health of the company. Adjustments can occur over the course of multiple accounting periods, as for example when companies incur expenses in one period but don’t pay them until another. They are discussed in internal statements designed for use by employees as well as public declarations to shareholders and regulators with an interest in the company’s financial activities.
Companies operating on an international scale typically use one functional currency to denominate all their transactions. It may be domestic; an Australian company, for example, would use the Australian Dollar (AUD). If the local currency is too unstable, the company could select a stable foreign currency. Whenever business is transacted in a different currency, the company needs to translate it, converting to the functional currency.
In the process, a cumulative translation adjustment may become necessary because of changes in the exchange rate. If an Australian businessman travels to Germany and pays expenses in Euros, for example, the company would account for those in Australian dollars in its financial statements. A change in the exchange rates between the two currencies might require an adjustment later to accurately account for the trip. The company might experience a gain or loss, depending on how the values change in relation to each other.
The Financial Accounting Standards Board (FASB) sets rules for accountants to use in financial statements and declarations for consistency. Rule 52 addresses the CTA, setting out the standards accountants must use to accurately record it. This is important, as shareholders may have an interest in the company’s economic health and rely on this declaration for information about the company’s financial activities. If it realizes a gain or loss as a result of a cumulative translation adjustment, this may have an impact on overall finances.
This line in accounting statements is clearly delineated. Companies may also discuss special circumstances leading to an unusually high cumulative translation adjustment. Notes can offer context which may be important to shareholders, like information about why a loss is likely to be a one-time event because of highly unusual events. A currency might experience marked inflation which throws off calculations, for instance, an event the company may not anticipate seeing repeated in the future.