Overview
ASU 2013-05, issued in March 2013, is entitled Foreign Currency Matters (Topic 830):
Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. Its objective is to resolve the inconsistencies in practice about whether ASC Subtopic 810-10, Consolidation—Overall, or ASC Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity, or no longer holds a controlling financial interest in a subsidiary or group of assets.
Background
Translation adjustments to convert an entity’s financial statements from its functional currency to the currency used for financial statement reporting are presented as another comprehensive income item, included in stockholders’ equity. Translation adjustments accumulate from year to year in stockholders’ equity and are labeled
“cumulative translation adjustment.
ASU 2010-02 (ASC Subtopic 810-10) Consolidation: Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification, requires that a parent deconsolidate a subsidiary or derecognize a group of assets (other than a sale of in substance real estate or conveyance of oil and gas mineral rights), if the parent ceases to have a controlling financial interest in that group of assets.
The derecognition guidance in ASC 810-10 supports releasing the cumulative translation adjustment into net income upon the loss of a controlling financial interest in such a subsidiary or group of assets. However, the ASC 810-10 guidance does not distinguish between sales or transfers pertaining to an investment in a foreign entity and to a subsidiary or group of assets within a foreign entity.
Further, ASC 830-30, Foreign Currency Matters—Translation of Financial State-ments, provides for the release of the cumulative translation adjustment into net income only if a sale or transfer represents a sale, or complete or substantially complete, liquidation of an investment in a foreign entity.
ASU 2013-05 resolves the variations in practice for the treatment of business combinations achieved in stages (referred to as step transactions) involving a foreign entity. In practice, some entities have treated step acquisitions as being composed of two events:
• The disposition of an equity method investment
• The simultaneous acquisition of a controlling financial interest
As part of the two-step transaction, those entities generally released the cumulative translation adjustment related to the equity method investment.
Other entities viewed step acquisitions as being composed of a single event (increasing an investment), and generally did not release the cumulative translation adjustment in practice. Thus, there was confusion in practice.
ASU 2013-05 addresses entities that cease to hold a controlling financial interest in a subsidiary or group of assets within a foreign entity when:
• The subsidiary or group of assets is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights), and
• There is a cumulative translation adjustment balance associated with that for-eign entity.
ASU 2013-05 also includes amendments that affect entities that lose a controlling financial interest in an investment in a foreign entity, by sale or other transfer event.
Additionally, it includes those that acquire a business in stages, such as in a step acquisition, by increasing an investment in a foreign entity from one accounted for under the equity method to one accounted for as a consolidated investment.
Rules
Cessation of a Controlling Financial Interest
When a reporting entity (a parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is either a nonprofit activity or a business (other than a sale of in-substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in ASC Subtopic 830-30 Translation of Financial Statements, to release any related cumulative translation adjust-ment into net income.
Under ASC Subtopic 830-30, upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity, the cumulative translation adjustment component of equity shall be both:
• Removed from the separate component of equity
• Reported in net income as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs
The sale of an investment in a foreign entity includes both:
• Events that result in the loss of a controlling financial interest in an investment in a foreign entity
• Events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date
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TOP ACCOUNTING ISSUES FOR 2015 CPE COURSE Partial SalesIf a parent has an equity method investment in a foreign entity, the partial sale rules in ASC 830-30-40, Foreign Currency Matter, Translation of Financial Statements, Derecogni-tion, should be followed. Under ASC 830-30-40, if a reporting entity sells part of its ownership interest in an equity investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment component of equity attributable to that equity method investment shall be released into net income.
NOTE: If the sale of part of the equity method investment results in a loss of significant influence, the entity should follow the rules found in ASC 323-10, Investments—Equity Method and Joint Ventures, paragraphs 35-39, for guidance on how to account for that pro-rata portion of the cumulative translation adjustment component of equity attributable to the remaining investment. That discussion is not addressed in this section.
If the partial sale involves ownership in a non-foreign entity, the pro-rata portion rule does not apply. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.
Transition and Effective Date
ASU 2013-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, it is effective for fiscal years beginning after December 15, 2014, and interim and annual periods thereafter. An entity shall provide the disclosures in ASC 250-10-50, Accounting Changes and Error Correc-tions, Overall, Disclosure (paragraphs 1 through 3) in the period the entity adopts the ASU.
The ASU shall be applied prospectively for the following:
• A sale or transfer of a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity after the effective date
• A sale of ownership interests in a foreign entity after the effective date
• A business combination achieved in stages after the effective date (Prior periods shall not be adjusted.)
Earlier application of the ASU is permitted. If early application is elected, an entity shall apply the ASU from the beginning of an entity’s fiscal year of adoption to account for the release of the cumulative translation adjustment in the same manner for all disposition and deconsolidation events and step acquisitions within that fiscal year.
STUDY QUESTION
5. Company X sells its investment in a foreign entity. How should X deal with the cumulative translation adjustment component?
a. Retain that amount in equity.
b. Remove that amount from equity in its entirety.
c. Remove a portion of the component and retain the remainder in equity.
d. Reclassify the component to a separate section of equity and re-label it.