I recently started working for a company that has a Mexican Mequilladora operation and they have not been correctly implementing FAS 52 as it applies to financial statement translation, so when I translated the Mexican operation's financial statements from Pesos to Dollars and went to record the translation loss to equity, I realized I had a one-sided adjustment that was needed in order to bring the Mexican dollar statements back into balance, which I guess means that the foreign currency translation adjustment must only be cumulative translation adjustments for reporting purposes and that it doesn't get recorded in the accounts; or am I doing something wrong?
Hi Stephen, The cumulative translation adjustment(CTA) for a foreign currency translation adjustmetn arises as the all of the monetary assets (cash, financial assets, etc.) are translated at the current rate, but the non-monetary assets are translated at the historical rate.
Hence, the CTA amount is the balancing amount so you can consolidate and report the Mexican in US$. The CTA balance accumulated over the years is recorded in the Accumulated Other Comprehensive Income (AOCI), which is a component of equity. If not please feel free to contact me and I can walk you with a working example that is more specific to your situation as I have worked with a lot of complex foreign exchange related issues.
Consolidated financial statements consist of the income statement, balance sheet and cash flow statements of a parent company and the subsidiaries under its ownership or administrative control.
When preparing consolidated financial statements, you must eliminate some entries to avoid duplicating or overstating financial data.
What really has me curious is that as you state "the CTA amount is the balancing amount so you can consolidate and report the Mexican operations in US$" but as I think through the statement translation process the CTA by definition seems to be a one-sided balancing amount and therefore by deduction I think only an amount used for reporting purposes "a balancing amount to make the consolidation process work" and therefore it doesn't get recorded in any GL accounts. Hi Stephen - This is the same email I had sent you last night - posting it here as it might be helpful for the others in the group.
The CTA is recorded in consolidated financial statements. The double entry is will be as follows: Assume you invested an amount of US0 million in the foreign (Mexican) operation - a separate legal entity.