The US Financial Accounting Standards Board (FASB) amended financial reporting standards to resolve diversity in practice related to financial reporting involving the narrow issue of a parent entity’s accounting for the cumulative translation adjustment of foreign currency into net income upon derecognition of foreign subsidiaries or assets.
The amendments are contained in Accounting Standards Update (ASU) No. 2013-05, 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.
Originally a project undertaken by FASB’s Emerging Issues Task Force, the ASU is designed to eliminate diversity that had emerged with regard to the application to the release of the cumulative translation adjustment into net income.
Derecognition guidance in FASB Accounting Standards Codification Subtopic 810-10, Consolidation—Overall, 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. But Subtopic 810-10 does not distinguish between:
- Sales or transfers pertaining to an investment in a foreign entity (as defined in Topic 830), and
- Sales or transfers pertaining to a subsidiary or group of assets within a foreign entity.
But Subtopic 830-30 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 in a foreign entity.
ASU 2013-05 attempts to resolve the diversity by requiring that when a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, the parent is required to apply the Subtopic 830-30 guidance to release any related cumulative translation adjustment into net income. The release into net income should be made only if the sale or transfer results in liquidation of the foreign entity where the subsidiary or group of assets resided.
For an equity method investment that is a foreign entity, the partial sale guidance in Section 830-30-40 still applies. A pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment.
This treatment does not apply to an equity method investment that is not a foreign entity. In those situations, the cumulative translation adjustment is released into net income only if the partial sale represents a liquidation of the foreign entity containing the investment.
ASU 2013-05 also clarifies that the sale of an investment in a foreign entity includes:
- Events that result in the loss of a controlling financial interest in the foreign entity, and
- Events that result in an acquirer’s obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date, otherwise known as a “step acquisition.”
In this circumstance, the cumulative translation requirement should be released into net income upon the occurrence of those events.
This guidance is designed to resolve the diversity in practice for the treatment of business combinations achieved in stages (also known as step acquisitions) involving a foreign entity.
A flow chart located within the ASU provides a step-by-step description of how to apply the amendments.
The amendments take effect prospectively for public companies for fiscal years beginning after December 15th 2013, and interim reporting periods within those years. For nonpublic entities, the ASU takes effect prospectively for the first annual period beginning after December 15th 2014, and interim and annual periods thereafter.
FASB requires the amendments to be applied prospectively to derecognition events occurring after the effective date; prior periods should not be adjusted. Early adoption is permitted, and entities that choose this option should apply the amendments at the beginning of the entities’ fiscal year of adoption.
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.