TABLE OF CONTENTS
Description
A Cumulative translation adjustment (CTA) summarizes the gains and losses resulting from varying exchange rates over time. Please review the CTA Article, this will inform this example. In this article, we walk through a concrete example of how this works for an example business.
Example
System Setup
Locations/Entities
Create Two locations/entities
- Global operating in USD
- SGD operating in SGD, subsidiary of Global
Accounting Periods
Assume the business operates their fiscal year same as calendar year.
Accounts Setup
In this example, we'll book a single journal entry at the SGD location to show how this affects the consolidated balance sheet.
Here are the accounts used
Number | Name | Type |
110000 | Cash | Asset |
410000 | Revenue | Revenue |
310000 | Retained Earnings | Equity |
340000 | Other Comprehensive Income | Equity |
340001 | Accumulated Other Comprehensive Income | Equity |
System Account Default Settings
Set default accounts in SoftLedger as Follows.
Navigate to Settings ➝ Accounts
Balance Sheet updates
In this example we'll update our balance sheet as noted above.
Booking a Sample entry
NOTE: Ensure to post the journal entry
Closing the year
Navigate to Admin ➝ Acc. Periods and close out 2021 FY
This will book the Retained earnings entry and CTA entry as well
Viewing the unconsolidated balance sheet
Looks as expected, SGD$100,000 in total assets, and the balancing amount in retained earnings.
Viewing the consolidated balance sheet
At first glance, we see SGD and Global individual locations do not balance, however the consolidated Balance does.
Understanding the Results
- First see our total Assets are USD $73,212.90.
- This is taking our SGD$100,000 and converting to USD using the rate(0.732129) from the transaction date of the journal entry (12/15/21).
- Next we see our Retained earnings(USD$74,148.20) does not offset our Assets here as it did when looking at the unconsolidated balance sheet.
- This is taking our SGD$(100,000) retained earnings entry and converting to USD using the rate(0.741482) from the transaction date of the retained earnings journal entry (1/1/22).
- This results in a balance of USD$(935.30) due to the difference in SGD ➝ USD exchange rate from 12/15/21 and 1/1/22.
- - - -
- In order to fix this imbalance at the consolidated level, we need to book a Cumulative Translation Adjustment at the Parent Location/Entity(Global).
- SoftLedger handles this automatically, as can be seen in the Balance Sheet above. There is a USD$935.30 amount booked to Accumulated Other Comprehensive Income at the Global Location. (Other side booked to Other Comprehensive Income, which is not present on the balance sheet)
- This offsets the value booked at SGD Location and results in a balanced consolidated amount.