Financial Reporting. The Currency Translation Adjustment (CTA) (Case Study Sample)
The Williams Company, a U.S.-based company, owns 100% of a European Subsidiary (ES). The investment in ES totals $10 million (euros 13.5 million) as of the end of Year 1. This represents an initial investment of $6 million and retained earnings of $4 million. The Currency Translation Adjustment (CTA) account included in Other Comprehensive Income (OCI) totals $1 million (loss) at the end of Year 1.
During Year 2, Williams decided to sell 25% of ES to the Tremont Company, an unrelated U.S.-based Company for $15 million in cash. The closing date of the transaction is June 30 of Year 2. Earnings of ES for the six months of Year 2 are $1 million and there was an additional increase of $200,000 in the CTA during the first six months of Year 2. No dividends have been paid by ES to Williams.
Calculate the gain or the loss on the partial disposal by Williams of ES as of June 30, Year 2, under both the US GAAP and IFRS. Make sure you show the details of both calculations and provide authoritative references supporting the basis and the reasoning for each of your calculations.
Assume that during January Year 2, ES paid a dividend to Williams of euro 6.75 million ($5 million). How would that dividend be treated by Williams under both the US GAAP and IFRS? What impact, if any, would this dividend have on the CTA account of Williams under both the US GAAP and IFRS? Make sure you show the details of any calculations and provide authoritative references supporting the basis and the reasoning for each of your calculations, if any.
Assume that Williams’s investment in ES totals $6 million, the amount of the original investment. ES had not made any money since being formed by Williams as of December 31, Year 1, management has decided to sell ES, and to evaluate ES for any impairment charge in its Year 1 financial statements. The CTA totals $1 million at the end of Year 1. How would the evaluation of ES differ under the US GAAP and IFRS? Make sure you show the details of any calculations supported by authoritative references when answering this question.
Your submission should be a minimum of 3 pages in length, not including the required cover and reference pages. Longer submissions are permissible.
Format your submission according to the CSU-Global Guide to Writing & APA.
Be sure to discuss and reference concepts taken from the assigned module readings and relevant research. You must include a minimum of three credible, academic, or professional references supporting your submission and work.
The Currency Translation Adjustment (CTA)
The foreign branch and subsidiary figures are translated using the principles set in the IFRS (IAS 21 and 29) and US GAAP (ASC 830/ FAS 52) on foreign currency translation, which reflect the effects of changes in foreign exchange rates (Black, 2016). Transactions denominated in foreign currencies are translated into the functional currency using the exchange rate at the time of the transaction, and the functional currency of the foreign subsidiary is the euro. In the case of the IFRS, where there is € 6,750,000 dividend payment the retained earnings reduce by this amount at the end of the year. The functional currency is the euro and figures not in Euros are converted and translated in the financial statement.
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