Release of CTA upon disposal of a foreign subsidiary-mechanics/journal entries?

USA Discussion in 'Technical Queries' started by CaesarSalad, Dec 13, 2016.

  1. CaesarSalad

    CaesarSalad

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    Fact pattern:
    • Parent owns a consolidated subsidiary with a functional currency of EURO. Parent currency is USD.
    • Parent plans to dispose of substantially all of sub's assets, which means cumulative transalation adjustment (CTA) balance must be inluded in calculation of gain/loss on sale and released to the P&L upon completion of the sale.
    • Contract sales price is 5M EURO or 5.3M USD
    • Asset carrying value is 4M EURO or 4.2M USD
    • CTA balance is a debit/loss of 3M USD (as of Month 0 latest translated balance sheet)
    • The group of assets will meet held for sale criteria in month 1 and the sale will occur in month 2.
    • Upon meeting HFS criteria, assets will be written down by the expected loss of 1.9M USD, which is calculated as 5.3M less 4.2M less 3M.
    • In Month 2,upon sale, the offset to cash received will be to remove the assets off the books and remove the CTA balance (no P&L effect since took the write-down in month 1).
    Question:
    (1) Conceptually I understand what needs to happen, but I do not know how to achieve this from a system/process standpoint. The fact that the loss must include CTA necessitates that the journal entries must be done in USD. Does this mean the entire transaction would be done through USD top-side journal entries? What about the fact that the contract price is in EUR?

    (2) Or would I determine the loss in USD, translate the loss to EUR, and then have the subsidiary post the journal entries? Would this not cause a circular reference since the loss depends on CTA and CTA results from translating the subsidiary's balance sheet and income statement accounts to USD?

    (3) Or would this be achieved through a combination of subsidiary-level journal entries and top-side journal entries? Maybe book the sale transaction in EUR and then separately book an entry top side in USD to the CTA?
     
    Last edited: Dec 13, 2016
    CaesarSalad, Dec 13, 2016
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  2. CaesarSalad

    CaesarSalad

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    Also:
    (4) After the sale, the balance sheet will continue to have some immaterial assets and liabilities (and thus CTA). To I continually relcass the new CTA balance to the P&L each month?

    (5) Upon liquidation and disbursement of the sale proceeds as a dividend to the parent, CTA will necessarily change. Does this new CTA amount replace the old one that I took to the P&L? Or do I continue to carry forward the $3M CTA loss I booked in month 0, on top of whatever new CTA is generated?
     
    CaesarSalad, Dec 13, 2016
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