Currency Translation Adjustment Journal Entry
Currency translation adjustments are necessary when a company has foreign subsidiaries and needs to consolidate their financial statements. These adjustments account for the changes in exchange rates between the functional currency of the foreign subsidiary and the reporting currency of the parent company.
Below is a detailed explanation and example of currency translation adjustment journal entries.
Scenario: Foreign Subsidiary Translation
Assume a parent company in India has a subsidiary in the USA. The subsidiary’s functional currency is USD, and the parent company’s reporting currency is INR. At the end of the financial period, the subsidiary’s financial statements need to be translated into INR.
Step 1: Translate Subsidiary’s Financial Statements
The financial statements of the subsidiary are translated using the current exchange rate for assets and liabilities, the historical rate for equity, and the average rate for income and expenses.
Step 2: Identify Translation Adjustment
The difference arising from the translation of the subsidiary’s financial statements is recorded as a currency translation adjustment (CTA) in the parent company’s books.
Example: Translation Adjustment
Assume the following:
- The subsidiary has net assets worth $100,000.
- The exchange rate at the beginning of the period was 1 USD = 70 INR.
- The exchange rate at the end of the period is 1 USD = 75 INR.
The value of the net assets in INR at the beginning of the period is $100,000 * 70 = ₹7,000,000. The value of the net assets in INR at the end of the period is $100,000 * 75 = ₹7,500,000. The currency translation adjustment is ₹7,500,000 - ₹7,000,000 = ₹500,000.
Journal Entry for Currency Translation Adjustment:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Translation Adjustment A/c | 500,000 | |
| To Foreign Currency Translation Reserve A/c | 500,000 | |
| (Being translation adjustment recorded for foreign subsidiary) |
Explanation:
- Translation Adjustment A/c is debited to record the increase in the value of the subsidiary's net assets due to currency exchange rate changes.
- Foreign Currency Translation Reserve A/c is credited to record the adjustment in equity.
Summary of Entry
- Currency Translation Adjustment:
- Debit Translation Adjustment A/c
- Credit Foreign Currency Translation Reserve A/c
Additional Considerations
Consolidation: When the parent company consolidates its financial statements with the subsidiary, the currency translation adjustment is included in the consolidated balance sheet under equity as a separate component of other comprehensive income.
Reversals: If the subsidiary is disposed of, the cumulative currency translation adjustment related to that subsidiary is reclassified from equity to profit or loss.
