Description
Currency Translation Difference (CTD) is an important component of consolidated financial statements for companies that report in more than one currency. CTD arises when a parent company location translates the financial statements of its foreign subsidiaries into the reporting currency of the parent.
The Currency Translation Difference is a calculated stub value added to the Balance Sheet, and is not a booked Journal Entry.
The CTD is similar to Cumulative Translation Adjustment, but slightly different in that it is calculated and represented during the fiscal year, and not booked like CTA. Learn more about the Cumulative Translation Adjustment here-->
Purpose of the Currency Translation Difference
CTD is needed for delivering consolidated financial statements for global businesses with multiple entities that have locations with differing reporting currencies. When consolidating financials, child Location account balances are translated from their reporting currency to their parent's reporting currency(ies).
If the child and parent share the same reporting currency, the translation rate is simply 1, and therefore there is no CTD. However, if the child reports in one currency (e.g. EUR) and the parent reports in another currency (e.g. USD), the balances will be translated using the appropriate consolidation rates.
If you're financial statement translates account balances for multiple types of accounts, different consolidation rates may be used:
Account Type | Consolidation Rates |
Asset Accounts | Spot Rate |
Liability Accounts | Spot Rate |
Equity Accounts | Spot Rate (Individual accounts can be specified to use Historical Rate) |
Revenue | Weighted Average Rate |
Expense | Weighted Average Rate |
Example of Currency Translation Difference
Assume the following entity structure:
Global - Reports in USD
Europe - Reports in EUR, subsidiary of Global
Assume the following ledger accounts:
Cash - Type: Asset
Expense - Type: Expense
Common Stock - Type: Equity, Historical Consolidation Rates Specified.
The unconsolidated Europe Balance Sheet has balances as follows:
Account | Amount (EUR) |
Cash | 10,000 |
Total Assets | 10,000 |
Accounts Payable | 500 |
Total Liabilities | 500 |
Common Stock | (5,000) |
Current Period Income | (4,500) |
Total Equity | (9,500) |
Total Liabilities & Equity | (10,000) |
The consolidation rates from Europe (EUR) to Global (USD) are:
Rate Type | EUR to USD |
Spot Rate | 1.0850 |
Weighted Average Rate | 1.0725 |
Historical Rate | 1.1200 |
Lets translate the unconsolidated Europe Balance Sheet to its parents currency (USD), by multiplying each balance by its appropriate consolidation rate:
Account | Balance (EUR) | Consolidation Rate | Amount (USD) |
Cash | 10,000 | 1.0850 (Spot) | 10,850 |
Total Assets | 10,000 | 10,850 | |
Accounts Payable | 500 | 1.0725 (WAVG) | 536 |
Total Liabilities | 500 | 536 | |
Common Stock | (5,000) | 1.1200 (Hist) | (5,600) |
Current Period Income | (4,500) | 1.0725 (WAVG) | (4,826) |
Total Equity | (9,500) | (10,426) | |
Total Liabilities & Equity | (10,000) | (9,890) |
When reviewing the sum of balances for this balance sheet at the parent level in USD, the translated balance sheet has:
Total Assets USD 10,850
Total Liabilities & Equity USD (9,890)
There is a delta of USD (960), and this delata is the Currency Translation Difference. Assuming no other activity in the Global Location, your consolidated Balance Sheet is now:
Account | Amount (USD) |
Cash | 10,850 |
Total Assets | 10,850 |
Accounts Payable | 536 |
Total Liabilities | 536 |
Common Stock | (5,600) |
Current Period Income | (4,826) |
Currency Translation Difference | (960) |
Total Equity | (11,386) |
Total Liabilities & Equity | (10,850) |