The Financial Accounting Standards Board has finalized a new rule that is intended to clarify when and how a company should release an accumulated foreign currency translation adjustment into earnings when a company sheds its investment or controlling interest in a foreign business operation.

FASB adopted Accounting Standards Update No. 2013-05 on the recommendation of its Emerging Issues Task Force, which studied diversities in how companies handle such adjustments based on different guidance in Generally Accepted Accounting Principles. EITF member Chuck Evans, a partner at Grant Thornton, says some companies follow consolidation guidance, which says they should release a portion of the cumulative translation adjustment, and some follow guidance on foreign currency, which says the adjustment should be made only when it can be released entirely. “There was diversity in practice, and a conflict in the guidance,” he says. The problem became acute following the financial crisis when merger and acquisition activity eventually resumed as currencies became particularly volatile. 

FASB's new guidance tells a company what to do with the CTA that is sitting on its books when a parent either sells a part or all of its investment in a foreign entity, or when it no longer holds a controlling interest in a business unit or a group of assets that do not produce a profit within a foreign entity. The new standard says under such circumstances, the parent company should follow the guidance in Accounting Standards Codification Subtopic 830-30, which addresses foreign currency matters, to release any related currency adjustment into earnings.

The new rule notes that the adjustment should be released into earnings only if the sale or transfer results in a complete or substantially complete liquidation of the foreign entity in question. It also explains what to do if the investment in question is an equity method investment. In that case, companies would follow the partial sale guidance contained in ASC 830-30-40, FASB says. The guidance contains a flow chart to help illustrate when and how the adjustment would be made.

Evans says the EITF originally issued a proposal that would allow for more instances of partial release of CTAs but heard concerns through the comment process, and so changed its recommendation to FASB. “It was an unusual situation where the EITF made one decision, looked at the comment letters, and came to a different decision,” he says.

The guidance is effective for periods beginning after Dec. 5, 2013, with early adoption permitted.