Switch of intercompany loan from foreign into functional currency - impact on CTA

accounting for intercompany loans Hello all,

Could you please help me to understand what shall happen to currency translation adjustment in the following situation. There was a intercompany quasi-equity loan in euro provided by a European company to a Russian one. Accordingly, all FX differences were booked by the Russian company as CTA inside equity. The loan is now refinanced by the same lender in Russian roubles, which for the Russian company of course means no FX differences anymore.

Question is - what to do with CTA accumulated so far? Should it be:

1. Released as FX gain/loss to income statement since the company has no loans in foreign currency any longer?

2. Kept in equity since it appeared on I/Co loan in foreign currency, no matter that it was later changed to functional currency?

If 2 is correct answer, should this accumulated CTA be released to income statement pro rata at the moment of partial repayment?

Thanks in advance.

Regards,

Svetlana

Answers

Martin van Wunnik I realize financial projects for my customers • August 21, 2012

Hi,

At first sight, I would go for 1. Your Russian company has no EUR-valued loan anymore.

However, I am a bit confused, as according to me it is either equity (i.e. capital), either loan. If it is equity, I believe there are no FX present in the equity other than the first time conversion of the EUR to RUR at the official moment of company creation (and related exchange rate to be used at that moment) or capital increase.

If it's a loan (on liabilities of the Russian company and on the assets of the European company), I would imagine the FX differences to be booked on a periodical basis (e.g. closing date) in Russia. Under IFRS-like regulation, that would mean both positive and negative exchange differences on the loan, given the fluctuation of the EUR-RUR exchange rate compared to the balance in your books. Anyway, these FX differences would get into the equity, included into the accumulated profit/loss line.

Now, you mention a specific CTA line in your equity. I am not sure how that can work out in the above described situation, being unfamiliar with the meaning of "quasi equity-loan".

In my understanding, you have a new loan document, stated in RUR, so you have to revalue your previous RUR balance in your books with the new, and book that final FX effect in your P&L. This would then IMHO just end up added on/removed from your accumulated profit/loss line in your equity. Depending on the historical evolution on the exchange rate and the newly used rate for the final EUR to RUR conversion, this can level out or leave a balance (that's OK as your business situation has changed). However, I am not sure if you still have a specific CTA balance once everything has been paid back...

I hope this helps.

Regards,
Martin

Anonymous Finance manager • August 29, 2012

Hello Martin,

Thanks a lot for your comments. Under quasi-equity loans I mean loans which will hardly be repaid in the foreseeable future. So by nature they are not very different from equity injection. To be honest, I am myself ready to follow, let's say, more conservative approach and leave accumulated FX difference in equity. Just because historically it arised from EUR loan, so by nature belongs to equity.
Thanks again.

Regards,
Svetlana

Helen Kane President • October 23, 2012

As the loan was treated as "quasi-equity" its release to income will follow the CTA on equity rules. When the loan is converted to rubles, the CTA amount will become frozen. It will remain there until "substantial liquidation of the subsidiary" at which time it will move to income together with the CTA that will continue to accumulate at the parent (now that the denomination has changed but the loan continues). Even if events were to change and the sub paid back the long term obligation, gains and losses would remain in CTA.

Note: If you were allowed to reclass the gain/loss to P&L just by changing the denomination of the long-term interco lots of people would reclass gains during difficult quarters by just changing the currency of denomination. We do a lot of training on FAS52/ASC830 issues. We have an advanced class coming up November but you might want to check out our complete course offering for 2013 which won't be posted for another few weeks.

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Switch of intercompany loan from foreign into functional currency - impact on CTA

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