CTA or Transaction Gain: Why Does One Go to OCI and the Other to Income?
Foreign-currency accounting changes depending on whether the company is translating a foreign operation or settling a foreign-currency transaction.
Transaction gain or loss
When a receivable, payable, or other monetary transaction is denominated in a foreign currency, exchange-rate changes can create gains or losses in earnings.
Translation adjustment
When a foreign entity's financial statements are translated from functional currency into the reporting currency, the resulting cumulative translation adjustment generally enters OCI.
Functional currency
Correctly identifying the functional currency is essential because it determines whether the accounting is translation or remeasurement.
Exam strategy
Ask whether you are accounting for one foreign-currency transaction or translating an entire foreign operation.
The takeaway
Transaction gains and losses generally affect earnings. Translation adjustments from qualifying foreign operations generally flow through OCI.
Related Summit guides
FAQ
Do transaction gains usually go to OCI?
Generally no.
Can translation adjustments enter AOCI?
Yes.
Does functional currency matter?
Yes.