Foreign currency translation describes the method used in converting a foreign entity's functional currency to the reporting entity's financial statement currency. Prior to translating the foreign entity’s financial statements into the reporting entity’s currency, the foreign entity’s financials must be prepared in accordance with generally accepted accounting principles (GAAP), specifically under Financial Accounting Standards Board (FASB) Statement No.52. GitLab’s financial statement reporting currency is USD. The functional currency of our non-U.S. subsidiaries is the local currency. Changes in foreign currency translation are part of accumulated other comprehensive income (loss), which is reported in the consolidated statement of equity and ultimately carried over to the consolidated balance sheet, under equity.
Exchange rates used in the currency translation process vary across the three primary financial statement components:
Currency transaction risk is due to company transactions denominated in foreign currencies. These transactions must be restated into the entity functional currency equivalents before they can be recorded. Gains(losses) are recognized when a payment is made or interim balance sheet dates.
Currency translation risk occurs due to the company owning assets and liabilities denominated in a foreign currency.
A cumulative translation adjustment (CTA) is an entry to the comprehensive income section of a translated balance sheet that summarizes the gains(losses) resulting from exchange rate differences over time. Currency values shift constantly, affecting how a currency is valued against others. The CTA is a line item in the consolidated balance sheet that captures gains(losses) associated with international business activity and exposure to foreign markets. The corresponding gain(loss) can be found in the consolidated income statement under Other Income(Loss). CTA’s are required under GAAP since they help distinguish between actual operating gains(losses) and those that arise from the currency translation process. Additional information on our reporting standards surrounding CTA's can be found in FASB Topic 830, "Foreign Currency Matters."
Exchange rate gains and losses for individual transactions are captured automatically by our ERP system, NetSuite. However, a CTA entry must be made in order to properly distinguish currency translation gains(losses) from other general gains(losses) in the consolidated financial statements. This entry includes reconciliation of any intercompany activity that generates foreign exchange gains(losses). The CTA is made on a monthly basis as part of our financial statement reporting cycle.