[FRA] Multinational Operation

CFA Level II
#1

Can anyone explain for me about translation gain/loss differences between TEMPORAL method and CURRENT RATE method?

The Schweser wrote

  • “Under current rate method, net asset (assets>liabilities) are exposed to the depreciating local currency. Holding net assets in a depreciating environment results in a LOSS.” ASSETS > LIABILITIES -> LOSS?

  • “Under temporal method, net monetary liabilities (monetary liabilities > monetary assets) are exposed. Holding net monetary liabilities in a depreciating environment results in a GAIN.” NET Monetary LIABILITIES > NET Monetary ASSETS -> GAIN?

It seems illogical @_@ OR Did I misunderstand somewhere?

#2

Ha i just finished my elan videos and yes, helps a lot. so for current rate, as u deal with net assets (assets minus liability) so if the currency depreciates, your net assets value shrinks so that means you record translation loss in temporal method, u only deal with monetary assets and monetary liabilities (as non monetary stuffs are not translated using current/latest rate). So if the functional currency depreciates, your net monetary liabilities shrinks. If you now have less ‘borrowing’ that means you benefit ie gain. So in temporal, in the case of net monetary liabilities, when the subs currency depreciates, you record a gain as your liability shrinks

#3

Tks so much for your help. I understand it now :slight_smile:

#4

Hehe was doing this reading today and was about to ask the same q yes

Q- Please list which items will be valued at current rates and which items in non current rates in B/S in temporal method?

#5

In current rate, all current except capital stock and retained earnings are from current rate in temporal method, monetary assets (cash, account receivable, monetary assets, non monetary assets measured at current value) monetary liabilities (payables, LT note payables, monetary liabilities, non-monetary liabilities measured at current value) are calculated using current rate historical cost: inventory, ppe, depr, non-monetary assets at historical costs, non-monetary liabilities at historical cost, capital stock-which also at historical cost in current rate method.