FRA reading 19 - translation

Translation gain/loss is used on the income statement when using the temporal method.

Translation adjustment is used on the balance sheet when using the current method.

How are these two calculated? The textbook seems to calculate it backwards just to make the BS and IS balance.

Also, if the foreign currency is the functional currency, that means the current method is used. If the foreign currency depreciates, that means there is a negative translation adjustment and vice versa. Is this always the case?

Yes: in each case it’s a plug figure to make the statement balance.

I believe that it is.

That’s the way it is. Accountant try to make everything overcomplicated.

I hate accountants. cheeky

I can add some insight to S2000’s post

  1. The reason the temporal method is used for the income statement is to reflect the fact that expenditures are incurred at various times throughout the year. In practice, many businesses use the average (or sometimes weighted average if monthly expenditure levels and FX rates vary to the extent that there could be a material difference in the translated balances) instead of actual FX rate in effect on the transaction date.

The balance sheet is translated at the spot rate (current method) to simply to reflect the presentation or functional currency equivalent value of those balance sheet items.

  1. This is correct. If it’s with a self sustaining subsidiary however; the gain/loss is tracked in equity in a CTA (cumulative translation adjustment) account. If the subsidiary is not self sustaining, the translation gain/loss is reflected in P&L of the parent as they bear real currency risk.

Hope this helps.

  1. Determine which method….

Current Mehtod used when funtional not equal presentation.

Temporal use when functional and presentation equal.

  1. If

Current: Start with income then plug in BS(Div and stock issuance @ Historical)

Start with Income Stament ( All Income items @ average rate)

All Balance Sheet Items @ current

Temporal :Start with BS the plug into NI ( Div and stock issuance @histoical)

Monetary items @ current

Non Monetary items @historical

COGS, AMORT and Depreciation @ Historical. All other expenses @average

Revenue @ Average

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Under the current method to check the effect of a depreciation or appreciation in the foreign currency, you have to calculate your net asset position. If Net asset exist (A>L) and the foreign currency is appreciating a gain is recognized.

I wrote an article on the two methods that may be of some use: http://financialexamhelp123.com/current-rate-vs-temporal-why-two-methods/

’'Translation gain/loss is used on the income statement when using the temporal method.

Translation adjustment is used on the balance sheet when using the current method.’'

Is there a intuitive reason why this is the way it is? Why isn’t translation gain/loss recognized on the Income Statement when using current method?

I don’t speak for the FASB Board or anything, but the logic of it probably comes from whether the operation is self-sustaining or not (long-term business prospects or may be sold in the near term). First, remember that OCI is typically used for gains or losses that are not realized.

Self Sustaining = CRM / Non-Self Sustaining = TM

Current Rate method is used if your foreign sub is self sustaining, so the translation losses relating to FX would be deemed as “unrealized” given that this is a long-term operating business. However, if the foreign ops are sold, these can be re-classified to P&L.

Because when using Temporal Method, the entity is not self-sustaining and could be sold or closed in the short-term, FASB Board may view these translation gains / losses as immediate and are realized, thus requiring that it be put through P&L.