Reading 18- Current vs Temporal

there is a statement in the curriculum that I don’t get, if anyone can help me comprehend it, "When using the temporal method, companies can manage their exposure to translation gain (loss) more easily than when using the current rate method."

When temporal method is used all changes in transactions between parent and subsidiary are recorded through P/L unlike with CRM where is recorded directly to equity position (OCI) item, net currency differences from business abroad. Thus currency risk exposure is easier to asses and monitoring with the first method.

Using current method, a company balance sheet exposure is measured by Total assets-Total liabilities, because of the fact that all assets and liabilities are retranslated at current rate A company will have no exposure when its total liabilities= total assets hence the parent coy provides no equity contribution. However, using temporal method, a company’s balance sheet exposure is measured by total monetary asset- total monetary liabilities. Here a company will have no exposure when its total monetary assets= total monetary liabilities. Hence based on the forecast on the strength of a foreign subsidiary, a company can adjust its balance sheet exposure by adjusting its monetary asset/liabilities position. This is more feasible for a company than when under current rate method.

With the temporal method, you can choose whether or not the cost of a project will be subject to forex translations. If you issue debt to finance a project, it will be since monetary liabilities are measured at current rates and if rates change you will feel the effects. If you use equity to fund a project, capital stock is considered non-monetary so it is carried at histroical cost under the temporal method. SO it is not subject to forex translations.

Current rate method exposure: Net asset value (NAV = assets - liabilities) Temporal method exposure: Net monetary asset value (NMAV = monetary assets - monetary liabilities)

Monetary assets/liabilities include: cash, receivables, payables, short-term debt, long-term debt.

Most companies have a net monetary liability exposure meaning they benefit when local currency depreciates and are hindered when local currency appreciates. Therefore if a company wanted to reposition themselves to be less exposed to fluctuating exchange rates they could simply reposition their cash, receivables, payables and ST/LT debt. (This is assuming they are using the temporal method).

If they are using the current rate method their exposure is net assets. It is much more difficult to reposition all of their assets/liabilities (relative to repositioning monetary assets/liabilities) to benefit from exchange rate fluctuations. By benefiting/being hindered by exchange rate fluctuations I’m measuring this by translation gain/loss.