When to use current vs temporal – does IFRS / GAAP impact this decision?

CFA Level II FRA
#1

I am so unnecessarily confused on this – when do you use current vs temporal methods and which do GAAP / IFRS prefer?

I understand that you use current method when the subsidiary has autonomy and temporal when there is no autonomy. But then some problems specifically give you GAAP or IFRS – and I can’t find a definitive answer whether GAAP or IFRS in any way impacts which method to use. Can anyone help out?

One other thing that confuses me is that the Intercorporate Investments reading says that fx gain/loss goes into the income statement under IFRS (for available for sale securities), and under the temporal methods fx gain/loss goes into the income statement. So does IFRS require the use of the temporal method or is that just a coincidence?

Thanks for the help!

#2

If the local currency differs from the functional currency, you use the temporal method to translate (remeasure) the local currency amounts to functional currency amounts.

If the functional currency differs from the presentation currency, you use the current-rate method to translate the functional currency amounts to presentation currency amounts.

In the real world, you could have to use both methods. On the CFA exams, they’ll give you the necessary clues to determine which method to use.

#3

Thanks Magician! So just to be clear, GAAP and IFRS have nothing to do with the method used? If a problem specifies that a company follows IFRS, for example, that shouldn’t influence choice of translation method?

#4

You’re correct.

#5

Might be good to note that GAAP & IFRS treat hyperinflation differently so make sure you know the difference.

#6

Good point.

I was talking about normal circumstances; not hyperinflation.

#7

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