Can someone help me figure out what I am missing here? The question asked about which method will produce higher income. The reported B/S showed: 13000 Monetary Asset 32500 Non-Monetary Asset 27500 Monetary Liability The foreign currency was depreciating. The correct answer was the temporal method, because there was a net monetary liability exposure, which will result in a positive translation adjustment to NI when the foreign currency is depreciating. I thought exposure under temporal was non-monetary asset/liability, not the monetary asset/liability. Does anyone remember this question?
Didn’t take the sample but it has to be non-monetary because monetary assets/liabs get translated at current rate under both methods.
They did most of the grunt work here for you by giving you the mon/nonmon figures. For all-current method your exposure is simply assets - liab. However, with the temporal method, you’re going to compare monetary assets vs monetary liab. You’ll notice that you have a net monetary liability exposure. No calculations are really needed here. Under the temporal method, remeasurement goes straight to the I/S; so a net monetary liab with a depreciating for. curreny leads to a gain which will lead to an increase in NI on the I/S. Also, I believe Schweser says that there really aren’t any non-monetary liab other than deferred tax liability. Just some more stuff you have to memorize for exam day. The joy I know… Hope that helps make sense of the question.
Thanks, caddy. It all makes sense now. I do not know why I had exposure for temporal method as non-monetary asset/liability stuck in my head. I’m guessing because I’m taking this test way too late at night. I don’t even have non-monetary liabilities anywhere on my notecards. I really have no idea where that came from. Anyway, thanks again!
“No calculations are really needed here. Under the temporal method, remeasurement goes straight to the I/S.” Then how about for the current method? Does it go into Equity’s comprehensive income? (i was searching for this info and came upon this thread)
yes goes into other comprehensive income if its current method. so doesnt affect I/S at all
Unearned revenue is a non-monetary liability
I could understand the net liability exposure increases the net income in the local currency depreciating environment, but does that always mean the net income in temporal is higher than that in all-current?? I think the lower CoGS usually leads to higher NI in all-current even though there’s some increased NI in temporal. Am I missing something?