When converting equity as a whole, you use ending rate
When converting common stock and dividends, you use historical rate
When do you know which to apply?
You cannot convert equity as a whole using the ending rate.
Under the temporal method, you translate the balance sheet first. You plug retained earnings to bring the balance sheet into balance (A=L+E). (It won’t be in balance because you use the current rate for some items and the historical rate for others). The change in R/E is then used in the income statement to calculate the translation gain/loss (the gain/loss is the plug you need to bring your income statement into balance).
Under the current method, you translate the income statement first. When you calculate the B/S, calculate ending R/E by adding the change in R/E you calculated when you translated the I/S to beginning R/E. The plug to bring your B/S into balance is to the cumulative translation adjustment account.
Common stock and dividends are translated using historical rates under both methods.
You’ll get the hang of it once you work through a few problems.
Thanks! I find myself pretty familiar with both methods, but saw in a printout (from a review class) that you translate “equity as a whole” are current rate, which does not make sense. I cannot remember where, but I have seen that rate used in an answer explanation but moved on. Wish I worked through it at that point! I will stick with the (correct) historical rate for translating CS.
I thought under the current method you *can* translate equity as a whole using the current rate, since you translate assets and liabilities as a whole under current rate and by A-L=E it follows that equity would be translated using the current rate.
^ Really? Well that would make the current method a lot easier. I don’t think this “shortcut” was covered in any of my materials.
Calling accounting experts! MrSmart, where are you?
I mean I’m averaging 57.6% in FRA on my mocks so yeah let’s get some more opinions lol
^ didn’t mean to bash you BITI!!! It’s been a long day. I’m thinking I’m going to be bagged and carried out on Saturday.
You didn’t, we’re good. I really am curious whether my statement above is correct
I checked and I’m right, despite my poor FRA averages.
Equity as a whole is translated at the current rate. Temporal is 100x harder than current.
^ Cool. Thanks for double checking and circling back!!!
I would agree. Common equity is still reported at historical but the CTA plug harmonizes everything under the current method.
Exactly, common stock is always historical, but with the plug and because of the basic accounting equation, as a whole, equity under current method is translated at the current rate
AH. That’s it… thanks for answering my original question! Equity including the CTA (which essentially brings everything to CR) can be translated at current rate.
The loop has been closed. Thanks all!