I got a question wrong in a schweser test and the answer explained “Under the current rate method, the equity accounts as a whole are translated at the current rate” I know everything other than retained earnings is translated at the historical rate. Is the statement above justified due to retained earnings calculations, and if so, is that always the case?
Yes in the current rate method assets and liabilities are translated at current rate. So E = A - L That is why equity is said to be translated at current rate.
Thanks, guess I’m getting burned out and focusing too much on details (common stock at historical) and forgetting the easy big picture stuff.
I hear you man. I’d have got that one wrong too.Never would have put 2-and-2 together . E=A-L , so use current rate . OK. So how about common stock issued at a historical rate? Is that not true then? Kind of hit-or-miss on some questions for me. Maybe I’m too literal
janakisri Wrote: ------------------------------------------------------- > I hear you man. > > I’d have got that one wrong too.Never would have > put 2-and-2 together . > > E=A-L , so use current rate . OK. So how about > common stock issued at a historical rate? Is that > not true then? > > Kind of hit-or-miss on some questions for me. > Maybe I’m too literal It is true, your common stock is translated at the current rate and your RE is mixed. CTA is your plug to force the balance sheet to balance.
Sorry, equity is NOT translated at current rate under the current rate method. See the (immensely helpful) table on page 177 of CFAI v. 2. Translation of equity is, in fact, the same under the current and temporal methods.
The trick here is to remember that under the current rate method, the translation g/l is a component of equity to keep the accounts balanced. I think the Schweser answer is misleading.
to everyone on the thread – many of you know it, some of you are still not quite so sure. the part about current rate method and equity that is confusing is: Individual parts of Equity are translated at different rates. The Common stock at historic rate, Retained earnings (part of Net Income that comes in is at the Average Rate). But do not forget 1. A-L = E A and L are translated at the Current rate. So E as a WHOLE should translate at the CURRENT RATE. And how does all that tie together? Thro’ the CTA - which is also a part of Equity. Unrealized gain/loss in CTA makes its way into the OCI (part of Equity) and helps to balance it all out, so that the Equity is at the Current Rate.
I don’t see it that way, but it is probably just semantics. The reason the balance sheet stays balanced under the current rate method is that you add in a translation adjustment to equity to compensate for the fact that the individual components of equity are not translated at the current rate, like assets and liabilities are. But this is an ad-hoc adjustment to equity, not a translation.
Agree with cpk. Your exposure when translating at the current rate is EQUITY. A-L = E
The CTA does it for me.