Guys has anyone cracked the logic behind the temporal method ? I mean the using different rates for monetary and non monetary and other conditions The Current rate method was straight forward and made sense to me . where we use current rate on the b/s and avg. Rate for p&l. Could someone expand on the temporal method ? Thanks . Fudge
I can’t remember exactly if it will answer your question, but S2000’s website has an article on the current and temporal methods. It’s probably worth checking out. His website is in his signature if you need to find it.
The logic is as any other logic in accounting. You may consider it as a creative accounting if certain method is within domain of underlying standards (otherwise it would be considered as misreporting).
Therefore, if temporal method can be applied under correspondent GAAP, the parent by consolidation only has net monetary asset exposure to its subsidiary related to current method in which case the parent would be exposed to total net assets changes.
By temporal method logic is in accordance of above and related to this same principle are applied. By this method in translation process historical value measures applies for non monetary items.
Maybe it will help to know how and why the Temporal Method developed. It has an interesting history.
The crux of FX accounting is a) which rates to use in translation (Current, Historical, or Average) and b) what do you do with the adjustment (Income Statement or OCI)?
After WWII the world was under Bretton Woods and FX accounting was not a major issue. In 1971 Nixon closed the gold window, and no longer allowed foreign Central banks to exchange US dollars for gold. Soon exchnage rates floated and FX accounting grew in importance. It became a big deal. In 1975, the FASB released FAS 8 (Current Rate Method) which required translation gains/losses to run through the Income Statement.
Financial Statement preaperers basically freeaked, and hated it. One thing that analysts should know is that Financial Statement preparers generally believe that analysts can be fooled by optics. Management wants smooth earnings. A few years later, the FASB requested feedback on its Statements issued up through that date, and the vast majority of letters were on FAS 8.
So, in 1981, the FASB issued FAS 52 (Temporal Method), which allowed comapnies to send the translation adjustments through Equity (OCI), rather than the Income Statement.
Management and Financial Statement preaprers do not like a volatility.