For the 2 questions below, could someone explain the concepts? Thanks!!!
Until recently, a parent company classified its presentation currency as the funcational currency when classifying a foreign sub’s financial statements. It now classifies foreign sub’s local currency as fucntional currency. This change will most likel result in which of the following now being recognized on the parent’s FS?
A: Unrealized gains and losses on nonmonetary assets and liabilities.
Comment: I see that its going from temporal to current, but that’s about it.
When the sub and parent are well-integrated, we should be using the temporal method. Why is this? I memorized that if PC = FC, then use temporal; if FC = LC, then use current - but I don’t understand why.
Under both methods, monetary assets and liabilities are remeasured/translated at the current rate, so there would be no change. Under the current rate method, nonmonetary assets and liabilities are translated at the current rate, whereas under the temporal method they are remeasured at the historical rate; therefore, you could have some unrealized gains/losses because of changes in excange rates.
When they’re well-integrated, the assumption is that the functional currency is the presentational (parent’s) currency; thus, you would remeasure from the local currency to the (different) functional currency using the temporal method.
A better way to remember it is that when FC ≠ LC, then remeasure from LC to FC using the temporal method; when FC ≠ PC, then translate from FC to PC using the current rate method.
The advantage of this over your approach is that it is possible that all three currencies – LC, FC, and PC – will be different, so that you have to remeasure and translate; your method assumes that only two will be different. (Note: you won’t have to use both methods in a single problem on the exam, but they could ask a conceptual question where all three are different.)
Is there no fancy short cut when LC ≠ FC ≠ PC ? Simply forced to translate LC to FC using the temporal method then FC to PC using the current rate method?
@s2000, you are absolutely unmatched at explaining concepts so easily. Thank you. If you are ever in LA, please let me buy you at least a cup of coffee haha.
@eveningstar - is that an important concept (autonomous decisions) I should be aware of?