Please help may be I am over complicating issues but I do not get it; I do not understand how translation of foreign entities in a hyper inflationary environment under US GAAP is described as; “US GAAP simply require the foreign currency financial statements of such an entity to be translated as if the parent currency is the functional currency;the temporal method must be used” Is this simply a requirement or there is a characteristic or property of the temporal method that is appealing for this preference? Example; what if the functional currency of the foreign entity is Swiss Francs and the parent company functional currency is US$ what is the process of translating to the presentation currency. Thanks for your help!
The temporal method uses the exchange rate that was in effect at the time of purchase.
If a US company bought a Swiss company when the exchange rate was USD/CHF 0.9500, and Switzerland later incurred hyperinflation (so that the current exchange rate is USD/CHF 0.0500), you use the temporal method and use USD/CHF 0.9500 to translate the values of the Swiss subsidiary’s assets and liabilities.
Thank you S2000magician
Just a point to note also, anything using temporal method that has a connection between the balance sheet and the income statement will be translated at the historical rate. Under IFRS everything done at current rate method so if we were to translate we would be translating at a current fx rate. So we would see the fixed asset disappearing, so we would want to reinflate the price by adjusting for the hyper inflation first then translate.