Multinational Operations

When you are using the temporal method and you have a Net Liability exposure…Why would NI go down when the Foreign currency strengthens? Is it because you have a liability exposure and thus owe money…so you have to pay it back with a higher amount of foreign currency…Not sure if thats the right way to think about it for Net Income.


Look at below example for clarity.

Home Currency : USD

Conversion Currency : EURO

Liability : 100 Euro

Liability @ Initial Conversion rate of 2USD/Euro is 200 USD

Liaility when foriegn currency strengthens @ Conversion rate 3USD/Euro is 300 USD


In Current rate method Translation G/L is reported in shareholders’ Equity and it would by pass income statement and reported in Balance sheet under the Head Equity. So basically currency fluctuations don’t have direct impact on I/S

In Temporal Method the remeasurement G/L is reported in the income statement. So Currency fluctuations have direct impact on I/S.

Here, you are holding Net Liability Exposure and foreign cuurency Appreciate, which would create loss and it would be reported in I/S.

Hope it helps.