Anyone have an amazing memorization technique to know how to translate things for current vs temporal method?
you read it 100times.
I suggest that you should memorize seperately on Balance sheet and Income statement. On Balance Sheet Current is to use current rate to all accounts except equity, Temporal is to use current rate to all monetary things, others use historical. On Income statement Current is to use average rate to all accounts. Temporal, again, use average rate to all accounts except account that linked to non-monetary (such as COGS linked to Inventory or goods, Depreciation linked to fix-asset)
all you have to do next is defining what is monetary things. hope it helps.
Ha I posted this exact same question like 4 days ago. The answer is to do problems and work through. Current method is the easier one, you are simply averaging all of the income statements and taking the current values except for equity on the income statement.
The trick for temporal is that anything (cash, receivables, payables, sales) that is not monetary i.e. inventory, depreciation, fixed assets, will be translated at the historical rate. For the balance sheet you’ve got to translate the same way as current with average for everything that is monetary.
I’m actually really hoping this pops up on the test since I spent so much time on this. The only tricky part is that the CFA makes it as tough as possible to determine whether to use the current or the temporal. Any easy tips for deciding which one?
Forget memorization, you have to understand the reasoning:
The current method is the “agressive accounting” method as all the FX P&L never touches the income statement. Therefore, translating every in the balance sheet item at current rate.
The Temporal method is the “conservative accounting method” as all the FX effect impact the income statement, thus we have to make it as realistic as possible and match the FX with their period of purchase. Thus inventory is average rate, property plant and equipment is historical.
Now, to remember which method to use, if you are functionning in the same currency as the local currency, then you are self-sustained and your parent company is “naturally hedged” against your currency risk as no real conversion ever happens within daily operation. If your operation differ from local then a bunch of FX transalation happen on a daily basis and you are not hedged against FX risk, thus temporal method (the conservative method) must be used.
Hope it helps…
@summerside182 …hahahah very good my Canadian friend!
I would also add that for the current method all of the translations go into a b/s account under equity…CTA.
As for the translations from the temporal method they hit you in the i/s.