This is for nonmonentary assets: Can somebody explain to me why realized G/L are included in COGS and DEP expense on the IS under the temporal method vs. being in the CTA on the BS in the all current method. Also, why are unrealized G/L ignored under the temporal method? I would assume this is because the historical rate is always used for these assets.
you have point 2 correct…as in Because under temporal method you use historical rates versus current rates (usually) the unrealized gains/losses on non-monetary assets are ignored…this is only for NON monetary assets - keep that in mind… i’m still thinking of a good way to explain point 1
I think no 1 relates to the fact that exchange gains/losses are realised when a good is sold. in the same way that historical rate is reflected in the cost of goods sold. so the relfection of exchange rate take place then versus at the end of the year for all current - CTA. not sure about the depreciation expense
for the second part - unrealized gains and losses represent an adjustment to the actual value considering actual rates- which as you said is not need in a temporal method- assets are carried at historical rate. so it’s only when they are sold that the difference is realised - reflected in income statement
For point 1, think of the non-monetary assets as inventory and fixed assets. If you sell inventory and realize a gain or loss, wouldn’t the cost of that inventory have to go into COGS? And when you own a fixed asset such as a building, you depreciate that asset over its useful life. Then when you sell the building, it will represent a gain or loss depending on the sale price and book value. COGS and Depreciation are both regular items on the IS. For point 2, it helps me to think of fixed assets. If you depreciate a building and then never sell it. You will never have a gain/loss on it. So why should it show up on the IS? Of course, you would have some depreciation expense but it’s ignored because you will never get screwed by an unfavorable movement in the exchange rate if you never sell it. I don’t know if that helps, but this is what reasoning makes sense to me. I could be totally off.
This seems to make sense. Since the non-monetary assets are held at historical value, unless they are sold the unreallized gains will never be realized (duh). When they are sold, the historical numbers will run through the IS in the form of COGS and Dep (indirectly). Is that what you are saying Lobster?
that makes sense.
There was question on the 2006 exam like this. I was able to figure it out based on the other options, but I couldn’t remember (or use logic) to figure this out.