If local currency is appreciating, will temporal or current method report higher net income (in parent’s domestic currency) when there is a net monetary liability.
The problem here is that there are two conflicting results:
Current method will report NI based on higher average rate. Temporal method will report Sales and SG&A based on average rate but lower depreciation costs and COGs resulting in higher NI.
Temporal method’s net monetary liability is exposed to rising exchange rates resulting in a foreign currency loss recorded in income statement causing lower NI.
So what will the end result be? Is it inconclusive or will one factor always dominate the other.