Temporal/current lifo/fifo

CFA Level II
#1

I cant get this.can someone tell me which exchange rates to use here

current method

lifo inventory?

lifo cogs?

fifo inventory?

fifo cogs?

and how does it change if at all for temporal?

#2

For current, the method does not matter, it is the year end exchange rate.

For temporal method, value at historical rate.

Inventory

Say it is FIFO, it means the remaining inventory is the latest one, so use year end rate. Say it is LIFO, the remaining inventory is probably the one bought at the beginning so use the earlier rate.

There is just one exception, when they state that inventory is valued at market value (under lower of cost or market value) use the current exchange rate.

COGS

Say it is LIFO, use the latest rates, (because the inventory which was sold was from the latest stock)

if FIFO use earlier rates . (because the inventory which was sold is from the earlier stock)

#3

Current method - no matter of LIFO / FIFO always use the average exchange rate for IS items and the ending exchange rate for BS items.

Temporal method - it’s quite messy here. Inventory and COGS have to be remeasured using historical rates. In real life you will have all historical rates needed in your reporting system. For the exam they will provide you with some simplifyng assumption but we can say:

LIFO COGS and FIFO inventory both show most current purchase prices so ending period exchange rate would give good approximation for them.

FIFO COGS and LIFO inventory show oldest purchase prices. If I’m given very little information about exchange rate levels I would use the oldest one or some combination between the oldest one and the average for the period (in case of increasing inventory).

I’m sorry I can’t give you a hard rule for the temporal method but it all depends on the provided information - what exchange rates are given, how the inventory has changed during the period and even whether the system is perpetual or periodic. If you give me concrete example I’ll be more precise.

#4

nsbharath , we have posted at the same time. I disagree on two points:

  1. Under the current method all IS items are translated through average exchange rate, not the year end;

  2. If we have the temporal method and LIFO inventory - if the beginning inventory is 100, ending inventory is 120, I think they have to be remeasured 100 * earliest exchange rate + 20 * average exchange rate.

Anyway, I doubt they will give us some brutal combination of temporal method & LIFO on the exam.

#5

I can’t remember the exact question, but I know there was an EOC or mock question that stated that inventory was acquired and sold evenly throughout the year. In this case, the average rate was used for inventory valuation.

#6

Gebura- I did not address point 1 in my post. Agreed, it is the average exchange rate.

On Point 2- Ideally, the firm should have exact exchange rates, but then if we have such a brutal combination in the exam, then agreed on the method.

Thanks for the additional clarification.