# Temporal Method when Local Currency is Appreciating

I am a little confused about this statement . If the historic rate under the temporal method is used to translate the local currency into the reporting currency, wouldn’t it be overstated. If the local currency is the Euro against the US and the Euro is strenghtened, then using the historic rate would give you more US dollars as opposed to using the current rate.

“Fixed assets are relatively understated under the temporal method if the local currency appreciates as they are translated at the weaker historic rate.”

Fixed assets are relatively understated under the temporal method if the local currency appreciates as they are translated at the weaker historic rate.

Perhaps a numerical example might help. Let imagine hypothetically the following:

FC is the foreign currency and LC is the local currency. Suppose Fixed Assets have a value of 500 LC.

Historical Rate : 1 LC = 2 FC

Current Rate : 1LC = 3 FC i.e. we see that local currency has appreciated against the foreign currency

Fixed asset under temporal method (non-monetary asset) will be translated at historical rate. Hence for our example, the fixed assets will be worth (in foreign currency terms), 500*2FC= 1,000FC

Fixed asset under current rate method (non-monetary asset) will be translated at _ current _ rate. Hence for our example, the fixed assets will be worth (in foreign currency terms), 500*3FC= 1,500FC

We see that, fixed assets are relatively understated under temporal method (1,000FC as compared to that under current rate method which gives 1,500FC) if the local currency appreciates.