Hi,
I cannot get my head around retained earnings and translation adjustment.
On p.145 in the CFA curriculum it says regarding the temporal method that “The balance sheet is translated first, determining the amount of retained earnings to keep the balance balance”. And translation adjustment is then solved for in the income statement…
however, on p.133, under section 3.1.2, the translation adjustment is calculated directly from the balance sheet. Where did the retained earnings disappear?
probably an easy explanation, but dont these two contradict? Im getting confused how the translation adjustment is actually calculated…
vice versa for current rate method…
remember that for Current rate method, you start with income statement first, and the CTL will hit equity. For Temporal method, you start with balance sheet, and the CTL will hit Net income.
Also, ending R/E=begin R/E+NI-Divd+CTL
Thanks. Still not clear to me unfortunately. I will do a few more examples, and hopefully I will get it.
I am fine with the comments above, but in my view they are attacking the two examples above in different ways.
And how is it:
under the current rate method, since we at the end of the process get the translation adjustment on the balance sheet - that would be cumulative, right?
while for the temporal method we end up with the translation gain/loss on the income statement - that is only for the current period, right?
Look at the examples in both the CFAI and Schweser FRA text, and do ALL the practice problems at the end of the chapters. There’s no way for you to not get it if you solve those questions and figure out the difference between current and temporal.