Why unrealized gains and losses are ignored in temporal method, but not in current method?
All-current method uses translation G/L and it’s recorded in BS (Equity - CTA). Temporal method uses remeasurement G/L and it’s recorded in IS.
Could you explain a bit more on the the intuition/reasoning behind those statements?
there is no intuition / reasoning. It is the method. Temporal - gains / losses are on the Income statement - hence there is no concept of unrealized / realized. Current rate - gains / losses go to the Balance sheet - as part of the Equity section.
It’s how the method works (as CP mentioned). If you want some easy way to remember it, just remember that under all current method the currency exposure is in equity and under temporal method the currency exposure is in net monetary asset. So you need to adjust equity in all current method and ending retailed earnings (which are affected by NI) in all temporal method.
Does the unrealized g/l rule apply to both monenary and non-monenary assest/liablity? Could you check Q10 of reading 24 in CFA Curriculum?
ans is A. temporal method is being discussed. (LC=CAD=FC) -> (PC=USD) Under temporal method -> all gains and losses are on the Income statement. gains and losses are due to MONETARY ASSETS and LIABILITIES. WHY? All non-monetary assets and Liabilities (e.g. Inventory, Fixed assets) are all costed at the Historical currency exchange rate. While the monetary assets and liabilities are costed at the current rate. So the movement of exchange rate causes the monetary assets / liabilities to recognize a gain / loss.
answer is c, unfortunately… I guess I am not sure whether there is any change for monetary A/L in terms of realize/unrealized when switching from Temp to Current method…
sorry my bad… I did not read the question properly - and happens to me all the time. LC=FC->PC Current rate method. LC->FC=PC Temporal method. Since LC=FC=CAD and PC=USD - this is the current rate method. In the Current rate method - all assets and liabilities are at the CURRENT Exchange rate. So there would be gains and losses due to exchange rate fluctuations on the NON-MONETARY ASSETS AND LIABILITIES. They were bought at an old rate - and now are being “repriced” at the current rate. And these are all unrealized gains / losses because they never make it thro’ the Income statement - but are directly on the Equity portion of the Balance sheet.
How about unrealized monenary A/L?
unrealized gain loss on monetary asset / liab cannot happen. temporal method - all gains / losses move to the income statement - hence everything is realized.
Then in temopral method, is there any unrealized gain/loss on Monenary A/L?
buddy please read the book for greater understanding. cannot help you
sorry, I meant to ask for current method… so what is your answer?
CP - I liked the (old) unedited reply. You have to be hard sometimes.