Can anyone explain than answer “temporal method ignores unrealized gains and losses on non-monetary assets and liabilities, but current rate does not”.
Does it mention in the curriculum? Can’t figure out the reason behind…
Under Current rate method, the exposure of the Parent is the subsidiary’s equity (assets-liabilities). Subsidiary’s equity is exposed to foreign currency appreciation/depreciation. There is no distinction made between monetary and non-monetary items.
The gain/loss calculated is on the whole EQUITY.
Under Temporal method, the exposure is the Net Monetary assets/liability. Net monetary asset/liability is equal to monetary assets - monetary liabilities.
The gain/loss calculated is on the Net monetary assets/liability or Monetary Equity.
So the temporal method ignores gains/losses on net non-monetary assets whereas current rate method accounts for monetary gains/losses and non-monetary gains/losses.
bumping this
as for the answer above is that because for current rate method, the CTA is in B/S while for temporal the translation GL is in IS thus counts for only monetrary asset liability