When to divide or multiply when doing Current/Temporal translation?

Is there a rule here that I just haven’t picked up? I previously thought you always multiply each IS or BS line item by the respective average/historical/current rate to get the translated figure.

But on Schweser Exam 2, Volume 2, Question 20, the depreciation expense is divided by the historical rate, not multiplied.

Q: Assuming that International Oilfield’s equipment is depreciated using straight-line method over ten years with no salvage value, calculate subsidiary’s 2008 depreciation expense under the temporal method.

A. $78.4MM

B. $95.7MM

C. $104.7MM

Is there a rule that I have missed the entire time here? I scanned the old Schweser FSA book and all the examples translate line items by multiplying them by the rate, not dividing.

I don’t think there’s a general rule about multiplying or dividing. You just kind of have to figure out what would be the appropriate calculation to make the adjustment.

I think the important thing is to know the accounting treatments and situations to apply the current / temporal rate method and the effects on financial statement ratios. The US GAAP / IFRS differences. Inflation treatments. That sort of stuff.

At most, we’ll probably only get one or two actual calculation questions, and we’ll just need to figure out then and there if we gotta multiply or divide.

Whatever currency you are going to I like to follow the signs. Sooo if I were in euors and going to dollars and my quote was e: I would multiply up to dollars. If my quote were :e I would divide down to dollars.

kd26goi is right on. This depends on whether you have direct or indirect quotes. to keep it straight, i always convert to a direct quote before doing anything…

Write out the currency in algebraic form, that’s much easier.

If you have exchange rates on notation FC:DC as, let’s say, JPY:CHF, then you’d simply write that as CHF/JPY. If your accounts are in JPY, you multiply: JPY amount * (CHF/JPY rate) where JPY cancels out and you get the amount in CHF. If your accounts are in CHF, then you obviously can’t multiply with CHF/JPY since you’d end up with CHF squared divided by JPY, then you have to divide: CHF amount * (1 / (CHF/JPY rate) ) = CHF amount * ( JPY/CHF rate) where CHF cancels out and you end up looking at the amount expressed in JPY.

I might add that I initially found it a bit difficult to tell the difference between direct and indirect quotes… A direct quote FC:DC is the price of the DC currency expressed in terms of the FC currency, or on algebraic form DC/FC. It’s like the price of an apple at the market. If you have SEK:USD 7.00 it means that one US$ will cost 7 Swedish kronas. If I were to travel to the US, I’d have to pay with 7 of my own coins for every USD I’d like to bring with me. That same quote, the direct quote, is an indirect quote to the other party, to the US party. It’s handy to keep track of the FC:DC expression since it’s useful for knowing whether or not to put the DC rate in the numerator and the FC rate in the denominator when you work with interest rate parity and forwards in Study Session 4: spot * (1 + R(domestic)*n/360 ) / (1 + R(foreign)*n/360 ) = forward at time n The spot rate then has to be expressed as a direct quote FC:DC or, algebraically, DC/FC. Domestic on top, foreign below. Domestic/foreign doesn’t have anything to do with the dealer or the one whose view you are taking when performing the transaction, but rather with the expression itself: FC:DC. The one in the denominator is the foreign, the domestic is the currency in which the price of the other is expressed, like the price of an apple. The only exception is the real spot rate and the consumption baskets in Study session 18, where the baskets are placed in the quote as foreign basket / domestic basket. I don’t understand why it is in reverse here, so best just learn it by heart: real S = S * P(foreign) / P(domestic).

Good tips on direct vs. indirect, wawa. I’ve heard an explanation that helped me as well… we live in a direct quote world. When you buy gasoline for your car (in the US anyway), you pay $4 US for each 1 gallon increment. This is a direct quote. The indirect quote alternative would be .25 gallons for each $1 US. It’s more time-consuming, but I always convert to direct to keep the numbers straight and then convert back to indirect by taking the reciprocal if that’s what the question is asking.