6.3 Foreign Currency Accounting

Question 1

TEMPORAL METHOD

Answer 1

In temporal method, monetary assets and liabilities are remeasured using the current exchange rate. Monetary assets and liabilities include cash, receivables, payables and short-term and long-term debt. Nonmonetary assets include inventory, fixed assets, and intangible assets and are remeasured using historical rates. So, a part of the numerator and denominator are converted using current exchange rate and the rest using historical rates. Thus, it cannot be concluded that the current ratio will increase, decrease or remain unchanged.

Question 2

The rules for applying the current rate method are:

Answer 2

The rules for applying the current rate method are:

(1) All assets and liabilities are translated using the current rate at the balance sheet date.

(2) All revenues and expenses are translated at the rates in effect when these items are recognized during the period. Due to practical considerations, however, weighted-average rates can be used to translate revenues and expenses which were incurred throughout the year.

(3) Owners’ equity accounts are translated using historical exchange rates.

(4) Dividends are translated at the historic rate on the date of declaration.

Question 3

TRANSLATION WHEN LOCAL CURRENCY IS EXPERIENCING HIGH INFLATION

Answer 3

When local currency is the functional currency we usually do translation. However at times of inflation (please see page F6-27) we do not use local currency as functional currency. The reporting currency would be the functional currency, therefore we would do remeasurement.

Question 4

Translation loss for the year

Answer 4

Translation loss for the year = Ending CTA – Beginning CTA