Foreign Currency Translation

Question 1

How do you know when to use the “Current Rate Method” or the “Re-measurement Method”?

Answer 1

If you see the key word referenced as “translating” or “translated” then use the Current Rate Method. If the key word is “Re-measuring” then use the Re-measurement Method.

Question 2

Explain the process to translate the the financial statements into U.S. dollars under the current rate method versus the re-measurement method.

Answer 2

The first step is to determine which one to use, so think current-translation or re-measurement. If the foreign currency is the functional currency, you would require something more dramatic so you would use translation or current rate rather than remeasurement. Vice versa if the reporting currency is the function currency.

For the B/S, in the current rate method, you want to use the most CURRENT rate for everything with the exception of Capital Stock or shareholders equity, which uses historic; retained earnings is a calculation. In the temporal method, you will use the historical rate for everything with the exception of any monetary assets/liabilities (cash, accounts payable and receivable, and any debt), which uses the current rate.

For I/S, everything uses average rate, with the exception that temporal uses historic rate for COGS (and I believe depreciation) because you are also using the historic rate on the B/S.

Question 3

Please tell me which accounts are paired with Monetary assets, Non-monetary assets, Monetary liabilities and Non-monetary liabilities,

Answer 3

Monetary Assets includes cash, A/R, N/R and HTM Investment in Bonds.
Non-Monetary Assets includes inventory, land, fixed assets and intangible assets.
Monetary Liabilities include A/P, N/P, some accrued liabilities.
Non-Monetary Liabilities include Unearned revenue.