Multinational Operations

Question 1

Current rate method

Answer 1

Translation from functional currency to presentation currency
Applying the method:
All IS accounts translated at average rate.
All BS accounts translated at current rate except for common stock, which is translated at historical (actual) rate that applied when the stock was issued.
Dividends are translated at the rate that applied when they were declared.
Translation gain/loss is reported in shareholders’ equity as part of cumulative translation adjustment (CTA)

Question 2

Temporal method

Answer 2

Remeasurement from local to function currency.
Applying the method:
Monetary assets & liabilities re measured using current exchange rate. Monetary a&l are fixed in amount of currency to be received or paid and include: cash, receivables, payables, short- & long-term debt.
All other a&l considered nonmonetary & remeasured at historical (actual) rate. Most common include inventory, fixed assets, intangible assets (ex: unearned/deferred revenue).
Common stock & dividends paid remeasured at historical rate.
Expenses related to non monetary assets (COGS, depreciation, etc) remeasured based on historical rates at time of purchase.
Revenue & all other expenses translated at average rate.
Remeasurement gain/loss recognized in income statement. Results in more volatile net income as compared to current rate method.