Current rate method
Translating a foreign subsidiary's assets and liabilities at the closing rate and its income at the average rate, with the translation adjustment taken to equity. Used when the subsidiary's own currency is functional.
Where you will meet it
Current rate method appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Contrast the current rate and temporal methods, assess the effect of each on the parent's income statement and balance sheet, and decide which method fits a given situation
“The current rate method translates all assets and liabilities at the closing rate, income and expenses at the average rate, and equity at historical rates; the translation adjustment goes to OCI and accumulates in equity.”
- Work out translation effects and assess how the income statement and balance sheet of a subsidiary are restated in the parent's presentation currency
“Under the current rate method, net assets are exposed: the translation adjustment for the year equals opening net assets times the change in closing rate, plus the effect of retained profit translated at the average rather than the closing rate.”
- Analyse the effects of the current rate and temporal methods on financial statements and ratios
“Under the current rate method every balance sheet item moves with the closing rate, so pure balance sheet ratios such as the current ratio and debt to assets keep their local currency values, and margins are preserved at the average rate.”
See also
Practise it
Practise current rate method until it is automatic: questions that explain every wrong option.
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