Temporal method
Remeasuring foreign statements with monetary items at the current rate and non-monetary items at historical rates, taking the gains and losses to net income. Used when the subsidiary's functional currency is the parent's.
Where you will meet it
Temporal method appears in 4 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 temporal method remeasures monetary items at the closing rate and non-monetary items such as inventory and fixed assets at historical rates, with cost of sales and depreciation at those historical rates; the remeasurement gain or loss goes to profit or loss.”
- 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 temporal method only net monetary items are exposed; the remeasurement gain or loss is the balancing figure that reconciles retained earnings, and it passes through net income.”
- Analyse the effects of the current rate and temporal methods on financial statements and ratios
“Under the temporal method historical rates on inventory, fixed assets, cost of sales and depreciation can distort margins and turnover, and the remeasurement gain or loss makes net income volatile.”
- Analyse how the different ways of translating subsidiaries in hyperinflationary economies change financial statements and ratios
“Under US GAAP the subsidiary's statements are remeasured with the temporal method as if the parent's currency were functional, so non-monetary assets stay at historical rates and remeasurement gains or losses hit net income.”
See also
Practise it
Practise temporal method until it is automatic: questions that explain every wrong option.
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