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. It applies when the subsidiary's functional currency is its own currency. 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. It applies when the functional currency is the parent's, and under US GAAP for a subsidiary in a highly inflationary economy. The trap is choosing by local rather than functional currency.