Do firms get to pick which one to use?
It depends on the currency being used for the subsidiary If autonomous, then use current If highly dependent on parent, then use temporal
There’s some vocabulary that the CFAI will throw at us if they don’t directly tell us: Current Method (PC does not equal FC) “Self Contained Independent Subsidiary”. Operating and financing decisions are made by the subsidiary in its locale. Temporal (PC equals FC) “Highly Integrated Operations”. Operating and financing decisions are made by the parent.
thank you for that answer, and here’s a follow-up: how are assets and liabilities remeasured under temporal?
No… Remember P - Presentation Currency (think Parent company) F - Functional Currency (main form of business) L - Local (where the sub is located) If F & L are same, you translate using Current from L/F -> P If P & F are same, you remeasure using Temporal from L -> P/F If F / P / L are all different, you use both Current & Temporal. Temportal from L to F. Current from F to P.
It depends on if they are monetary or non-monetary. Under the temporal method you remeasure monetary a+l at the current rate and all non-monetary a+l at the historical Monetary Assets: Cash, AR, Marketable Securities Non-Monetary Assets: Inventory, PPE, Intangibles Monetary Liabilities: AP, NP, LTD Non-Monetary Liabilities: unearned revenue
Chuckrox8 Wrote: ------------------------------------------------------- > It depends on if they are monetary or > non-monetary. Under the temporal method you > remeasure monetary a+l at the current rate and all > non-monetary a+l at the historical > > Monetary Assets: Cash, AR, Marketable Securities > Non-Monetary Assets: Inventory, PPE, Intangibles > > Monetary Liabilities: AP, NP, LTD > Non-Monetary Liabilities: unearned revenue Thank you; I will pray for you to pass in English, French, and Turkish.
To make your life simple, tell yourself this; REGARDLESS of method, they all use these same rules: Assets & Liability - Current Rate Equity - Historical Rate Revenues - Average Expenses - Average This intuitively makes sense, Revenues & Expenses occur throughout the year so you want to reflect the Average Rate. Equity should be recorded when the transaction took place. And B/S accounts should reflect the reporting period. The only EXCEPTION is Temporal applies HISTORICAL rates to NON-MONETARY B/S items & expenses. B/S include: inventory, PP&E, intangibles, defferred rev, etc Expenses include: COGS, D&A
Equity under the current method is a little funky. ALL Equity is translated at the current rate, but the individual components excluding RE are translated at the historical rate. The difference is the CTA.
Also, make sure you READ the vignette in detail! The rules given to us only apply if they do not tell us anything different. Sometimes they will give you certain rates (i.e. avg inventory rate or historical PPE acquisition rate) in addition to the current, average, and historical. Use the rates they give you and forget the rules if this happens.