cfa 2 financial analysis

Current Rate Method

Used when the subsidiary’s functional currency is its local currency.

Current Rate Method – Translation of Accounts

Assets & liabilities are translated at current rate, revenues & expenses at average rate, common stock at historical rate, and dividends at rate at declaration.

Current Rate Method – Translation Adjustment

The translation adjustment goes to Equity (OCI) and does not affect net income.

Temporal Method

Used when the subsidiary’s functional currency is the parent’s currency.

Temporal Method – Translation of Accounts

Monetary assets & liabilities are at current rate, nonmonetary assets (inventory, PPE) at historical rate, revenues & most expenses at average rate, and COGS & depreciation at historical rate.

Temporal Method – Translation Adjustment

The translation adjustment goes to the Income statement and affects net income.

Key Difference between Current Rate and Temporal Methods

Current rate has the adjustment go to equity, while temporal method has the adjustment go to income.