Current Rate Method and Temporal Method: Translation Gain/Loss

A foreign subsidiary of a U.S. company

Operations	from January 1, 2007
Foreign Currency	FC

B/S of foreign subsidiary

(in FC)	12/31/2007	12/31/2008
Cash and accounts receivable	5,000	5,200
Inventory	3,800	4,900
Net fixed assets	6,200	7,400
Total assets	15,000	17,500
Current liabilities	2,000	2,000
Long-term debt	9,000	9,500
Shareholders' equity	4,000	6,000
Total liability and equity	15,000	17,500

Exchange Rate

Spot on 1/1/2008	$0.35/FC
Spot on 12/31/2008	$0.45/FC
Average spot (2008)	$0.42/FC

Translation Gain/Loss: Current Rate Method and Temporal Method

Method	Current method	Temporal method
Exposure	Equity (H) Assets (C) = Liabilities (C) + Equity (H) + Translation gain or loss	Cash and accounts receibable - Current liabilities - Long-term debt >0: Net monetary assets <0: Net monetary liabilities
Equity	Beginning: +4,000 (positive) Ending: +6,000 (positive) ΔEquity = +6,000 - (+4,000) = +2,000 (positive)
Net monetary assets or liabilities		12/31/2007 5,000 - (2,000 + 9,000) = -6,000 12/31/2008 5,200 - (2,000 + 9,500) = -6,300 ΔNet monetary assets = -300 < 0 → change in exposure is negative; increase in net monetary liabilities
Foreign Currency	Appreciated	Appreciated
Translation gain or loss	Translation gain Assets (C) > Liabilities (C) + Equity (H) Assets (C) = Liabilities (C) + Equity (H) + Translation gain (>0)	Translation loss FC appreciated while net monetary liabilites icreased.
Reported on	Balance sheet	Income statement

(H) Historical exchange rate
(C) Current exchange rate