CURRENCY TRANSLATION TEMPORAL APPROACH

With the temporal strategy, currency translation does not modify the attribute of an item getting measured; it only adjustments the unit of measure. In other words, translation of foreign balances restates the currency denomination of these items, but not their actual valuation. Under U.S. GAAP, money is measured in terms of the amount owned in the balance sheet date. Receivables and payables are stated at amounts expected to be received or paid when due. Other assets and liabilities are measured at money costs that prevailed when the items were acquired or incurred (historical costs). Some, nevertheless, are measured at prices prevailing as from the economic statement date (present rates), just like inventories under the lower of cost or marketplace rule. In short, a time dimension is connected with these capital values. In the temporal technique, monetary items for example cash, receivables, and payables are translated in the present rate.

Nonmonetary items are translated at rates that preserve their original measurement bases. Specifically, assets carried on the foreign currency statements at historical price are translated at the historical rate. Why? Simply because historical expense in foreign currency translated by a historical exchange rate yields historical cost in domestic currency. Similarly, nonmonetary items carried abroad at present values are translated in the current rate for the reason that existing value in foreign currency translated by a current exchange rate produces existing value in domestic currency. Income and expense items are translated at rates that prevailed when the underlying transactions took place, though average rates are recommended when revenue or expense transactions are voluminous. When nonmonetary items abroad are valued at historical price, the translation procedures resulting from the temporal strategy are practically identical to those created by the monetary-nonmonetary approach. The two translation approaches differ only if other asset valuation bases are employed, just like replacement expense, industry values, or discounted money flows. Since it is related to the monetary-nonmonetary approach, the temporal approach shares most of its positive aspects and disadvantages. In deliberately ignoring local inflation, this method shares a limitation with the other translation methods discussed. (Of course, historical cost accounting ignores inflation too!). All 4 methods just described have been employed within the United States at one time or yet another and may be located these days in different countries.

In general, they create noticeably diverse foreign currency translation outcomes. The very first 3 procedures (i.e., the present rate, current-noncurrent, and monetary-nonmonetary) are predicated on identifying which assets and liabilities are exposed to, or sheltered from, currency exchange threat. The translation methodology is then applied consistent with this distinction. The current rate method presumes that the whole foreign operation is exposed to exchange rate danger since all assets and liabilities are translated at the year-end exchange rate. The current-noncurrent rate approach presumes that only the current assets and liabilities are so exposed, while the monetary-nonmonetary approach presumes that monetary assets and liabilities are exposed. In contrast, the temporal method is designed to preserve the underlying theoretical basis of accounting measurement employed in preparing the economic statements becoming translated.