The monetary-nonmonetary strategy also makes use of a balance sheet classification scheme to determine proper translation rates. Monetary assets and liabilities; that is definitely, claims to and obligations to pay a fixed quantity of currency within the future are translated in the present rate. Nonmonetary items-fixed assets, long-term investments, and inventories-are translated at historical rates. Income statement items are translated under procedures similar to those described for the current-noncurrent framework. Unlike the current-noncurrent strategy, this method views monetary assets and liabilities as exposed to exchange rate risk.
Due to the fact monetary items are settled in money, use from the present rate to translate these items produces domestic currency equivalents that reflect their realizable or settlement values. It also reflects modifications inside the domestic currency equivalent of long-term debt inside the period in which exchange rates adjust, creating a much more imely indicator of exchange rate effects. Note, however, that the monetary-nonmonetary method also relies on a classification scheme to identify suitable translation rates. This may perhaps lead to inappropriate outcomes. For example, this method translates all nonmonetary assets at historical rates, that is not reasonable for assets stated at present marketplace values (like investment securities and inventory and fixed assets written down to industry). Multiplying the current marketplace value of a nonmonetary asset by a historical exchange rate yields an quantity inside the domestic currency which is neither the item’s current equivalent nor its historical expense. This approach also distorts profit margins by matching sales at current prices and translation rates against expense of sales measured at historical expenses and translation rates.
Due to the fact monetary items are settled in money, use from the present rate to translate these items produces domestic currency equivalents that reflect their realizable or settlement values. It also reflects modifications inside the domestic currency equivalent of long-term debt inside the period in which exchange rates adjust, creating a much more imely indicator of exchange rate effects. Note, however, that the monetary-nonmonetary method also relies on a classification scheme to identify suitable translation rates. This may perhaps lead to inappropriate outcomes. For example, this method translates all nonmonetary assets at historical rates, that is not reasonable for assets stated at present marketplace values (like investment securities and inventory and fixed assets written down to industry). Multiplying the current marketplace value of a nonmonetary asset by a historical exchange rate yields an quantity inside the domestic currency which is neither the item’s current equivalent nor its historical expense. This approach also distorts profit margins by matching sales at current prices and translation rates against expense of sales measured at historical expenses and translation rates.
