Question

2. With reference to IAS 21 The Effects of Changes in Foreign Exchange Rates compare and contrast between the two translation methods (a) temporal method exchange rate and (b) current rate method exchange rate with supported illustrations?

Answer 1

Temporal exchange method:-

Exchange rate prevailing at the time of acquisition of assets and liabilities is used for translating foreign currency under temporal exchange method for most of the assets. However, the exchnage rate to be taken will also depends on how the valuation of assets and liabilities is being done.

The physical assets for example:- assets like Land, Building etc are translated using the historical exchange rate whereas the financial assets and liabilities which possess a fixed foreign currency value is translated using the currenct exchange rate.

It is different from the current rate method in the manner that it doesn't provides to translate all assets and liabilities (except shareholder funds and retained earnings) using the closing current rate prevailing as on the reporting date as done in current rate method.

Current rate method:-

Under this method of transalting foreign currency, mostly all items in the financials are translated at the current exchange rate as prevailing on the reporting date (except shareholder's funds and retained earnings).The current method differs from temporal exchnage method in the way that assets and liabilities under this method are translated using the current exchange rate as opposed to historical data.

For example:- An indian company has a subsidiary in US who does business in US and presents its financial statements in $ currency. At the time of converting the financial statements of US subsdiary from foreign currency to presentation currency i.e. INR the assets and liabilities will be converted using current exchange rate as at reporting date except for shareholder's fund and retained earnings which are converted using historical rates. Income statements are converted using the weighted average exchange rate.

The current method is mainly used when the subsidiary of the parent company is non-integrated to it. If the subsidiary is well integrated then temporal method can be used.