Please use current year Part A Analyze the underlying conceptual differences bet
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Please use current year
Analyze the underlying conceptual differences between
the temporal method of translation and the current rate method of
translation when determining why balance sheet exposure differs under the
two methods. Which method do you see providing the most minor balance
sheet exposure and why? Provide a rationale for your selection.
Please to respond to the classmates’
When using the temporal
method, you are translating the foreign subsidiary’s account amounts on their
balance sheet into U.S. dollars, acting as if U.S. dollars were used. In this
method, the historical exchange rate is used if historical cost figures are
being used on the balance sheet. The current exchange rate would be used if the
figures were recorded at current or future value. The temporal method creates a
net liability balance sheet exposure or net asset balance sheet exposure. This
is all dependent on whether the sum of cash, marketable securities, and
receivables is greater or less than the liabilities. Items on the balance
sheet, such as assets and liabilities, are exposed to translation adjustment.
When these items are being translated at the current exchange rate, they change
in dollar value as a result. If the net asset appreciates, there will be a
positive translation adjustment and if it depreciates, there will be a negative
translation adjustment. When a net liability depreciates, a positive
translation adjustment occurs. And if the net liability appreciates, a negative
translation adjustment will be the result. When using the current rate method,
you do not need to keep track of the historical costs and rates when
translation adjustments include inventory, prepaid expenses, property, plant,
and equipment, and intangible assets. Cost of goods sold in foreign currency is
multiplied by the average (for that period) exchange rate when translating. It
is quite simple.