Current Rate Method for Translation of Foreign Statements

When the functional currency needs to be translated to the reporting currency.

  • Current Exchange Rate (assets and liabilities): when translating with the current rate method, all assets and liabilities are translated from the subsidiary's foreign currency to the parent's presentation currency at current exchange rates (hence the name "current rate method").

  • Historical Exchange Rate (equity items)

  • Issued Stock: translate at the rate prevalent when the stock was issued.

  • Retained Earnings: retained earnings start with the prior year amount, plus net income, less dividends to arrive at current period retained earnings. This is the same balance that must hold for the temporal method.

Retained Earnings End = RE Beginning + Net Income - Dividends

  • Weighted Average Exchange Rate (income statement items): revenues, expenses, gains, and losses, are translated into the parent company's presentation currency at the weighted average exchange rate for the accounting period.

Steps in the Current Rate Method

  1. Income Statement: translate the income statement first with the weighted average exchange rate.
  2. Balance Sheet: assets and liabilities are translated at the current rate; issued capital stock is translated at the exchange rate on the date of issuance; retained earnings is balanced per the equation previously cited.
  3. Cumulative Translation Adjustment (CTA): after doing all this work in the current rate method, the balance sheet must be balanced. The CTA is a derived plug number that balances the asset side of the balance sheet with the liabilities and owner's equity side of the balance sheet. The CTA is carried as an unrealized gain or loss on the balance sheet, which is realized when the subsidiary is sold or an impairment charge is recognized.

LESSONS

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