Current Rate Method for Translation of Foreign Statements

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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.
01
CFA Level 2: Financial Reporting Part 2 – Introduction
02
Intercorporate Investments Accounting - Ownership Categories
03
Minority Passive Investments – Accounting Classes
04
Minority Active Investments and the Equity Method for Financial Reporting
05
Joint Venture Investments
06
Controlling Interest Investments: Accounting for Business Combinations
07
Purchase Method of Accounting for Controlling Interest Investments or Acquisitions
08
Pooling of Interests Method to Account for Controlling Interest Investments
09
Purchase Method vs. Pooling of Interest Method
10
Acquisition Method to Account for Controlling Interest Investments
11
GAAP Purchase Method, IFRS Purchase Method, and GAAP Acquisition Method Accounting
12
Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs)
13
Defined Benefits Plans vs. Defined Contribution Plans
14
Measuring the Defined Benefit Obligation
15
Pension Expense (both GAAP & IFRS) for the Income Statement
16
Defined Benefit Plans & the Company Balance Sheet
17
The Role of Actuarial Assumptions in DB Plan Accounting
18
Economic Pension Expense
19
Pensions and the Statement of Cash Flows
20
Accounting for Stock (or Share) Based Compensation
21
Financial Statement Consolidation of Multinational Operations
22
Consolidation: Presentation Currency vs. Functional Currency vs. Local Currency
23
Foreign Currency Translation
24
Temporal Method for Translation of Foreign Statements
25
Current Rate Method for Translation of Foreign Statements
26
Consolidating Financial Statements: Determining the Functional Currency
27
Translation Methods and Financial Statement Effects
28
Accounting for Subsidiaries in Hyperinflationary Economies
29
CFA Level 2: Financial Reporting 2 - Recommendations
30
MBS Weighted Average Life