Translation Methods and Financial Statement Effects

Current Rate Method & Financial Statement Effects

• Income Statement Stability: Because the current rate method applies the cumulative translation adjustment to the equity section of the parent's balance sheet, the consolidated net income will be less volatile, when compared to translation under the temporal method.
• Balance Sheet Exposure: All assets and liabilities are translated at current rates. Given that a subsidiary's assets will exceed its liabilities, a net asset balance sheet exposure is created. Therefore when the foreign currency (subsidiary's local currency) appreciates, the cumulative translation adjustment will be positive.

Translation Methods and Financial Ratios

• Because the current rate method uses largely (not entirely) the current exchange rate to translate financial items, the financial ratios in the presentation currency will more closely (but not identically) resemble the financial ratios in the local currency. The temporal rate uses multiple exchange rates, so the local currency ratios and the presentation currency ratios are much less comparable.
• Because the current rate method does not translate contributed capital at the current exchange rate, financial ratios which employ both income statement items and balance sheet items, local currency ratios and presentation currency ratios will not be identical.
• Under the temporal method, financial ratios in the local currency can be significantly different from those in the presentation currency.