Comparison of four translation methods
Monetary / Non- monetary Method
* All monetary balance sheet accounts (cash, marketable securities, accounts receivable, etc) of a foreign subsidiary are translated at the current exchange rate. * All other (non-monetary) balance sheet accounts (owner’s equity, land) are translated at the historical exchange rate in effect when the account was first recorded.
Current –Non Current Method
* All current assets and current liabilities of foreign affiliates are translated into parent currency at current exchange rates. * All non current assets ,non current liabilities and owner’s equity are translated at historical exchange rates . * Most income statement items are related to current assets or liabilities and are translated at the average exchange rate over the reporting period. * Depreciation is related to non current assets and translated at the historical exchange rate.
* Monetary assets and monetary liabilities are translated at current exchange rates. * Monetary assets include cash, accounts receivables and notes receivables .In general ,all liabilities are monetary . * Non- monetary assets, non monetary liabilities are translated at historical rates. * Non monetary assets include inventory and fixed assets. * Most income statements items related to current items are translated at average exchange rate. * Depreciation and cost of goods sold are related to real assets (Non monetary) and are translated at historical exchange rate.
The current rate method
* All assets and liabilities except common equity are translated at the current exchange rate. * Common equity is translated at historical exchange rates. * Income statement items are translated at current exchange rate. * Any imbalance between the book value of assets and liabilities is recorded as a separate equity account called the cumulative translation adjustment (CTA). * All...
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