When do you use the temporal method vs. the current rate method for foreign subsidiary translation?

The choice between methods depends on the functional currency of the foreign subsidiary:

Current Rate Method (functional = local currency):

Temporal Method (functional = parent's currency):

Example: Pennwick Corp (USD parent) has a subsidiary, Mistral SA, operating in Switzerland (CHF).

If Mistral operates independently with Swiss customers and suppliers → Functional currency = CHF → Current rate method

If Mistral is merely a sales office executing Pennwick's orders → Functional currency = USD → Temporal method

Key ratio effects:

• Current rate method: All assets/liabilities at same rate → financial ratios are preserved from the local currency statements. The CTA is a plug in equity.
• Temporal method: Mixed rates create ratio distortions. Gross margins can shift because revenue uses average rate but COGS uses historical rate. The remeasurement gain/loss hits net income, adding volatility.

Net asset/liability exposure:

• Current rate method: Net asset exposure (assets - liabilities in local currency)
• Temporal method: Net monetary asset/liability exposure

A depreciating local currency with net asset exposure under current rate → negative CTA in OCI. Under temporal with net monetary liability → remeasurement gain on income statement.

Explore more translation scenarios with worked numbers in our AcadiFi CFA Level II course.