Which items are translated at the historical rate vs. current rate under the temporal method?

The temporal method translates items based on when they were measured — hence the name 'temporal.' Items measured at current value use the current exchange rate; items measured at historical cost use the historical rate.

The Core Rule:

Balance Sheet Translation:

Income Statement Translation:

Remeasurement Gain/Loss:

Because the balance sheet will not balance after translation (monetary items at current rate, non-monetary at historical), a remeasurement gain or loss is plugged into the income statement (not OCI). This affects reported net income and earnings volatility.

Example: Kendrick Automotive (US parent, USD functional) has a subsidiary in the UK. The pound weakened from $1.35 to $1.20 during the year. The subsidiary holds net monetary liabilities of GBP 8 million.

Net monetary liability exposure = GBP 8,000,000

Exchange rate change = $1.35 - $1.20 = $0.15 per GBP (depreciation)

Remeasurement gain = GBP 8,000,000 x $0.15 = $1,200,000 gain

Why a gain? The subsidiary owes pounds that are now worth less in dollar terms.

Contrast with Current Rate Method:

• Current rate method: ALL assets/liabilities at current rate, translation adjustment in OCI
• Temporal method: Mixed rates, remeasurement gain/loss in net income

Exam tip: If a company has net monetary assets in a depreciating currency, the temporal method produces a loss. If net monetary liabilities in a depreciating currency, it produces a gain. Memorize: 'liabilities in weak currency = good.'

For more currency translation practice, check our CFA Level II question bank.