How is the remeasurement gain or loss calculated under the temporal method, and where does it go?
Granville Corp (USD functional currency) has a subsidiary, Aldgate Ltd, operating in the UK with GBP as its local currency. Since Aldgate's functional currency is actually USD (it's basically a sales office executing Granville's directives), I need to use the temporal method. I understand monetary items use the current rate and non-monetary items use historical rates, but the remeasurement gain/loss calculation is throwing me off. Can someone walk through a simplified example?
The temporal method remeasurement gain/loss is the 'plug' that makes the balance sheet balance after translating assets and liabilities at different rates. Here is a systematic approach.
Temporal Method Rules Recap
| Item | Exchange Rate Used |
|---|---|
| Monetary assets/liabilities (cash, receivables, payables, debt) | Current rate |
| Non-monetary assets at historical cost (inventory at cost, PP&E, equity) | Historical rate |
| Non-monetary assets at fair value (inventory at NRV) | Current rate |
| Revenue & most expenses | Average rate |
| COGS | Historical rate (matches inventory) |
| Depreciation | Historical rate (matches PP&E) |
Aldgate Ltd Example (GBP to USD)
Assume the following simplified balance sheet (in GBP):
| Item | GBP | Rate | USD |
|---|---|---|---|
| Cash | 100 | Current: 1.25 | $125 |
| Accounts receivable | 200 | Current: 1.25 | $250 |
| Inventory (at cost) | 300 | Historical: 1.30 | $390 |
| PP&E (net) | 500 | Historical: 1.35 | $675 |
| Total assets | 1,100 | $1,440 | |
| Accounts payable | 150 | Current: 1.25 | $187.50 |
| Long-term debt | 400 | Current: 1.25 | $500 |
| Common stock | 300 | Historical: 1.35 | $405 |
| Retained earnings | 250 | (computed) | $310* |
| Total L+E | 1,100 | $1,402.50 |
*Retained earnings is rolled forward from prior periods.
The Plug: Remeasurement Gain/Loss
Total assets in USD = $1,440
Total L+E before plug = $1,402.50
Remeasurement gain = $1,440 - $1,402.50 = $37.50
This gain is recognized in the income statement (not OCI). That's the key difference from the current rate method.
Intuition: Net Monetary Liability Exposure
The remeasurement gain/loss can also be estimated by analyzing the net monetary position:
Net monetary liabilities = ($150 + $400) - ($100 + $200) = GBP 250 net monetary liability
If GBP depreciates against USD (rate went from 1.30 to 1.25), Aldgate's net monetary liability in GBP is now cheaper in USD terms → remeasurement gain for Granville.
Key Distinction:
| Method | Gain/Loss Name | Where Reported |
|---|---|---|
| Temporal | Remeasurement gain/loss | Income statement |
| Current rate | Translation adjustment (CTA) | OCI / Equity |
Exam tip: When the subsidiary's functional currency differs from its local currency, use the temporal method. The remeasurement gain/loss is an income statement item, which means it affects EPS.
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