How does the treatment of translation gains and losses differ between the current and temporal translation methods under FAS No. 52
Translation Gains and Losses differ vs. Current and Temporal Translation Methods.
Differences exist in terms of treatment of translation gains and losses and current and temporal translation methods. On translation gains and losses, it is essential to note that enterprises that undertake their operations globally need to ensure they translate their transactions, including buying services or asset acquisition, into their functional currency. Fluctuations in foreign exchange expose the value of properties and liabilities to variations. The additions and losses, which emanate from this, are accumulated as a comprehensive income statement’s entry of a translated balance sheet. Under FAS No. 52, an entry should permit investors to distinguish between substantial daily operational gains and losses and those that result from the translation of foreign currency. Distinct rules apply for translating financial statement items, such as income statement items, assets and liabilities, and cash flow statements, among others. Due to the complexity that exists here, it becomes essential to refer to an accountant concerning the accounting rules that govern foreign currency translation.
On the other hand, due to the constant fluctuation of exchange rates, challenges emerge when it comes to accounting for foreign currency translations, leading to current and temporal translation methods. Firms might consider different rates for a specific date or period. The current translation method requires businesses to translate their financial statement items at the present rate of exchange, including possessions as well as liabilities. The volatility affiliated with the practice in exchange rates, the gains, and losses attributed to the translation technique is reported on the consolidated net income account’s reserve account. The temporal translation method facilitates adjusting the assets that generate income on the balance sheet as well as affiliated items in the income statement by employing past exchange rates from the last date a company evaluated the account’s fair market value or transaction dates.