METHODS OF TRANSLATION

Four methods of foreign currency translation have been developed in various countries.

· The current rate method

· The monetary/non-monetary method

· The temporal method

· The current/non-current method

Current rate method

The Current rate method is the simplest & the most popular method all over the world. Under this method,

· All balance sheet & income items are translated at the current rate of exchange, except the stockholders’ equity.

· Income statement items, including depreciation & cost of goods sold (cogs), are translated at either the actual exchange rate on the dates the various revenues & expenses were incurred or at the weighted average exchange rate for the period.

· Dividend paid is translated at the exchange rate prevailing on the date the payment was made.

· The common stock account & paid –in-capital accounts are translated at historical rates.

· Gains or Losses caused by translation adjustment are not included in the net income but are reported separately & accumulated in a separate equity account known as Cumulative Translation Adjustment (CTA). CTA account helps in balancing the balance sheet balance since translation gains or losses are not adjusted through the income statement.

ADVANTAGE:

· The relative proportions of the individual balance sheet accounts remain the same & hence do not distort the various balance sheet ratios like the debt-equity ratio, current ratio, etc

· The variability in reported earnings due to foreign gains or losses is eliminated as the translation gain/loss is shown in a separate account – the CTA account.

DISADVANTAGE

· The various items in the balance sheet which are recorded at historical costs are translated back into $ at a different rate.