Temporal Method

Applying the Temporal Method

The temporal method is applied using the following procedures:

Monetary assets and liabilities are remeasured using the current exchange rate. Monetary assets and liabilities are fixed in the amount of currency to be received or paid and include: cash, receivables, payables, and short term and long term debt.

All other assets and liabilities are considered nonmonetary and are remeasured at the historical (actual) rate. The most common nonmonetary assets include inventory, fixed assets, and intangible assets. An example of a nonmonetary liability is unearned (deferred) revenue.

Just like the current rate method, common stock and dividends paid are remeasured at the historical (actual) rate. Expenses related to nonmonetary assets such as COGS, depreciation expense, and amortization expense are remeasured based on the historical rates prevailing at the time of purchase. Revenues and all other expenses are translated at the average rate.

Remeasurement gain or loss is recognized in the income statement. This results in more volatile net income as compared to the current rate method whereby the translation gain or loss is reported in shareholders’ equity.

Inventory and COGS Under the Temporal Method

Remember, the historical rate is the actual rate in effect when the original transaction occurred. Thus, there can be numerous historical rates to keep track of as a firm purchases nonmonetary assets (e.g., inventory, fixed assets, and intangibles) over time.

Inventory can be particularly complicated since the firm’s cost flow assumption (i.e., FIFO, LIFO, or average cost) must also be considered.

Recall that ending inventory under FIFO consists of the costs from the most recently purchased goods. Thus, FIFO ending inventory is remeasured based on more recent exchange rates. On the other hand, FIFO COGS consists of costs that are older; thus, the exchange rates used to remeasure COGS are older.

Under LIFO, ending inventory consists of older costs; thus, the inventory is remeasured at older exchange rates. LIFO COGS, however, consists of costs from the most recently purchased goods; thus, COGS is remeasured based on more recent exchange rates.

Not surprisingly, under the weighted average method, ending inventory and COGS are remeasured at the weighted average exchange rate for the period.