What Is the Current Rate Method?

The current rate method is a method of foreign currency translation where most items in the financial statements are translated at the current 澳洲幸运5官方开奖结果体彩网:exchange rate.

When a company has operations in other countries, it may need to exchange the foreign currency earned by those foreign operations into the currency used when preparing the company's financial statements—the presentation currency. The current rate method is utilized in instances where the 澳洲幸运5官方开奖结果体彩网:subsidiary isn't well integrated with the parent company, and the local currency where the subsidiary operates is the same as its 澳洲幸运5官方开奖结果体彩网:functional currency.

Understanding the Current Rate Method

Currency translation is the process of converting a foreign entity's functional currency 澳洲幸运5官方开奖结果体彩网:financial statements to the reporting entity's financial statements.

The current rate method differs from the 澳洲幸运5官方开奖结果体彩网:temporal (historical) method in that assets and liabilities are translated at current exchange rates as opposed to historical ones. This can create a high amount of translation risk, as the current exchange rate may change. To help smooth this volatility, gains and losses associated with this translation are reported on a reserve account, instead of the consolidated 澳洲幸运5官方开奖结果体彩网:net income account, which is used in the temporal method.

This helps to reduce the volatility of consolidated earnings. It is also more helpful for management, shareholders, and creditors in evaluating a company because losses and gains resulting from currency translation are excluded from the accounting of consolidated earnings. In the current rate method, the 澳洲幸运5官方开奖结果体彩网:cumulative translation adjustment (CTA), which is the loss/gﷺain associated with the currency translation, is held on the balance sheet as an unrealized gain or loss.

Calculating With the Current Rate Method

When translating currency using the cur𒁃rent rat🏅e method:

1. The first step is to translate the 澳洲幸运5官方开奖结果体彩网:income statement using the weighted average exchange rate observed over the reporting period.
2. Next, assets and liabilities found on the 澳洲幸运5官方开奖结果体彩网:balance sheet are translated at the current exchange rate. Note that issued 澳洲幸运5官方开奖结果体彩网:capital stock is to be translated at the exchange rate observed on the date of issuance. Retained earnings are adjusted for net income less dividends.
3. Finally, the balance sheet has to be re-balanced as a result of this accounting procedure. The CTA is used as a plug-in figure that nets out the asset side of the balance sheet with the liabilities and equity side. The CTA is treated as an unrealized gain or loss, which can subsequently be realized when the foreign subsidiary is sold or impaired.

Example of the Current Rate Method

An example would be a Canadian subsidiary of a U.S. company that does business using the Canadian dollar or "looney."

When converting foreign currencies to the company's presentation currency, the assets and liabilities listed on the balance sheet are converted to the presentation currency using the 澳洲幸运5官方开奖结果体彩网:spot exchange rate as of the date on the balance sheet. Stock and 澳洲幸运5官方开奖结果体彩网:retained earnings are translated at their historical rates, while income statement items are translated at the weighted average rate for the accounting peri♔od.