Temporal Method When an American Term Paper

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In practice, a monthly or a quaterly weighted average may be computed.

But for expenses that are related to nonmonetary assets such as depreciation, amortization (of intangible assets and deferred charges except for deferred income taxes) and cost of goods sold are translated at appropriate historical rates.

This method will result in a net exchange gain or loss, which should be recognized in the income statement for the current period.

To determine whether a specific foreign operations is integral or not with the operation of the parent company, the concept of functional currency may be used as guidance. Functional currency is defined as the primary currency of the foreign entity's operating environment, it could either be the parent's currency or a foreign currency. Foreign operations are considered as integral to the operations of the parent if its functional currency is the same with its parent's.

Below is a list of indicators in determining the functional currency of the foreign entity.

Indicator

Foreign Currency

Foreign Operations is Not Integral)

Parent's Currency

Foreign Operation is Integral)

Cash flow

Primarily in foreign currency and do not affect parent company's cash flows.

Directly impact parent company's cash flows on a current basis.

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Sales price

Not affected on short-term basis by changes in exchange rate.

Affected on short-term basis by changes in exchange rate.

Sales market

Active local sales market.

Sales market mostly in parent's country or sales denominated in parent's currency.

Financing

Primarily denominated in foreign currency and foreign currency cash flows adequate to service obligations.

Primarily from parent company or denominated in parent currency or foreign currency cash flows is not adequate to service obligations.

Intercompany transactions

Low volume of intercompany transactions and not extensive interrelationship with parent company's operations.

High volume of intercompany transactions and extensive interrelationship with parent company's operations.

II. Part 2

Long-term accounts receivable

Long-term accounts receivable is considered as a monetary asset, and as such is translated at the current exchange rate.

Deferred Income

Deferred or unearned income is a nonmonetary liability, as such, it is translated using its appropriate historical rate.

Inventory valued at cost

Inventory is a nonmonetary asset, as such, it is translated using its appropriate historical rate.

Long-term debt

Lont-term debt is considered as a monetary liability, and as such is translated at the current exchange rate......

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