Temporal Method Explained: Foreign Currency Remeasurement Example

Learn the temporal method with a complete foreign currency remeasurement example. Professor Farhat walks through a Swiss subsidiary worksheet, selects exchange rates, solves for net income and verifies the remeasurement loss using net monetary assets. For advanced accounting students, CPA BAR candidates and CMA candidates reviewing foreign currency accounting. How does the temporal method work? Remeasure books kept in a currency other than the entity's functional currency into that functional currency. This example assumes the U.S. dollar is functional. Monetary balances use the closing rate; historical-cost nonmonetary items and related depreciation use historical rates. Current-value items require the rate appropriate to their measurement basis. Revenues and other expenses use transaction-date rates; an average is an approximation when appropriate. The example's remeasurement loss enters earnings. Calculation and rounding note (12:16–18:12): The worksheet displays about $198 of loss, while the second proof rounds to $199. Keeping the four-decimal exchange rates without intermediate rounding gives $198.90: • Beginning net monetary liabilities: −10,000 × 0.5987 = −$5,987 • Add revenue: 75,000 × 0.5654 = $42,405 • Subtract other operating expenses: 27,000 × 0.5654 = $15,265.80 • Subtract dividends: 15,000 × 0.581 = $8,715 • Expected ending monetary position before FX adjustment: $12,437.20 • Closing-rate balance: 23,000 × 0.5321 = $12,238.30 • Remeasurement loss: $12,437.20 − $12,238.30 = $198.90 Use consistent rounding throughout your solution. Chapters 00:00 Temporal method and the worked example 00:57 Why remeasurement is needed 01:49 Historical, current and transaction-date rates 02:33 Swiss subsidiary financial statements and rates 03:30 Excel worksheet and five-step approach 04:12 Nonmonetary assets at historical cost 05:17 Monetary assets and liabilities at the closing rate 05:59 Paid-in capital and historical rates 06:35 Deriving ending retained earnings 07:54 Revenue, depreciation and preliminary income 08:56 Beginning retained earnings and dividends 10:10 Retained earnings rollforward formula 11:14 Solving for net income 12:16 Calculating the remeasurement loss 13:59 Net monetary position: a second proof 15:46 Remeasuring changes in monetary balances 16:45 Comparing the proof with the closing-rate balance 18:13 Temporal method vs. current rate method 19:05 When remeasurement and translation are both needed 19:58 Further study Why use retained earnings to check the answer? Beginning retained earnings + net income − dividends = ending retained earnings. The lesson works backward to find net income and compares it with preliminary income. Normally, beginning retained earnings carries forward the prior functional-currency balance; it is not automatically converted at each new year's opening rate. How does this differ from the current rate method? The lesson compares the rates applied to historical-cost nonmonetary balances and where the adjustment appears: this remeasurement loss affects earnings, while ordinary financial statement translation differences enter OCI. If book, functional and reporting currencies differ, remeasure first and translate second. The two-step case is introduced here; it is not a full second worked example. Study note: The years and Swiss-franc rates are hypothetical teaching inputs. The highly inflationary Switzerland scenario is an assumption, not a factual claim about Switzerland. The U.S. GAAP highly inflationary discussion should not be applied as an IFRS inflation-accounting tutorial. Continue the foreign currency series:    • Foreign Currency Translation & Remeasureme...   Advanced accounting course:    • Advanced Accounting Full Course | Universi...   More accounting lectures and practice: https://farhatlectures.com #TemporalMethod #ForeignCurrency #CPAExam