Meaning and definition of Temporal Method
The temporal method can be defined as a method of translating foreign currency through the use of exchange rates based on the time of acquisition of assets and liabilities. The exchange rate involved also depends on the valuation method being used. For assets and liabilities valued at current costs, the current exchange rate is used. On the contrary, the assets valued at historical costs involve the use of historical exchange rates.
As explained by Investopedia, any kind of income-producing assets like property, inventory, equipment, and plant are recurrently reorganized to replicate their market values, through the use of temporal method. The profits and losses resulting from translation are positioned directly into the current consolidated income. This leads to consolidate earnings being comparatively volatile.
Applications of Temporal Method
The temporal method is helpful in translating the assets evaluated in foreign currency into the home currency through the use of exchange rate which exists at the time of acquisition of assets. Also, it is, in actual fact, similar to the monetary-nonmonetary method except in treatment of physical assets gone through re-evaluation.
The temporal method applies the current exchange rate to all financial assets and liabilities, counting both current as well as long-term. The physical (non monetary) assets which are evaluated at past rates, are translated at past rates. Since, the various assets of a foreign subsidiary will, in all prospects, be acquired during different time periods and exchange rates do not stay stable for such long periods, different exchange rates are applied for translating these foreign assets into the multinational’s home currency.
However, the use of temporal method can lead to changes in certain financial ratios because the balance sheet is converted into parent currency for assets and liabilities being affected in different ways.
Illustrating the Temporal Method
Contrasting the all-current method, the temporal method calls for a majority of assets and liabilities to be evaluated through the use of exchange rate in effect at the time of creation of the specific asset or liability. Only the assets and liabilities featuring a fixed foreign currency value are translated at the existing (current) exchange rate.
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