What is the 'Temporal Method'

The temporal method (also known as the historical method) is a method of foreign currency translation that uses exchange rates based on the time assets and liabilities are acquired or incurred to convert values on the books of an integrated foreign entity into the parent company's currency. The temporal method is used in instances where the local currency of the subsidiary differs from its functional currency. Differing exchange rates are used depending on the financial statement item being translated. Monetary assets and liabilities are converted using the exchange rate in effect as of the balance sheet date. Non-monetary assets and liabilities are converted using the exchange rate in effect on the date of the transaction. Gains and losses due to foreign exchange are reported in net earnings.

BREAKING DOWN the 'Temporal Method'

When a company has operations or subsidiaries in a country other than where the parent company is domiciled, the parent company must convert the values on the foreign entity's financial statements back into the parent company's currency in order to calculate its profits and losses and generate the financial statements. If the subsidiary's functional currency differs from its local currency, the temporal method is used to perform these translations.

Example of the Temporal Method

An example of this would be subsidiary XYZ being domiciled in Great Britain. The local currency of XYZ is the pound. However, if the majority of XYZ's clients reside in continental Europe it may conduct its business in euros. The euro would be the functional currency. In this instance, the parent company of XYZ would use the temporal method to translate XYZ's financial statements back into the currency used by the parent company.

Monetary assets such as accounts receivable, investments, and cash are converted to the parent's currency at the exchange rate in effect on the balance sheet date. Non-monetary assets are longer term assets, such as property, plant, and equipment, and are converted using the exchange rate in effect on the date the asset was obtained. All foreign exchange gains and losses are reported in net earnings of the parent company. This can increase the volatility of the parent company's earnings.

RELATED TERMS
  1. Current Rate Method

    The current rate method is a method of foreign currency translation ...
  2. Currency Translation

    Currency translation is the conversion of a foreign entity's ...
  3. International Currency Converter

    An international currency converter converts the value of one ...
  4. Translation Exposure

    Translation exposure is the risk that a company's equities, assets, ...
  5. Functional Currency

    Popular with multinationals, functional currency represents the ...
  6. Parent Company

    A parent company is a company that has a controlling interest in ...
Related Articles
  1. Trading

    Corporate Currency Risks Explained

    Corporate currency risks include transaction, translation and economic risks.
  2. Trading

    Profiting From a Weak U.S. Dollar

    Learn how to allocate your investments when the U.S. dollar is down.
  3. Financial Advisor

    Which Economy Is Larger - The United States or China?

    China's economy may be larger than the U.S. economy, but it all depends on which exchange rate method you use to make the GDP comparisons.
  4. Trading

    How to Calculate an Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
  5. Trading

    Currency fluctuations: How they effect the economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. Read on for what effects these changes can have.
  6. Retirement

    The Booby-trapped World of Parental College Loans

    Private parent loans can help families pay for college. But the repayment timeline associated with the loans can hurt parents’ retirement savings.
  7. Taxes

    How Your Government's Budgetary Decisions Impact the Public Sector

    Issues facing the public sector are not unlike some issues facing America’s oldest and largest companies, but with larger and broader impacts.
  8. Insights

    Understanding The Currency Board vs Central Bank

    Each is different in their own way, but which system is better: the currency board or the central bank? Find out more about these systems in this article.
  9. IPF - Banking

    Foreign savings accounts: Should you open one?

    Find out whether opening a savings account in a foreign bank might make sense for your money. Learn the pros and cons – as well as how to establish one.
  10. Financial Advisor

    New Parents Need a Financial Planning Checklist

    There are many areas of personal finance to consider throughout the journey of parenthood. Here are a few to review with your advisor.
RELATED FAQS
  1. What is the difference between a subsidiary and a sister company?

    Discover the differences between subsidiary companies and sister companies, and understand how both are related to parent ... Read Answer >>
  2. How is taxation treated for both the parent and subsidiary company during a spinoff?

    Learn how the potential tax implications of a spinoff can affect both parent and subsidiary companies and how taxes may be ... Read Answer >>
  3. How are international exchange rates set?

    Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments ... Read Answer >>
  4. What are the tax implications for both the company and investors in a divestiture ...

    Learn the tax implications for a company and its investors in divestiture events, such as spinoffs, equity carve-outs, and ... Read Answer >>
Trading Center