Temporal Method – Which rate to use?

@diya @sophie well that’s what I understood as well, apart from the list given above (first post), everything else should be historical rate under the temporal method.

However, the explanation to the question i’m working on seems to place inventory under historical rate (when they use average for COGS as requested) and taxes/interest expense under average.

Again, I could post the question if needed. As I thought I’m asking specifically how these items were classified. It seems like they are using different rates for different questions which is very confusing.

Basically the question is to use the temporal method (making the functional currency as the EURO), what would the translation gain/loss be?

Monetary assets – Cash & marketable securities, accounts receivable
Monetary liabilities – acc. payable, short term debt, long-term debt, accrued expenses, notes, deferred taxes
Non-monetary assets – Inventories, PP&E, Intangibles
Non-monetary liabilities – Deferred (unearned) revenue (unlikely to be tested on this, but FYI)

Thansk @sophie for this list, i got most of it apart from accrued expense, notes and deferred taxes, gonna include that into my list.

@vincentt, I don’t fully understand your question. Inventory is a non monetary asset, hence historical under temporal. Your question’s explanation seems correct then.

As mentioned, taxes/interest expense are considered “other income statement items” not listed in the lists above, hence would be average.

As for this:

Beg. Inventory + purchases – COGS = End. Inventory
(very useful method way of understanding which you have mentioned in the other post last week or so)

However, I know that COGS is always historical under temporal but the question specifically mentioned inventory purchase occurred evenly across the year and should use the average rate, hence I would assume that COGS and inventory should use the average rate. (In the answer, COGS is using average but not inventory!)

But logically (in real life), taxes and interests are paid at a certain time of the year, so wouldn’t that be right to use the historical rate (something like a to use the rate at the time when common stocks were issued?)

Just trying to reason it out with my logic, so I could remember them easily.

I would say that although purchases occur throughout the year, inventory is stable and they use LIFO accounting, so inventory is still the same inventory they bought on Jan 1st.

My take is that inventory is historical because it was bought all at once at the 1st of Jan, then with LIFO accounting the inventory was kept stable, meaning that all new inventory that was purchase would have been shifted to COGS (therefore using average rate), and the inventory at the end of the period would still be the inventory bought at the 1st of Jan. So historical rate should apply here.
😀

@fabian :-O !!! That’s explains the used of historical rate for inventory!!! thank you!!! That’s a very evil question!

Inventory depends on date of purchase
COGS depends on date of sale

Why would COGS depends on date of sale? Wouldn’t COGS be the actual cost when you purchased the specific item?

thanks for that guys @sophie @fabian but, what about the tax and interest expense bit?

LOL @vincentt now you can see how tricky the questions can be. Underlining these key ‘extra’ info is always useful.

But logically (in real life), taxes and interests are paid at a certain time of the year, so wouldn’t that be right to use the historical rate (something like a to use the rate at the time when common stocks were issued?)

Just trying to reason it out with my logic, so I could remember them easily.

Definitely, logic is always my preferred method as I’m terrible at memorizing. But in this case, even in CFAI studies for temporal method it is just assumed that these Other Income Statement items (excluding COGS, depreciation etc that have specific treatment) occur throughout the year, therefore using average exchange rates. I suppose it’s a simplification as I think they did enough havoc in this section.

So to summarize, under the temporal method:

Balance Sheet items are usually historical apart from cash (please add onto my list if i missed anything out, I promise to put ur name as credit in my notes ) 😛

Income statement:
Rev & SG&A – average
NI – mixed
depreciation & COGS – historical

everything else should be average?