Financial Education

When foreign subsidiary results are translated into parent currency using the temporal method, any changes in the net monetary assets and liabilities flow through the income statement as a gain or loss. It can be important to consider this gain or loss when comparing the results to other companies, especially when those companies have different capital structures or use the all-current method.

The amount and direction of any reported gain or loss will depend upon the direction of currency movement and on whether the subsidiary’s financial position is one of net monetary assets or net monetary liabilities.  In the case of a strengthening foreign currency, a gain will be reported when there are net monetary assets and a loss when there are net monetary liabilities. For a weakening foreign currency, there will be a loss on a net monetary asset position and a gain on a net monetary liability position.

For more information, see all articles on: Accounting, Adjusting Reported Financial Statements

See also:

Integrating Losses and Separating Gains

Comprehensive Income

Accounting for Debt Retirement

Comprehensive Income

Long-Term Return Reversals: Overreaction or Taxes?