Internationally, four methods of foreign currency translation are used in practice: the current/noncurrent method, the monetary/nonmonetary method, the temporal method, and the current rate method.
Current/Noncurrent Method Under this method, all the current assets and liabilities of the foreign operation are translated into home currency at the current exchange rate, whereas noncurrent assets and liabilities are converted at historical exchange rates prevailing when the assets were acquired or liabilities incurred.
The profit and loss account is translated at the average exchange rate of the period, except for items like depreciation and amortisation which are associated with the noncurrent assets and liabilities. The latter items are translated at the same rate as the corresponding balance sheet items.
Monetary/Nonmonetary Method Under this method, monetary assets and liabilities — items that represent a claim to receive or an obligation to pay a fixed amount of and liabilities are translated at the current rate and non monetary assets and liabilities are translated at historical rates.
Profit and loss account is translated at the average exchange rate of the period, except for revenue and expense items associated with nonmonetary assets and liabilities. The latter items, cost of goods sold and depreciation in the main, are translated at the same rate as the corresponding balance sheet items.
Temporal Method Under this method, monetary balance sheet items are translated at the current rate. Nonmonetary balance sheet items are translated at the current rate, if they are carried at current value, or the historical rate, if they are carried at historical cost. Profit and loss account items are normally translated at the average rate for the period. However, cost of goods sold and depreciation and amortisation charges are translated at the same rate as the corresponding balance sheet items.
Current Rate Method Under this method, all assets, liabilities, and profit and loss accounts are translated at the current rate.
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