There are four principal translation methods available in order for multinational corporations to protect their assets and liabilities from translation exposure. Translation process has an effect on net investment upon sale or liquidation of the assets.

The first is current/noncurrent method, which was used by almost all U.S. multinationals. All the foreign subsidiary’s current assets and liabilities are translated into home currency at the current exchange rate. Noncurrent asset or liabilities is translated at its historical exchange rate, which is the rate at the time the asset was acquired or the liability was incurred. The income statement is translated at the average exchange rate of the period except for the revenues and expenses that are associated with noncurrent assets or liabilities.

The second is monetary/nonmonetary method. This method differentiates between monetary assets and liabilities and nonmonetary or physical assets and liabilities. Monetary assets and liabilities are cash, accounts payable and receivable, and long-term debt, and they are translated at the current rate. On the other hand, nonmonetary assets and liabilities are inventory, fixed assets, and long-term investments, and they are translated at historical rates. Income statement items are translated at the average exchange rate during the period, except for the revenue and expenses related to nonmonetary assets and liabilities.

The third is temporal method mandated by FAS 8. This method is a modified version of the monetary/nonmonetary method. Under monetary/nonmonetary method, inventory is always translated at the historical rate; under temporal method, however, inventory can be translated at the current rated if the inventory is shown on the balance sheet at its market values. Only choice of exchange rate under monetary/nonmonetary method is based on the type of assets or liabilities; on the other hand, with temporal method, company can evaluate the cost according to the exchange rate difference between historical and market. Income statement items are translated at an average rate for the reporting period except for cost of goods sold, depreciation, and amortization charges related to balance sheet items carried at past prices, which are translated at historical rates.

Finally, the forth method is current rate method. This is the simplest method of all, that is, all balance sheet and income items are translated at the current rate of financial statement date. With some variation, it is the method mandated by the current U.S. translation standard FAS 52.

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