Foreign exchange translation gains or losses can arise from transactions that multinational corporations face every day because of the known fact that exchange rates can change dramatically. Assets and liabilities can be classified by multinational corporations as exposed to this risk if they are translated at the current exchange rate and others are classified as not exposed if they are translated at their historical value. There are four currency translation methods that are used by companies with international operations as a form to hedge against translation risk and they are the current/noncurrent method, the monetary/nonmonetary method, the temporal method and the current rate method. These four methods share certain similarities but also differ in ways that certain items are classified. The current rate method allows companies to translate their current assets and liabilities at the current exchange rate. In the event that the assets and or liabilities cannot be classified as current this method translates these items at its historical exchange rate. The historical exchange rate is known as the rate that was in effect when the company entered a transaction in which an asset was either purchased or sold, this value is used for the balance sheet account. Under the Monetary/nonmonetary method translate at a certain rate depending on whether they are classified as monetary items or as liabilities. Monetary items are translated into the current rate and nonmonetary items/liabilities are translated into at their historical rates. The temporal method uses the historical rate to translate inventory except inventory that is shown on the balance sheet which is translated at its current rate. The current rate method is mandated by the FASB 52 translation standard. This method translates all income and balance sheet items at the current rate. When a company translates their income statement under the current/noncurrent, monetary/nonmonetary and temporal method the average exchange rate for that given period is used.

Sources:

http://www.cgap.org/p/site/c/template.rc/1.9.3001/ accessed October 27, 2009.

http://www.worldbank.og accessed October 31, 2009.