CFM8027 – Accounting for foreign exchange: explanation of the temporal method
The temporal method
Where the temporal method is used to translate the results of a
foreign enterprise, the company essentially accounts for the
assets, liabilities and transactions of the enterprise as if they
were its own.
The company must translate each of the monetary assets and
liabilities of the foreign enterprise into sterling at the closing
rate. The exchange gain or loss that arises goes through profit and
loss account. Non-monetary assets and liabilities are translated at
the historical rate. This follows the basic rules for preparing the
accounts of a single company (
CFM8006).
CFM8027a gives an example of the use of
the temporal method. The facts are the same as in the closing
rate/net investment method example at
CFM8026b, but the result is different.
This table summarises the effect on group profits:
| Profit after tax attributable to subsidiary | Exchange gain (loss) included in this profit | Exchange gain (loss) taken to reserves | |
| CR/NI average rate method | £60,000 | Nil | £25,417 |
| Temporal method | £63,723 | £117 | Nil |
CFM8029 explains when it is appropriate for a company to use the temporal method.
