International Finance (Compare between the current rate and The temporal method) - Essay Example

Comparison of the Current Rate Method and the Temporal Method in International Finance Due to the different currencies that are present in the world, there has been the need of the development of methods to aid in the translation of value of assets. These include the current rate method and the temporal method as used in international finance. This paper looks at the two methods mentioned defining and subsequently comparing them. IntroductionThe different nations of the world operate on different currencies except for those that have agreed to use the same currency amongst themselves.

For the rest however there is an issue of exchanging the currency the designated local currency if a transaction is to take place. Thus, the use of the current rate method and the temporal method of foreign exchange come into play. This paper looks at the each of the two methods and compares them.The current rate method involves the conversion of foreign currencies, Items on balance sheets and income statements at the exchange rate that is current (Investopedia, 2009), hence the name. On the other hand, the temporal method converts the same based on time (Investopedia, 2009).

That is to say, if an item is valued at the market cost then the current market rate is used and if it is valued at historical cost then the historical rate is used to translate the value of said item.Of these two methods, the current rate method is the more popular. This is because unlike the temporal method, which is constantly changing, this method is more static and has only one variable, which is the current exchange rate. Also rather than recording profits and losses associated with the conversion in the net income, it is recorded and presented in a reverse account.

This creates simplicity in the interpretation of the earnings. The temporal method combines the two, losses/profits, and net income thus causing the volatility of the earnings expectedFrom the above, there is a clear advantage in the use of the current rate method as it provides more accurate and static results trough separation of net income from the losses and profits compared to the temporal method, which consolidates losses/profits with the net income. Also current rate method depends only on the current exchange rate while the temporal method relays on the current or historical market depending on the nature of the value of the object.

ReferencesInvestopedia. (2009). Current Rate Method Definition | Investopedia. Investopedia. Retrieved 21 May 2014, from http://www.investopedia.com/terms/c/currentratemethod.aspInvestopedia. (2009). Temporal Method Definition | Investopedia. Investopedia. Retrieved 21 May 2014, from http://www.investopedia.com/terms/t/temporalmethod.asp