Multinational Operations

[AlexMo]

When you are using the temporal method and you have a Net Liability exposure…Why would NI go down when the Foreign currency strengthens? Is it because you have a liability exposure and thus owe money…so you have to pay it back with a higher amount of foreign currency….Not sure if thats the right way to think about it for Net Income.

Thanks

 

[vallabhu]

Look at below example for clarity.
Home Currency : USD
Conversion Currency : EURO
Liability : 100 Euro
Liability @ Initial Conversion rate of 2USD/Euro is 200 USD
Liaility when foriegn currency strengthens @ Conversion rate 3USD/Euro is 300 USD

 

[darshanP]

Remember
In Current rate method Translation G/L is reported in shareholders’ Equity and it would by pass income statement and reported in Balance sheet under the Head Equity. So basically currency fluctuations don’t have direct impact on I/S
In Temporal Method the remeasurement G/L is reported in the income statement. So Currency fluctuations have direct impact on I/S.
Here, you are holding Net Liability Exposure and foreign cuurency Appreciate, which would create loss and it would be reported in I/S.
Hope it helps.