Chartered Financial Analyst (CFA) Practice Exam Level 2

In the temporal method of translation, how are non-monetary assets treated?

1. Translated at historical rates

2. Translated at market rates

3. Translated at average rates

4. Remain unaltered during translation

The correct answer is: Translated at historical rates

In the temporal method of translation, non-monetary assets, such as property, plant, and equipment, are translated at historical exchange rates. This approach is based on the idea that the value of non-monetary assets is fundamentally tied to their original purchase price, which remains constant despite fluctuations in exchange rates over time. Using historical rates ensures that the financial statements reflect the true economic value of these assets as seen when they were acquired. Since these assets do not have a direct cash flow associated with them at the current market rate, they are treated in a way that maintains their original accounting values. For clarity, non-monetary assets differ from monetary assets, which are typically translated at current exchange rates, as they are expected to be converted to cash at current values. This distinction outlines why other translation methods like those involving market or average rates do not apply to non-monetary assets under the temporal method, as they would inaccurately reflect the asset's value over time.