Translation of foreign subsidiary financial statements has become a necessary part of business particularly to those which operate at the international levels.. By using foreign currency translation, multinational companies can have consolidated financial statement for their business operation at home and abroad (Ramirez, 2007). There are two methods for translation foreign currency. These are:
a) Current rate
In this method, all the liabilities and assets of a business firm is translated using the current exchange rate. This process of translation does allow the use of the rate in operation rate at the time in which translation done is not used. Current rate method allows items located in the equity section to be are usually translated into historical rates. Stockholder's equity is also translated using historical rate of exchange. Often, revenue as well as other expenses is translated with the help of historical rates (Conklin, 2007). The major advantage of this method lies in the way gain or losses are handled. Here, any gain of loss is reflected in a reserve account and not in the income state. These method best fit an organization whose operations are self-sustaining.
b) Temporal method
This method applies a single exchange rate for the translation of all assets and liabilities. However, this method utilized both the historical rate as well as the current rate in translating assets and liabilities. During the process of translation, items in the balanced-sheet are often translated with focus being placed on how they are reflected in the books of the organization. For this reason, some items are valued at fair market while other are carried as historical purchase (Conklin, 2007). The main advantage of this method is its ability to detect whether a value is temporary or not and adjust to it accordingly. This method best suits a case where individual transactions are dealt with.