The major concept underlying the current rate method is that the entire foreign investment is exposed to foreign exchange risk. Therefore, all assets and liabilities are translated at the current exchange rate. Balance sheet exposure under this concept is equal to the net investment. The major concept underlying the temporal method is that the translation process should result in a set of translated U.S. dollar financial statements as if the foreign subsidiarys transactions had actually been carried out using U.S. dollars. To achieve this objective, assets carried at historical cost and stockholders equity are translated at historical exchange rates; assets carried at current value and liabilities (carried at current value) are translated at the current exchange rate. Under this concept, the foreign subsidiarys monetary assets and liabilities are considered to be foreign currency cash, receivables, and payables of the parent that are exposed to transaction risk. For example, if the foreign currency appreciates, then the foreign currency receivables increase in U.S. dollar value and a gain is recognized. Balance sheet exposure under the temporal method is analogous to the net transaction exposure that exists from having both receivables and payables in a particular foreign currency.

Some experts criticized that any method for translation of foreign financial statements is misleading. One of the reasons they put forth was that exchange rates were often politically controlled, therefore distorting the true economic value. Do you agree?