Temporal Method

The temporal method is a method of accounting for foreign currency transactions that is based on the principle of recognizing exchange gains and losses in the period in which they occur. This method is in contrast to the current rate method, which recognizes exchange gains and losses in the period in which the foreign currency is converted into the reporting currency.

The temporal method is based on the assumption that the functional currency of a company is the currency of the primary economic environment in which it operates. The functional currency is the currency in which the company generates and expends cash.

Under the temporal method, foreign currency transactions are recorded in the functional currency at the exchange rate that existed when the transaction occurred. Exchange gains and losses are recognized when the foreign currency is converted into the functional currency.

The temporal method is often used by companies that have operations in multiple countries and that conduct business in multiple currencies. This method can provide a more accurate picture of the company's financial performance by reflecting the effects of exchange rate changes on the company's assets, liabilities, and income.

There are two main advantages to using the temporal method. First, it provides a more accurate picture of the company's financial performance by reflecting the effects of exchange rate changes on the company's assets, liabilities, and income. Second, it is consistent with the principle of recognizing exchange gains and losses in the period in which they occur.

There are also two main disadvantages to using the temporal method. First, it can be more complex to apply than the current rate method. Second, it can result in volatility in the company's earnings, which can make it difficult to compare the company's financial performance over time.

The temporal method is a generally accepted accounting principle (GAAP) in the United States. However, companies may elect to use the current rate method if they can justify doing so.