All Current Method, Features, Advantages, Challenges

All Current Method, also known as the Current Rate Method, is a widely used approach in translating the financial statements of a foreign subsidiary into the reporting currency of the parent company. This method is applied when the foreign subsidiary operates independently of the parent company, with its functional currency being different from that of the parent. The method aims to reflect the foreign subsidiary’s financial position and results in terms of the current exchange rate environment.

Features of the All Current Method

1. Translation Approach:

   • All assets and liabilities (both monetary and non-monetary) are translated using the current exchange rate at the balance sheet date.
   • Equity items, including common stock and retained earnings, are translated at their respective historical exchange rates.
   • Income statement items, such as revenues and expenses, are translated at the average exchange rate for the reporting period.

2. Currency Translation Adjustments (CTA):

   • The difference between the translated assets and liabilities and the translated equity is recorded as a Currency Translation Adjustment (CTA).
   • The CTA is reported in the Other Comprehensive Income (OCI) section of equity, ensuring it does not directly impact the income statement.

3. Consistency with Functional Currency:

The method reflects the financial performance and position of a subsidiary as if it were a standalone entity operating in its local currency.

When is the All Current Method Used?

The All Current Method is typically used when:

1. A foreign subsidiary operates as an independent entity.
2. Its functional currency is not the same as the parent company’s reporting currency.
3. Required under accounting standards such as IFRS and US GAAP in cases where the foreign operation’s financial results need to align with the local currency environment.

Advantages of the All Current Method

• Simplicity and Uniformity:

The method is straightforward, using the current rate for most items, and ensures uniformity in translating balance sheets.

• Reflects Economic Reality:

By translating assets and liabilities at the current rate, the financial statements reflect the subsidiary’s position in light of current market conditions.

• CTA in Equity:

Recording the translation adjustments in OCI avoids distorting the income statement with currency-related fluctuations.

• Compliance:

Meets the requirements of international accounting standards, ensuring global comparability.

Challenges of the All Current Method:

• Volatility in CTA:

Fluctuations in exchange rates can cause significant changes in the CTA, leading to unpredictability in equity.

• Equity Consistency:

Since equity items are translated at historical rates, inconsistencies may arise between the balance sheet and income statement translations.

• Complex Consolidation:

Reconciling the CTA in the consolidated statements can become complex when multiple subsidiaries with diverse currencies are involved.

Steps for Translation Using the All Current Method

• Identify the Functional Currency:

Determine the functional currency of the foreign subsidiary.

• Translate the Balance Sheet:

Convert all assets and liabilities at the current rate. Translate equity items at historical rates.

• Translate the Income Statement:

Use the average rate for revenues and expenses unless specific transactions require a different rate.

• Calculate the CTA:

Derive the difference between the translated assets and liabilities and the translated equity.

• Record in Consolidated Statements:

Include the CTA in the equity section of the consolidated balance sheet under OCI.

Example of the All Current Method

A U.S. company has a foreign subsidiary in Europe that reports in euros (€). The subsidiary’s financial information for the year is as follows:

Translation:

1. Balance Sheet:
   • Cash: 20,000 × 1.20 = $24,000
   • Inventory: 50,000 × 1.20 = $60,000
   • Fixed Assets: 100,000 × 1.20 = $120,000
   • Liabilities: 70,000 × 1.20 = $84,000
   • Common Stock: 50,000 × 1.10 = $55,000
   • Retained Earnings: 30,000 × 1.15 = $34,500
2. Income Statement:
   • Revenues: 120,000 × 1.18 = $141,600
   • Expenses: 90,000 × 1.18 = $106,200

3. CTA:

The difference between the total translated assets and liabilities and the equity is recorded as CTA in OCI.