CFA Level II Exam · Multinational Operations

Temporal Method (Remeasurement) for CFA Level II

Updated 7 October 2026 · Fact-checked

The temporal method remeasures a subsidiary's books into the parent's currency when that currency is the subsidiary's functional currency. Monetary items use the current rate. Nonmonetary items carried at historical cost use historical rates. Income items use average rates, except cost of goods sold and depreciation. The resulting remeasurement gain or loss goes to net income.

Understand Temporal Method (Remeasurement)

A subsidiary keeps its books in a local currency. If its functional currency is the parent's currency, the subsidiary acts as an extension of the parent. Its local-currency numbers must then be remeasured into the functional currency. The CFA curriculum calls this the temporal method. The same method applies under US GAAP when a subsidiary is in a hyperinflationary economy.

The idea is to keep the measurement basis of each item. Each item is converted at the rate that matches the date its value was set.

Monetary items are fixed in currency units: cash, receivables, payables, and debt. They are remeasured at the current (closing) rate.
Nonmonetary items carried at historical cost are remeasured at the historical rate from when they were acquired. These include inventory at cost, property, plant and equipment, intangibles, and prepaid expenses. Common equity also uses the historical rate.
Nonmonetary items carried at current value, such as inventory at market or fair-valued assets, use the rate on the date of that valuation.

Income statement items use the average rate for the period. There are two exceptions. Cost of goods sold uses the historical rates at which the inventory was bought. Depreciation and amortization use the historical rate of the related asset.

Because balance sheet items use different rates, the statements will not balance on their own. The balancing figure is the remeasurement gain or loss. Under the temporal method it goes to net income, so it makes earnings more volatile. Under the current rate method, the equivalent translation adjustment goes to other comprehensive income instead.

The exposure is the net monetary position: monetary assets minus monetary liabilities. If you hold net monetary assets and the foreign currency depreciates against the parent currency, you lose. If you hold net monetary liabilities and it depreciates, you gain. The signs reverse if the foreign currency appreciates.

Key formulas to remember

Rate by item type: Monetary items → current rate; nonmonetary items at historical cost → historical rate; revenue and most expenses → average rate; COGS and depreciation are the exceptions. Use historical rates for them.
Exposure: Net monetary position = monetary assets − monetary liabilities; Positive means net asset exposure. Negative means net liability exposure.
Direction of gain or loss: Foreign currency depreciates: net monetary assets → loss, net monetary liabilities → gain. Foreign currency appreciates: net monetary assets → gain, net monetary liabilities → loss; Measured against the parent (functional) currency, which is the one you remeasure into.
Remeasurement gain or loss (reconciliation): Gain or loss = ending net monetary position × closing rate − [beginning position × beginning rate + flows at their transaction-date rates]; Flows include sales, cash costs, and dividends. A positive result is a gain. Use average rates for flows unless a date is given.
Where it is reported: Remeasurement gain or loss → net income; Under the current rate method it would go to OCI.

How to solve Temporal Method (Remeasurement) questions

Use this order for any temporal method question. Read the vignette for rates, dates, and the measurement basis of each item.

1Confirm the method. If the subsidiary's functional currency is the parent's currency, use the temporal method. Read the rates quoted as parent currency per unit of foreign currency, and check this before you multiply.
2Sort every balance sheet item into monetary or nonmonetary. Note whether nonmonetary items are at historical cost or at current value.
3Pick the rate. Monetary items take the closing rate. Cost-based nonmonetary items take the rate from their acquisition date. Equity takes historical rates.
4For the income statement, use the average rate. Switch to historical rates for COGS and depreciation or amortization.
5If asked for the gain or loss, compute the net monetary position at the start and end. Convert the opening position and each flow at its own rate. Compare the result with the ending position at the closing rate.
6Check the direction with exposure logic. Net monetary assets with a depreciating foreign currency give a loss. Net liabilities give a gain.
7Report the gain or loss in net income. Then answer what was asked: a line item, a ratio, or an effect on earnings volatility.

Quickest way: Rate-sorting shortcut

When to use it: Use it when the question asks for one remeasured line item, or only the direction of the gain or loss.

Ask one question for each item: is it a claim to a fixed amount of currency? If yes, use the closing rate. If no, use the historical rate.
For direction, find the sign of the net monetary position, then the direction of the currency move.
Net assets and a falling foreign currency mean a loss. Net liabilities and a falling foreign currency mean a gain. Flip both if the currency rises.
For margins, remember that COGS uses older rates than sales. If the foreign currency has been falling, COGS is remeasured at higher rates than the average rate. The gross margin falls compared with the local-currency margin.
Do the full reconciliation only when a number is demanded.

Common mistakes in Temporal Method (Remeasurement)

Remeasuring PP&E and inventory at the closing rate.
Students mix up the temporal method with the current rate method, where all assets use the closing rate.
Fix: Under the temporal method, only monetary items use the closing rate. Cost-based nonmonetary items keep their historical rates.
Putting the remeasurement gain or loss in OCI.
The cumulative translation adjustment under the current rate method goes to equity, and the two get confused.
Fix: Temporal method gains and losses go to net income. Link the temporal method to volatile earnings.
Translating COGS and depreciation at the average rate.
Students assume every income statement item uses the average rate.
Fix: Treat COGS and depreciation or amortization as the exceptions. Use the historical rate of the inventory purchase or the asset.
Getting the gain or loss direction backwards.
Students forget which currency is being measured against, or mix up net assets and net liabilities.
Fix: Work out the sign of the net monetary position first. Then apply the currency move relative to the parent currency. Net liabilities with a depreciating foreign currency produce a gain.
Treating inventory as monetary.
Inventory is a current asset, and students assume current means monetary.
Fix: Monetary means a fixed claim to currency units. Inventory is nonmonetary unless it is carried at current market value, in which case use the rate on the valuation date.
Reading the quote the wrong way round.
Rates are given as parent currency per foreign unit or the reverse.
Fix: Write the quote with its units, such as USD/EUR 1.20. Multiply foreign amounts by parent per foreign. If the quote is reversed, divide.

Worked examples

Example 1

A US parent owns a subsidiary whose books are in euros (EUR). The subsidiary's functional currency is the USD, so the temporal method applies. At the start of the year it has monetary assets of EUR 500 and monetary liabilities of EUR 800. Rates in USD per EUR: start 1.25, average 1.20, end 1.15, and 1.18 on the dividend date. During the year the subsidiary has cash sales of EUR 2,000 and cash expenses of EUR 1,500, both at the average rate. It pays a cash dividend of EUR 100. Q1: What is the ending net monetary position in EUR? Q2: What is the remeasurement gain or loss in USD? Q3: Where is it reported?

Show the solution

Q1: The opening net monetary position is 500 − 800 = −EUR 300, a net liability. Add sales of 2,000, subtract expenses of 1,500, and subtract the dividend of 100. The ending position is −300 + 2,000 − 1,500 − 100 = +EUR 100.
Q2: Convert the opening position at the opening rate: −300 × 1.25 = −USD 375. Convert sales: 2,000 × 1.20 = +USD 2,400. Convert expenses: 1,500 × 1.20 = −USD 1,800. Convert the dividend: 100 × 1.18 = −USD 118.
The expected ending position in USD is −375 + 2,400 − 1,800 − 118 = USD 107.
The actual ending position at the closing rate is 100 × 1.15 = USD 115.
The gain is 115 − 107 = USD 8. This is consistent with the exposure rule. The company was a net monetary liability holder for part of the year while the euro fell, so a gain is plausible.
Q3: Under the temporal method the gain goes to net income.

Answer: Q1: ending net monetary position is a EUR 100 net asset. Q2: remeasurement gain of USD 8. Q3: reported in net income.

Example 2

Same subsidiary and rates as before: start 1.25, average 1.20, end 1.15 (USD per EUR). Inventory of EUR 600 is carried at cost and was bought when the rate was 1.22. PP&E of EUR 3,000 was acquired when the rate was 1.30. Annual depreciation is EUR 300. Q1: What are the remeasured values of the inventory and PP&E? Q2: What is the remeasured depreciation expense? Q3: How much lower would PP&E be under the current rate method, and how does depreciation at the historical rate compare with the average rate?

Show the solution

Q1: Inventory and PP&E are nonmonetary and carried at historical cost. Use their historical rates. Inventory: 600 × 1.22 = USD 732. PP&E: 3,000 × 1.30 = USD 3,900.
Q2: Depreciation uses the historical rate of the asset. 300 × 1.30 = USD 390.
Q3: Under the current rate method, PP&E is 3,000 × 1.15 = USD 3,450. That is 3,900 − 3,450 = USD 450 lower.
At the average rate, depreciation would be 300 × 1.20 = USD 360. The historical rate gives USD 390, which is USD 30 higher. Net income is USD 30 lower on this item, because the euro has weakened since the asset was bought.

Answer: Q1: inventory USD 732 and PP&E USD 3,900. Q2: depreciation USD 390. Q3: PP&E would be USD 450 lower under the current rate method. Depreciation at the historical rate is USD 30 higher than at the average rate, so net income is USD 30 lower.

Exam tips

Look for the phrase functional currency. If it is the parent's currency, the temporal method applies. If it is the local currency, the current rate method applies.
In vignettes, list each balance sheet item and tag it monetary or nonmonetary before you read the questions. Most questions then become lookups.
Direction questions come up often. Decide the sign of the net monetary position, then the direction of the currency move. Do not compute unless a number is asked for.
Expect comparison questions: temporal versus current rate. Know where the gain or loss goes, what happens to gross margin, and what happens to earnings volatility.
Check how the exchange rate is quoted before you multiply. A reversed quote gives an answer that looks plausible but is wrong.

Temporal Method (Remeasurement): frequently asked questions

What is the difference between monetary and nonmonetary items under the temporal method?

Monetary items are fixed claims to currency units, such as cash, receivables, payables, and debt. They use the current rate. Nonmonetary items, such as inventory at cost, PP&E, and intangibles, use the historical rate of acquisition.

Where does the remeasurement gain or loss go?

It goes to net income. This is why the temporal method can make reported earnings more volatile. Under the current rate method, the translation adjustment goes to other comprehensive income instead.

When is the temporal method used?

It applies when the subsidiary's functional currency is the parent's currency, so the subsidiary is an extension of the parent. Under US GAAP it is also used for subsidiaries in hyperinflationary economies. The curriculum uses the name temporal method, while IFRS describes the process as remeasurement into the functional currency.

Why are COGS and depreciation not translated at the average rate?

They are linked to nonmonetary balance sheet items carried at historical cost. Inventory and fixed assets use historical rates, so the expenses that come from them use the same historical rates. This keeps the income statement consistent with the balance sheet.