Under the current rate method for foreign currency translation, which rates apply and where are translation adjustments reported?

• A. Assets and liabilities at historical rates; adjustments in net income
• B. Assets and liabilities at closing rates; adjustments in other comprehensive income
• C. Assets and liabilities at average rates; adjustments in retained earnings
• D. Assets and liabilities at current rates; adjustments in equity

Answer: (B)

Under the current rate method, assets and liabilities are translated using the closing (current) rate because those balance sheet items reflect amounts at the reporting date. The translation adjustments that arise from using different rates for different components accumulate in equity as part of other comprehensive income, not in net income. This method keeps the effects of exchange rate movements on the balance sheet separate from the reported earnings. (Income and expense items are translated at average rates, and equity items use historical rates, which is why the net effect shows up in OCI rather than in earnings.)