- CFA Exams
- CFA Level I Exam
- Study Session 5. Financial Reporting and Analysis (1)
- Reading 15. Multinational Operations
- Subject 6. Impact on Financial Statements and Ratios

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**CFA Practice Question**

Which of the following statements about the return on assets is true in a period of an appreciating local currency and the use of the current rate method?

A. The current rate method results in a lower return on assets than the temporal method.

B. The current rate method results in a higher return on assets than the temporal method.

C. Cannot determine the effect of translation method on the return on assets.

**Explanation:**Since the temporal method remeasures nonmonetary assets at historical exchange rates, while the current rate method uses current exchange rates, assets will be remeasured at a lower $US equivalent. The asset effect usually offsets the income effect, resulting in a lower ROA under the current rate method.

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**User Contributed Comments**
5

User |
Comment |
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DZ2008 |
Isn't this contradictory? A lower US$ equivalent assets value means that ROA should be higher, since assets are in the denominator. I think B is the answer. |

johnb190 |
It would resuly in lower assets under the temporal method. The question asks about the current rate method. |

malawyer |
well, as the answer states, it is "usual" - what about service companies with no or little assets? |

mrpman |
IF FX appreciates, then when you exchange at the current rate, you would get more USD. Therefore current rate method translates assets at the current rate, if the rate appreciated against USD, then the number of Assets would be larger than it would had the temporal method been used. This would mean lower Assets in the equation (NI/A). Thats why I chose A |

MathW |
I think the "local currency" means the currency in the foreign country where the asset is held. This currency is appreciating against the dollar, therefore the reported dollar value is increasing, therefore the RoA is decreasing under the Current Rate Method. |