Temporal method refers to one of the method of two basic methods for the translation of foreign subsidiary financial statements in which specific assets and liabilities are translated at exchange rates consistent with the timing of the item’s creation. The temporal method assumes that a number of individual line item assets such as inventory and net plant and equipment are restated regularly to reflect market value.
Under the temporal method, gains or losses resulting from re-measurement are carried directly to current consolidated income, and not to equity reserves. Hence foreign exchange gains and losses arising from the translation process do introduce volatility to consolidated earnings.