Final answer:
Translation gains and losses are reported in other comprehensive income (OCI) under the current rate model but affect net income directly under the temporal model, with differences in treatment arising from the use of current versus historical exchange rates.
Step-by-step explanation:
The handling of translation gains and losses varies significantly between the current rate model and the temporal model, which are two methods used in accounting to convert the financial statements of a subsidiary into the parent company's presentation currency.
Current Rate Model
Under the current rate model, also referred to as the functional currency method, all assets and liabilities are translated at the current exchange rate as of the balance sheet date. Translation gains and losses resulting from this method are typically reported in the other comprehensive income (OCI) section of equity until they are realized through the sale or liquidation of the investment.
Temporal Model
In contrast, the temporal model, or the historical rate method, applies different exchange rates to various line items depending on the nature of the underlying transactions. Monetary assets and liabilities are translated at the current exchange rate, whereas non-monetary assets and liabilities are translated using historical exchange rates. Translation gains and losses in the temporal model are recognized directly in the income statement and affect net income.