 Hello and welcome to this session. This is Professor Fahad and this session we would look at a translation of cost of goods sold depreciation and Immortization this topic is covered in international accounting as well as advanced accounting covered on the CPA exam ACCA exam as well. If you haven't connected with me on LinkedIn, please do so YouTube is where you would need to subscribe. I have 1500 plus accounting, auditing, tax and finance lectures. Also on my YouTube I'm sorry on my website. I do have additional resources if you're planning to practice questions Exercises have access to the notes PowerPoint slides. Please visit my website If you are looking to study with another person for the CPA or the CFA exam I strongly suggest you visit studypal.com .co. Sorry not .com Prior to this session you should be familiar with the temporal method and the current method We already have two recording about this. You could look in the description for that Now let's talk about cost of goods sold. So when we're translating cost of goods sold We have two methods. We either have the current method and the temporal method Let's look at the current method first and hopefully you remember what we when we talked about the current method The current method remember, it's the easy method Simply we're gonna take cost of goods sold in the foreign currency and Translated it into the into the parent company using the average rate for the period and here's the formula Simply put current method is pretty straightforward Not only for cost of goods sold for all expenses you take the expense in the foreign currency You multiply it by the average exchange rate You will get your cost of goods sold in the parent company. So the current method is pretty straight forward. This is it Let's talk about the temporal method when it comes to cost of goods sold Well, what's gonna happen with the temporal method and here you have to have it Hopefully you have a good understanding about cost of goods sold cost of goods sold is beginning Inventory plus Purchases minus Ending you get to cost of goods sold. So notice it's composed To get to cost of goods sold you have you have three items beginning inventory purchases and ending inventory So we're gonna have to do under the temporal method We're gonna have to decompose the beginning inventory from purchases from from ending inventory and for each component We must translate this at the appropriate historical rate So we have to look at three basically three different pieces at the same time So let's take a look at an example without numbers, but just let's take a look at the formulas We would look at numbers later on in another in another session So beginning inventory in year two was acquired evenly. So if we have beginning inventory Remember beginning inventory as last year ending inventory if it was acquired evenly throughout the fourth quarter of year one Then the average exchange rate in the fourth quarter will be used So for the beginning inventory, we'll use the average rate of the fourth quarter. It's just simply put if we're looking at This is Year one and this is year two. So we're looking at beginning inventory right here. What's gonna happen We're gonna use for the beginning inventory here We're gonna use the average of the fourth quarter with whatever the average rate here We're gonna use the average rate Why because we're assuming we're using first and first out It means all the inventory that we have were assumed was purchased in the fourth quarter. Therefore, we use the fourth quarter So that's the beginning inventory. That's how we translate it Likewise the fourth quarter year two exchange rate will be used to translate ending inventory So for year two when we get to the end of the year now, we're looking right here the end of the year ending we're gonna be using the The fourth quarter year two exchange rate will be used for the ending inventory. Okay, whatever that Fourth quarter year two exchange rate is now the purchase is now throughout the year Throughout the year. We're gonna be making purchases if purchases were made evenly throughout the year And we can make that assumption then the average year to exchange rate will be used So for here, we use the average for the whole year Let's take a look at this from another perspective the beginning inventory and foreign currency We're multiplied by the historical exchange rate the fourth quarter of year one and that's gonna give us beginning inventory in the parent company The purchases again, we assume they occur throughout the year. Therefore, we would use the average exchange rate for year two That's gonna give us the purchases that we're gonna be using in the parent company and the ending inventory We're gonna be using the historical exchange rate for the fourth quarter year two And that's gonna give us the ending inventory So beginning inventory plus purchases minus ending inventory will give us cost of goods sold in the parent company So this is how we translate cost of goods sold. Remember, this is the temporal method Under the current method once again under the current method will take this number right here. We multiply it by the current rate And we're done. That's that's all what it takes. Okay, let's take a look at Application of lower of cost or net realizable value for inventory. Well, let's start with the current method Which is really the straightforward method the current method We're gonna take the ending inventory reported at the foreign currency balance sheet Balance sheet then we're gonna translate it at the current exchange rate regardless Whether we carry it at cost or lower of cost lower at cost or at lower of cost or net realizable value So simply both will take ending inventory times the current exchange rate with the current method Just like cost of goods sold will take cost of goods sold times the current exchange rate for the temporal method It's gonna be a little bit more involved. We're gonna require the foreign currency cost and the foreign currency exchange Net realizable value of the inventory to be translated under the parent company currency at the appropriate exchange rate So simply put for the currency for the foreign currency It has to be at the appropriate exchange rate. Whatever that exchange rate is and when it comes to the NRV Net realizable value It has an At the appropriate exchange in the lower of the parent currency cost or parent currency net realizable value Again, we have to translate it into the parent company NRV So basically in a sense, we have to worry about two things the foreign currency Which which rate do we use and the NRV value? So simply put as a result of this procedure under the temporal method It's possible for inventory to be carried at cost on the foreign currency balance and at net realizable value at the parent Parent currency consolidated financial statements or vice versa. Okay, let's talk about property planning equipment And we're gonna start with the temporal methods. We're gonna start with the most challenging method this time rather than the current method So item of property planning equipment acquired at different times must be translated at different exchange historical rates So whatever we whenever we bought them, we have to keep track of that rate The same is true for depreciation and accumulated depreciation simply put you bought it at a different rate You keep track of it for that rate The depreciation expense will be for that rate and accumulated depreciation will be for that rate You buy another asset at a different date that asset you bought it at a different exchange rate It will be kept track of using that rate the depreciation expense at that rate and accumulated depreciation for that rate So so simply put you're gonna have more work to do when it comes to the temporal method Okay, for example, if a company bought a piece of equipment on January 1st for 1,000 foreign currency when the exchange rate was 1, then they bought another piece of equipment on January 1st year 2 for $4,000 when the exchange rate was 1.2. So this was the rate when we made the purchase. So let's take a look at how we report them first on the balance sheet. Both pieces of equipment have a five-year useful life for depreciation purposes. Under the temporal method, the amount of which equipment will be reported on the consolidated sheet will be as follow. Although the exchange rate now December 31st exchange rate is 150, we don't care. Why? Because we want to go back and keep track of how much we paid for them on the date of the exchange. Well, on the date of the exchange for the one piece, the exchange rate was one, therefore it's reported at the parent company for $1,000. The other piece, the foreign currency when we bought it, it was 1.2. The rate was 1.2. Therefore it's reported at the parent company for $4,800. Now, let me ask you this. Can you guess what would the current method will do? The current method is going to take this amount multiplied by 1.5. We'll see it later. That's the current method. I just want to show you how the current method would report this. Okay, but this is the temporal method. Now, again, let's talk about depreciation. Depreciation expense will be reported for year one for both assets. This is five years there for 20%, 1,000 times 0.2 because it's a five-year policy, 20%. So it's multiply at the exchange rate of a dollar. The $4,000 times 20% will give you $800 of depreciation. The depreciation expense will be translated at 1.2 for the second asset because the rate was when we bought it was 1.2. So notice the expense, the rate for the depreciation expense, it's different for each asset. That's interesting. It's interesting. Okay, now what would we do for the current method? We're going to use the average rate for the year, whatever that average rate is. Okay, but for the temporal method, it requires more work. So you have to keep track of each asset separately. Hopefully you appreciate the fact that it's more work. And if you appreciate the fact that it's more work, you're getting the big picture. Okay, then accumulated depreciation, the same thing. Year two, we're going to have two years of accumulated depreciation after having this asset for two years times one. And this is year two because we bought it in year two. So this should be 800 times 1.2960. So again, accumulated depreciation is kept track using that specific rate. Now if we have any intangible asset, it's treated the same way. It's treated the same way the way we account for it. Now let's look at the current rate method, which is the current rate method. Once again, it's generally speaking simpler or simpler, simpler. Let's put it this way, simpler. So simply put, at year two, we have two assets. One we bought for a thousand, one we bought for 4,000. We don't care what was the rate when we bought those assets, one we bought them at $1 for the foreign currency, 1.2. We don't care. What we care about is the December 31st year two. The rate was 1.5. Therefore, we're going to take 5,000 reported at the current rate. So it's simple. We don't have to keep track. I mean, think about if you have many assets and companies do have a lot of property, plant, and equipment that they purchase throughout the year. The current rate, it makes it simple. Just give me how much you paid for them. Translate them at the current rate. Now the depreciation expense will be reported at the average year two exchange, which happens to be 1.4. So what we do is we'll take the 1,000, the asset for a thousand dollar, and we multiply it by 1.4. Therefore, our depreciation expense will be 1,400. Why 1,000? Just in case you're wondering why 1,000, because 200 and 800, 200 of depreciation for the first asset, 800 for year two. This should be year two because we have the asset for year two. So simply put, we have 1,000 of foreign currency depreciation. We translate it at the average rate. So this is the average rate for year two. We don't care what was the rate when we bought this asset. We use the average rate. Simpler. Accumulated depreciation, same concept. We have 1,200 of accumulated depreciation. We multiply it by year end because this is a balance sheet. Remember, accumulated depreciation is a balance sheet account. It's a counter asset. Therefore, we translate this amount at the year end, which is 1,231, okay, 1,800. Now again, in this example, the foreign subsidiaries had only two items. Could you only imagine if you have 50 items? Now, of course, you could have software that keep track of it. But the fact that you're creating all this work, is it really worth it? Creating the substantial additional work to translate the financial statements. Anyhow, if you have any questions about this topic, please email me. And if you want additional resources, exercises, multiple choice or the PowerPoint sites, please visit my website. Consider subscribing. It's an investment in your career. Good luck. And if you're studying for your CPA exam, study hard. It's worth it.