 the session. This is Professor Farhad and this session we will work on translation, a financial statement, and specifically we're going to be looking at the current method. Now, if you don't know what the current method is or if you're confused about the current, what is the current method, please go off part one of two in which I explain when to use the current method and when to use the temporal method, which is translation versus remeasurement. This topic is covered in an advanced accounting course or international accounting course also covered on the CPA exam. These lectures can be found on my YouTube as well as on my farhadlectures.com. So what I'm going to do first, I'm going to go over a list of items, which is I went over in the prior session, but today we're going to work an actual example to show you how the current rate method work, which is the translation method. Okay, so under the current rate method, here's what we do. If you don't have the slide, by all means copy what's on the slide and we're going to see how it works. Assets and liabilities are translated at the current exchange rate, paid in capital historical rate beginning retained earning equal to ending balance of retained earning dividend are translated at the historical rate, revenues and expenses, we use the average technically for revenues and expenses, we're supposed to use what's in effect, but we cannot keep track of the exchanges from day to day. Therefore, we use the average. Remember the cumulative translation adjustment goes on the balance sheet. It's a balance sheet adjustment. So notice it's a balance sheet that goes into OCI. So current here, translation classification that goes into OCI. So the translation is OCI. So the best way to illustrate this is to work an example. Otherwise, we can just keep on talking about this, but if you don't see it in action, you don't know how this works. So we're going to be working with this company. We have two year balance sheet. We have the January 1st balance sheet for this company in December 31st, which is the beginning balance and the ending balance for two years. And we have assets, we have liabilities, we have equity, and we have the income statement. And those numbers are using the Swiss franc. Okay, so this is the Swiss franc. So basically what they're asking us is to basically using the current rate methods. So basically on January 2018, it's a U.S. based company purchased a controlling interest in grant management consulting located in Switzerland, and they given you the exchange rates as of the beginning of the year, the end of the year, which is the end of the year, is the current, because we are preparing the financial statement at the end of the year. The average is the average and the dividend declaration and payment date, this has to do with dividend. Translate the year and balance sheet and income statement of the foreign subsidiary using the current rate method. Now, although they're telling you using the current rate method, now, why are they using the current rate method? This is why, because we have a subsidiary, okay, in Switzerland, the subsidiary is in Switzerland, we are a U.S. company, we are right here. This is a U.S. company, okay, but they have a subsidiary in Switzerland, the subsidiary in Switzerland using the local currency. And what's the local currency in Switzerland? The Swiss franc. So if they're using the Swiss franc, therefore we use the current method. So they're not using the U.S. dollar, they're not telling us they're hyperinflationary and they're not using a third currency such as the euros. So they're using the local currency as their functional currency, and that's why we use the current method. This is just a review of why we use the current method, okay? So now what I'm going to do, I'm going to pull the information that's here, specifically I'm going to pull the balance sheet, I'm going to pull the income statement, put those on an Excel sheet, and you should have this information as well and show you how we are going to do the conversion using the current rate method. So let's go ahead and get started. Okay, let's go ahead and take a look at this Excel sheet. So with this Excel sheet what I did is I provided you with five steps that's going to help you with the translation process. So using the current method. So what's the step one? Step one, revenues or expenses are translated using the average rate. So revenues and expenses, the average rate. Let's go ahead and process this transaction. The average rate is 0.5654, 0.5654. So we're going to take the Swiss franc 75,000 times the exchange rate gives us the amount in US dollar. Swiss franc times the exchange rate gives us the amount in US dollar. Revenues minus expenses gives us net income in US dollar. Now, so we're done with step one. Step two, right here, we're going to take the beginning retained earning, which is the retained earning 1-1. What is this coming from? Just in case you're wondering, this is coming from the beginning retained earning, which is $10,000, which is the prior year retained earning. Okay, so we're going to take this beginning retained earnings, okay, and translate it at the beginning rate. And the beginning rate is 0.5987. So this is the beginning retained earning, $5,987. We're going to take beginning retained earning plus net income, beginning retained earning plus net income minus dividend. Now, we have to translate the dividend. The dividend is the dividend declaration date of 0.581. So equal to negative 7000, negative 8715. So $31,430 minus the dividend gives us the ending retained earning. And I hope you remember this. So you have to know this formula by heart. This formula you should have learned about in accounting 101. And what's that formula? Beginning retained earning plus net income minus dividend equal to ending retained earning. Now, in this problem, the information is given a little bit more clearly, but this is the formula that you might have to manipulate to figure out your ending retained earnings. So beginning retained earning plus net income minus dividend. Okay, hopefully, if you have three of them, you can find the fourth. So you have to deal with that type of situation. So if you're not familiar with this formula, make sure you get yourself familiar with it. Okay. So we're done with step one. Let's look at step three. Step three said paid in capital translated at us. So we're done with step two. Let me highlight step two and hopefully you covered step two. This is done. Step three, paid in capital translated at historical cost, paid in capital, which is common stock. The historical, which is 0.5987, which is 11,974. Then so we're done with this step. Okay. Then step four, all assets and liabilities translated at the current rate. The current rate is 1231, 2014. So that rate is 0.531 for property planted equipment, 0.531 for accounts payable and notes payable, 0.531. Okay. Now, basically, we're done with step four. Okay, we're done with step four. Now, here's what we have. We have assets of 48,953, which is our asset are complete. We know our assets were not missing anything. And remember assets should equal liabilities plus equity. Now, right now, if we add up all our liabilities and all our equity, we come up with 51,716. But the answer should be 48,953. What does that mean? It means we need to make an adjustment. And what's that adjustment? Well, that adjustment, it's going to reduce it. Basically, we have a loss here. Why? Because we have to reduce the adjustment is basically a debit to OCI. Why is it a debit to OCI? Because if we add liabilities and equity right now, take those three figures, $17,000, $27 for liabilities, $11,974 for common stock and $22,714 for retained earning gives us $51,000. This is why I have this one on the side, $51,000. But the balance should be 48,953. Therefore, the entry, the cumulative translation adjustment should be the difference between those two. And the difference between those two is, I'm going to make it negative, the difference between those two is, let me see, this minus, this is negative $2,763. And by doing so, now, if we add those four, notice the sum here. Whoops, notice the sum here. Okay, 48,953, which is equal now to 48,953 equal to the asset. I plugged it in before to know what do I need to do. So what I did now is I find my retained earnings. I still want to kind of verify this to myself. Again, we're using the current method because when you use the remeasurement method, it's a different method. Okay, so let's go ahead and prove to ourselves, basically, the adjustment. Okay, how do we do so? Well, what we do is this. First, we have to start with net asset position. And what is net asset? What is net asset? Well, it's asset minus liabilities net or simply put equity net position is simply put equity. But since they're using net asset is asset minus liabilities. Okay, so notice we'll start with asset minus liabilities asset minus liabilities. Okay, equal to 30,000 franc. And let me show you once again, just in case you're just like, hold on a second, where is this number coming from? Well, if you look at the beginning, the prior year, let me just highlight this. So equity is 30,000. What they did, they called it net asset and net asset is assets 60,000 minus liabilities of 30,000 equal to 30,000. So you want to call it equity, you want to call it net asset, but this is what net asset is, it's equity. Okay, asset minus liabilities. Okay, so let's go back to the Excel sheet. So you start with this amount and you're go, we are going to convert it, we're going to go into converted at the beginning grade, because this is the beginning 1111 of the 11 at the beginning of the year, which is equal to 17,961. Then what happened is this, we're going to convert net income that income is 45,000. Hold on a second, where's that net income coming from? It's the net income of the company 45,000 based on the Swiss franc. Now we are going to convert net income at the average rate 0.5654. That's 25,443, which is net income that we computed earlier. We're going to convert dividend at the dividend rate, dividend rate of 0.581, which is 8,715. Now here's what we have right now. If we take the US dollar beginning net asset plus net income minus dividend, what they're telling us, we should have 34,000 net asset position translated using rate and effect at the date of the transaction. So this is what we have. So what's the 34,000? The 34,000 is what should be the net asset position, the net asset position using the rate, the effective rate, the effective rate at the date of the transaction. Well, do we really have 34,684 of net assets? Let's see how much net assets do we actually have? Well, if we take assets minus liabilities, minus asset liabilities, will give us 31,926. It should be grounding 927. So what happened is this, the exposed net asset at 1231, which we computed really, is equal to 31,927, or if you'd like to compute it, you could use the December 31st. So let me show you how I came up with this 31,927. So first I said, well, assets minus liabilities after I did the translation equal to 31,927. So this is net assets as of December 31st, or I can say net asset, which is given to us 60,000. Again, where is the 60,000 coming from? If I really want to see where is the 60,000 coming from? The 60,000 coming from here, 60,000. That's the equity, or I can say assets, 92,000 of assets, 92,000 of assets, minus 32,000 of liabilities. So my equity using the Swiss franc is 60,000. I already computed this anyway. I already computed it anyway. I just want to show you where it's coming from. So what I would do, I convert it at the ending rate and use convert at the ending rate, but you could always double check yourself. So if you convert at the ending rate, what you will find out is what you will do is you will find out that the net asset is 31,926. So we have a difference. Basically, we have to reduce, we have to take a loss and the loss take the difference between those two. The net asset translated using the current rate and our exposure of net asset that it's equal to 2007. Let me make it a negative. So this, you'll take this minus this and it's negative 2763. And this is what we kind of computed earlier. Let me just do this. If you remember here, 2763, 2763. Basically, it's a reconciliation, so we confirmed it. Okay. Hopefully, you were able to follow this is the current method. What I'm going to do is to illustrate the second method. And the second method is the remeasurement. And remeasurement, we use the temporal method, which is a little bit different. I'm going to have different steps and we'll go through the process. Part of this is you have to know the mechanics. Now, I don't want to go in there and start to talk about why it's this one way or the other. Like, basically, because there's a lot of mechanics here. And what you need to do first is get the mechanics down and add on your knowledge later on. If you have any questions, any comments about this example, email me. If you're studying for your CPA exam, by all means study hard. If you need more lectures, please go to my website. And if you happen to go on my website and you would like to contribute by all means contribute, it's highly appreciable. And always, always, always study hard. It's worth it. Good luck.