 Hello and welcome to the session. This is Professor Farhad and this session we're going to be looking at translation of retained earnings. This topic is covered in international accounting, advanced accounting, the CPA exam, as well as the ACCA exam. If you haven't connected with me on LinkedIn, please do so. YouTube is where I house my lectures. I have 1500 plus accounting, auditing, and finance lectures. Also on my website, I have additional resources in addition to the lecture where you can practice and get better at what you are doing. Also, if you are looking for a study buddy, check out studybuddystudytel.com. If you're studying for your CPA or CFA, they have users in 85 countries and 2800 cities. For this session, the two prerequisites are the temporal method and the current rate method. I have the link in the description just because they're very helpful if you understand them before you get to the retained earnings. So what's the issue with retained earnings? Well, if you remember, and hopefully you remember this much, when we are dealing with retained earnings, the way we compute retained earnings will take beginning, let me just write this down, we take beginning retained earnings and let's assume the first year we don't have the beginning retained earnings, it's a new company. Then we add net income, so it's going to be a plus, then we deduct dividend, that's going to be a minus, and that's going to give us ending retained earnings, whatever that ending retained earnings. So this is year one. Now year two or period two, this ending retained earnings becomes your beginning retained earnings, then you add net income, then you subtract dividend, then you have again your ending retained earnings, and your ending retained earnings becomes your year three beginning, so on and so forth. So the point is retained earnings is a continuous, is a continuous, it's a cumulative account that factors all revenues, expenses, because net income is revenues and expenses, revenues, expenses, dividends, gains and losses over the years. So this account has a lot, has a lot. In other words, it absorbs a lot of account, that absorbs a lot of account. So stockholders' equity, other than retained earnings, they're easy to translate as we saw earlier, they are translated at historical rate. However, whether you're using the temporal or the current, but this creates a problem in translating retained earnings, which is a composite of many previous transactions, such as revenues, expenses, gains, losses, and declared dividend, and as well as others, but those are the main accounts that affect retained earnings. This increase is retained earnings, reduce it, increase it, reduce it, reduce it. Okay? Now, in those transactions occur over the life of the company. In other words, the day the company was created, retained earnings start at zero, then it accumulate over the years. So that's why there's not complication, because that's a continuous account, so you have to know how to translate it. Therefore, at the end of the first operation, the foreign currency retained earnings is translated as follows. So we're going to translate the retained earnings. We're going to go with the net income and the foreign currency, whatever that net income is, and we're going to translate it using the method that we are using. The method could be temporal or the current method, whatever method we are using, we're going to translate this into net income in parent company using that method. It doesn't matter what the method did. It's both, the method is used, the same method is used, it doesn't matter what the method is when we translate retained earnings. Okay? Then we're going to take dividend in foreign currency. Okay? Why do I mean translated per method? Because under the temporal method, we're going to be using for some expenses, the averages, the average rate, some expenses we're going to be using the average rate, and some we use the historical rate. And for the current, we use the average rate for all. So that's why they differ a little bit, but it doesn't matter what the method is. Then we're going to take dividend in the foreign company, then translate it at historical rate. So the dividend is translated at historical rate, and that's going to give us the dividend and the parent company. Then now we have ending retained earnings. So ending retained earnings is net income minus the dividend. Now this is year one. So the ending parent company retained earning in year one becomes the beginning parent retained earnings in year two, as I showed you earlier. And the translated retaining in year two is then determined as follows. Let me show you how it works. We have the beginning retained earning in the foreign company from last year translation, and we cannot translate into the beginning retained earning in the parent company. Then we go through the same process. We'll take a look at net income in the foreign company, translated per the method that we are using, either the current or the temporal, that's going to give us net income in the foreign currency. Dividend in foreign currency times the historical exchange rate, it's going to give us dividend and parent company. This should be parent company. And that's going to give us ending retained earnings. Then the same process repeats itself year three, year four, and year five. Now the best way to illustrate this is to actually work an example. Am I going to work an example in this session, but I will work an example for both method and you will see how we illustrate this. Anyhow, hopefully you could follow, but at least this is a good review for retained earnings. And this is why I always emphasize when I go over retained earnings in financial accounting one-on-one in my introductory course, I always tell the students retained earnings is that account that's going to appear with you throughout your accounting career. And this is showing again, in advanced accounting as well as international accounting. If you're looking for more practice, more lectures, more exercises, visit farhatlectures.com. Consider subscribing. And if you're studying for your CPA, as always, study hard. It's worth it. Stay motivated.