 Hello and welcome to this session in which we would look at CPA exam questions that deals with foreign currency translation and not transaction. First you need to know the difference between translation and transaction. Foreign currency translation is covered on the far CPA exam section, foreign currency transaction, you could see it on far, you could also see it on BEC. Usually foreign currency translation is a little bit more difficult than foreign currency transaction. In this session I'm going to be working basic, basic questions about foreign currency translation. I do have a detailed explanation somewhere else, I will talk about this in a moment, but first you have to understand the basic of the translation, then you have to understand how to translate financial statements from one currency to the parent currency using various methods. So in this session I'm just going to cover the basic. If you want more in-depth explanation please visit my website farhatlectures.com whether you are an accounting student or CPA candidate. Usually this material is taught in an advanced accounting course, usually this chapter is skipped. Teachers skip this chapter or if they do teach it they don't do a good job. I will tell you check out my website and I have plenty of explanation and resources. Now if you are a CPA candidate I strongly suggest you check out my website. Although you might be taken back to Roger, Glyme, Wiley or in some other course, I don't replace those courses. I can be a useful addition. I can explain the material in-depth by adding 10 to 15 points on your CPA exam. So here's my offer to you. Are you willing to try my website for one month? Just as a try. Take that risk. If you like it you keep it. If you don't like it you lose that $30. The potential gain for you is passing the CPA exam. I have helped hundreds if not thousands of students pass the exam. I do have advanced accounting cover in-depth as well if you are an advanced accounting student. Check out my LinkedIn account where you would see all the reviews from the students already passed using my system. Please like this recording, share it, connect with me on Instagram and Facebook. So let's take a look at this first basic questions and all the questions in this session I would have to say they are basic, straightforward. It doesn't mean because they are basic and straightforward you may not see on the exam on the contrary. I don't think they will test you in-depth about translation but look, do you want to take your chance when you are taking the exam? I don't think so. So first I'm going to teach you the basic. If you want a little bit more go to my website. I may have another session where I add a little bit more of questions with numbers. So in this session I'm not going to compute any numbers. I want to make sure you understand the basic terminology. Once again, the reason I do this because most likely you are not familiar with it, that chapter is skipped or not covered in-depth. Starting with the first question, what does translation mean? Do you even know what does translation mean? In accounting term, the term translation refers to what? Think about the term translation. Again, Google translate. Translate. When do you translate? You translate when you have a foreign language. You translate. Same thing. You are translating financial statement and what's the idea? You're taking the financial statements of some foreign subsidiary. I always assume U.S. is the parent. You know, some foreign subsidiary in Europe and you are combining that subsidiary with the U.S. So what you do is you have to translate the number. This is what translation is. Is it the calculation of gain or loss from hedging transaction? No. You might have gain and loss from hedging transaction, but that's not translation. The calculation of exchange rate, gain or loss on individual transaction, what's the difference between A and B? Nothing. Basically both computing gain and losses on certain transaction. That's not what translation is. The calculation of gain or loss from all transaction for the year, I would say A, B, and C, they're the same thing. If A is right, then B is right, C is right. So none of them. By process of elimination, D is the answer. The procedure to prepare a foreign currency financial statement for consolidation. This is what translation is. What is the assumption? The foreign currency uses foreign money, foreign currency. Therefore, you translate it. You transfer this money to U.S. dollar. Now, how you translate this? Now, this is the question. This is what you learn in your translation method. So what is the company's functional currency? So one of the terms you need to know when you are translating is, what does functional currency mean? That's a term you need to be familiar with. And this could be just a question, simply a simple question on the exam. A, the currency of the primary economic environment in which it operates, I would say, yes, that's what it means right there. What does that mean? So if you are operating in Europe, you will be using most likely the euros if you're operating in France and Italy and Germany. Well, we call the euro as the functional currency. What does that mean? It's the local currency where you are operating and you're using it. It's the functional. That's the one that you're using. It's functioning. Now, why would we say it's functional? Is there something that's not functional? Yeah. In certain countries, you might be operating maybe in Russia, okay, the local currency is the ruble, but you might be using the euro or the US dollar. Well, I'm not going to use the US dollar. You might be using the euros because I always assume that the parent is the US. So you could be operating in a local currency where the functional currency is not the local currency. Another example I can give you, for example, a country like Lebanon where their currency is really devalued. It's no longer the functional currency. They use the US dollar. Although the local currency is the Lebanese lira, but it's not being used, you are using the US dollar. So you need to know what the functional currency is. The currency of the countries where it's had quarter, usually that's the parent company currency. That's not the functional. The currency in which they prepare the financial statements. No, that's for example, this will be the USD for us. The reporting currency, this is the reporting currency. The reporting currency is BNC. So reporting currency is BNC. So you want to understand the difference between the functional currency and the reporting currency. So there you go. We covered the reporting currency in dye, practically. According to US GAAP, when the local currency is the functional currency, this is what we just saw. When it is, that's the case. Which method is usually required for translating affording subsidiaries financial statement into the parent reporting currency? So what they're saying is this, you have already established that the functional currency is the local currency, which is very good. Then if that's the case, which accounting method do you use to account for the translation? Okay, why do we have to know this? We have more than one method. Okay, more than one method. We have current, non-current, the portal, so on and so forth. When that's the case, when the local currency is the functional currency, again, I think you are operating in Europe and France and Germany. Everything is good. Then we use the current rate method. The method is called the current rate method. So we use the current rate method to transfer the euro, which is the functional into the USD, which is the reporting company. So think about a McDonald operating in France. They sell in euros, but when they report their numbers, it's reported in USD, using something called the current method. Why the current method? Because the local currency is the functional currency. Now, there is more complication to that when we do the actual translation. But again, you can go to my website to see examples. In translating affording currency subsidiaries financial statements, which exchange rate does the current method require for the subsidiaries asset and liabilities? Now we established you are operating in a country where the local currency is the currency that's being used, which is the functional currency. We need to use the current method. Now the question is, when you use the current method, which exchange rate do you use for most assets and liabilities? That's the question. Well, do you use the exchange rate in effect when each asset or liability was acquired? Simply put, do you use the exchange rate when you purchase the asset? No. This means you are using the historical rate. No, you don't use the historical rate. The average exchange rate for the year? No. A calculated exchange rate on a market value? I don't know what calculated it is, but no, you don't calculate anything. It's basically whatever the exchange rate is. C is out by process of elimination D. The exchange rate in effect on the as of the balance sheet. Now think about this. It's called the, I'm going to highlight this, current. Current rate means the exchange rate that was in effect at the balance sheet date. So if you want to try to remember this, okay? So for most assets and liabilities, you would use the exchange rate in effect as of December 31st, assuming the year end is December 31st. Good. Now when using the current rate method, now we established we're using the current rate method. Now the translation adjustment. So we have to, again, there's a difference between the functional currency and the report and currency. Therefore, there is an adjustment from translating the financial statement should be shown where simply put, when you translate, you're going to either have a gain or a loss. And my question to you is if you're using the current method to do the translation, where do you book? Where do you park? Where do you keep this gain or loss? Because that adjustment has to go somewhere, has to go somewhere. Okay. And that process is not really easy. Well, where does it go? Usually, where does it go? It's either it's going to go on the income statement, or it's going to get it's going to go on the equity section, the stockholders equity section of the balance sheet. That's all we have to know. Which where does it go? Does it go into income? Or does it go into the balance sheet? Okay. An asset or liability depending on the balance sheet in the consolidated? No. A revenue or an expense. Here we're assuming it's on the income statement. It's not on the income statement. A component of stockholders equity in the consolidated balance sheet? Yes. So the current method, when you translate, when you do the translation and you have a gain or a loss, that difference, that difference, that adjustment, it's a component of the stockholders equity in the consolidated financial statements. You need to know this. You need to know this. You need to know this. Now, once you work an example, it will make, and you will see why. I mean, this is really, I cannot explain to you, not even in 10 minutes, why it goes there. But I do have plenty of examples, complete example from A to Z. Why does it go there? But all you have to know for now is do you know that the current method adjustment goes on the balance sheet? Obviously, it doesn't go on the cash flow. It's not a component of the cash flow from financing activities. So basically what I did, I went through various questions, basic questions, and specifically, I did not want to tell you. And all what I covered is the current method. So I covered basic translation questions, specifically focusing on the current method. The reason is simple, because you need to learn this step by step, step by step. And this is what I'm trying to do in this session. At the end of the session, I'm going to ask you again, if you want more detailed explanation with examples, that's going to supplement your CPA review course. Look, let me tell you something. The CPA review course will spend 30 to 50 minute max explaining this topic. This topic, you may need three hours to really understand and grasp. Okay, 30 to 50 minutes, it's going to leave you confused, asking for more. It's not going to be helpful. You focus on my lectures. You don't have to take all three hours. I mean, I could have up to three hours, you may need maybe an hour and a half, two hours with detailed explanation and examples. Or I might, you might need one hour of my detailed explanation versus, versus going fast through this, and you'll be able to get it. You get it, it's done, it's behind you. That may be the five to seven extra points that's going to help you pass the exam. You don't want to take your chances. All that you're risking is $30. You risk that money, you try my system. If you don't like it, cancel it. If you like it, obviously it's a subscription. You're going to be charged every month. But the, the up, the, the, the return is passing the exam. Now you can cancel anytime, obviously. So that's my offer to you. Anyhow, stay safe, good luck and study hard.