 Hello, and welcome to this session. This is Professor Farhad. In this session, we're going to look at the remeasurement method, which is part of the translation of financial statement. The remeasurement method uses the temporal method, and this is part three or four. In other words, in the prior two sessions, I looked at the introduction of translation, a financial statement, then in the prior method, I look at the translation method, and specifically, I look at the current method, which is another method. I'm not covering this method here. I'm covering the temporal method. This topic is covered in advanced accounting or international accounting course, and obviously, it's covered on the CPA exam. Additional lectures could be found on my website or my YouTube channel. So we're going to be working the same example that I work in the prior session. So this way, you can compare what we did under the translation method versus what we are going to be doing under the temporal method. So this is the translation method is remeasurement. We're using the temporal method, and the adjustment goes to the income statement. Now, just real quick, why are we using the temporal method? Two reasons why we are using the temporal method. In this problem, we are not told why, but I'm going to tell you why, because this is what you need to know for the exam. One reason is the economy is hyperinflationary. In Switzerland, that's not because we're using a Swiss example, but we don't care about reality here. We need to know the rule one is hyperinflation. That's when we use the temporal method or the functional currency equal to the US dollar. So what they do, the Swiss company, they use the US dollar as their functional currency. Now, if you don't know what the functional currency is, I suggest you go and watch part one because I cannot go over functional currency. It takes 10 to 15 minutes to explain, go and watch part one. So how do we convert under the temporal method? Here are the steps. I'm going to go over much, much more in details. Here are the translation rate, monetary assets and liability, cash accounts, receivable accounts, fable, use the current exchange, assets and liabilities carried at historical cost, use historical cost rate, asset and liabilities used at current value, use the current exchange, revenues and expenses related to assets and liabilities translated at historical cost, PPNE, inventory, we use historical cost, other revenues and expenses we use, exchange rate on the date of the transaction occurred, we really cannot keep track. And when the transaction occurred, we use an average. It's a lot of work to keep track on the date of the transaction. So this is the company that we are working with. It's a Swiss company and these are their numbers, their balance sheet, the prior year, their balance sheet of the current year and their income statement of the current year. Hopefully you are familiar with this example because we did work it when we did the current method. And here's what we are told on January 1st, T-System, a US-based company purchased a control and interest in G management consultant located in Zurich, Switzerland and are given as the direct exchange rate as of January 1st, 2008 or 2014, whatever the years are. It's going to be 20, it doesn't matter, December 31st, 08, average rate for 08, those are the year that we are working with. It doesn't matter what year we are working with. The dividend declaration, payment date, so those are the four rates. Convert using the remeasurement, the financial statement of the foreign subsidiary using the temporal method of translation. So this is what we need to do. So what I did is I went and I created an Excel sheet and this is the current rate method. So we already finished the current rate method. So you could go back to the prior session and review it. I'm going to be doing the temporal method which is on this Excel sheet. So what I have on the Excel sheet is the balance sheet of the end of the year in Swiss franc, the consolidated income statement also in Swiss franc. And what I have on the side are the steps, five steps we need to undertake. So let's go through it step by step. Step one, right here. And there's no reason why they should be red for now. Let me just change the color this way. I take it step by step. Step one, non-monetary balance sheet use historical rate. So what are the non-monetary balance sheet items? Well, there is non-monetary, which is the non-monetary cash account receivable and cash account receivable and payable. Those are monetary, non-monetary will be property, plant, and equipment. We use the historical rate. Let me just kind of fix this. Historical rate. So what is the historical rate? The historical rate is given down here, which is on 1, 1, 20, 2008, not 2014, 0.98. Let me just change the years here. So this way some people, they're like, why are we using different years? It just happens since the data on the PowerPoint is 08. So that's the first conversion. So this is non-monetary balance sheet items. Now, if it's a monetary, if it's a monetary, we use the current rate. And what's the current rate? The current rate is the 1231 rate, the 1231 rate. And the 1231 rate is 0.5321. So for the monetary, which is cash unreceivable, we're going to take this amount times the 1231. And for the liabilities, let me just oops, this is way too much, just 0.5321. Okay. Then for account spable and note spable, it's monetary, we use the current rate. So we're done with those two. We converted the monetary and non-monetary. Paid in capital, use historical rate, or if the transaction occurred after the beginning of the year, use the subsequent date. Here we are not told it happened after the beginning of the year. Therefore, we're going to use the historical rate. So simply put, if the transaction happened during 2008, 2008, we use the rate of the date of the transaction. Let's assume it happened March 1st, then we use the rate on that date. But we are not told that's the case. Simply put, if we are not told, we are going to be using the historical, which is the 1108, which is 0.987. At this point, what I did is this. I say, here's my assets. My assets are 100% complete. So my assets should equal to my liabilities and equity. Right now, my liabilities and equities are equal to, if I add them up, if I add those two figures out, let me just show you what I'm doing here. Here's what I would do. At this point, what you would say, the only thing that's missing is your retained earning. You would say, I am positive about my assets. Okay. Then if I take assets minus liabilities of 17,027 minus 11,974, my retained earning will be 22,714. Okay. And notice, I have the formula here, the difference between assets and liabilities, 22,714. If I plug in 22,000, I'm sorry, 22,417. Okay. Now this goes to zero. And if I add all my assets and liabilities, they equal to 51,418, which is equal to my assets. So I plugged in this number. So once I have my assets, I know what my liabilities total, this should be total liabilities plus equity. So this way, you know what that number is, which is hopefully you would know what that number is. It's the balance sheet. Okay. And total assets should equal to that. Okay. So I know my total assets. So obviously, I'm going to have to verify this figure, 22,417. Okay. So that's step one. Step two, we're going to start with our revenues. Our revenues is computed based on the average rate. So 75,000, the average rate 408 is 0.5654. Operating expenses, depreciation, if it's depreciation, depreciation relate to property, plant, and equipment, we're going to be using the historical rate. The historical rate is 0.9887. The operating expenses, other operating expenses use the average rate. And now we have revenues of $42,405 minus expenses, these two, equal to $25,314. We call this $25,314, the preliminary income. It's the income before the adjustment. It's the income before the adjustment. Once I have this number, once I have this number, this is good. So I'm going to show you what I'm going to do next. Okay. So that's preliminary income. So this is okay. So now retained earnings, I convert beginning retained earnings at the beginning rate, 0.987. So now I have beginning retained earnings. I don't have my net income, precise net income. I'm going to convert my dividend. I still have to convert my dividend at the dividend rate, dividend rate. Now, at this point, I completed step three as well. Now the dividend is at the declaration date, which is 0.58, not sorry, this is at declaration date, not historical rate. Okay. Declaration date. Okay. At this point, what do I have? Here's what I have at this point. At this point, let me just copy this to a note I can work with. So this is what I have at this point. Once you get to this point, you're not pretty much done, but you should be able to figure out your net income from here. So I'm going to show you how. I'm going to show you how. At this point, okay. At this point, here's what you have. Okay. Well, before I tell you what you have, let's go over this. Remember that beginning, and hopefully you remember this formula, which is beginning retained earnings plus net income minus dividend gives you your ending retained earnings. So what do you have here? Well, let's see what we have here. Do we have beginning retained earnings? Yes, we did compute beginning retained earnings. Happens to be 5,987. Do we have net income? Not really. We have preliminary net income. We don't have the exact net income. Well, we're going to call this X because we don't know net income exactly. Do we, I'm sorry, plus X, plus net income minus dividend. Do we know dividend? Yes, dividend is negative 8,715. And that's going to give us ending retained earnings. Did we compute ending retained earnings? Yes, we did. 22,417. 22,417. Now, all we have to do now is solve it. Solve this formula. So if I say 5,987 minus 8,715 equal to negative 2,728. I need to go from negative 2,728 to positive 22,417. I'm just going to subtract 22,417 to get there. And my net income should be 25,145. So my net income, 25,000. How much was it? 145. 25,145. Not always it's good to verify yourself because this is basically simple arithmetic, but you want to verify yourself. Let me do it again. So if I take beginning retained earning plus my net income of 25,145 minus my dividend of 87,15 should equal to 22,417. I know my net income should be 25,145. So copy this number down. This is what your net income should be. Let's go back to the Excel sheet and look at your preliminary net income. Your preliminary net income is 25,343. Well, simply put, I'm going to have to deduct. So this is the adjustment I have to make. And remember the adjustment under the temporal method goes on the income statement. So this is the adjustment. Let me cover it in red. This is the adjustment. So what do I have to do? I have to deduct an additional because I have to bring my income down to 25,145. So I have to deduct. So I need my income to be, my income is 25,145. This is how much it should be. So I need the difference between those two. So the difference, let me just see, the difference is 198. So my adjustment is 198. Now my net income, I got my net income. My net income is 25,145. So this is, so I work backward to find my net income. How did I work backward? I know my ending retained earnings. The beginning retained earnings is giving. I convert the dividend. So I convert those. And once I have all of those, I can find my net income. I already have my preliminary net income. So what's going to happen? The difference between my preliminary net income, which is the last step here, the difference between my preliminary net income, which is step two, the difference between what you get in step two, preliminary net income. And the net income that you computed here that was missing is the adjustment, which is, I just showed you, it's 198. 198. Okay. Now, so this is one way to look at it. Another way to find the adjustment, we can find the difference in net monetary liability position, the difference between the beginning and the ending net monetary position. So let's go ahead and do the same proof to find out that our adjustment should be 198. So I just showed you through the retained earning, but you could also do the same proof. So your net monetary liability position, which is your assets minus your liabilities at the beginning of the year and your assets minus liabilities at the beginning of the year. So at the beginning of the year, net monetary liability position, okay, let me show you what that 10,000 coming from. Okay, let's go back here to the balance sheet and 20,000, I'm sorry, yes, 20,000 minus 30,000 equal to negative 10,000 and 55,000 minus 32,000 equal to 23,000. So those are, I'm reconciling between those net monetary position. Let me go back up here. So notice the negative 10,000 here, negative because we have more liabilities than assets at the end of the year, that's 32, actually 55 minus 32 at the end of the year. We have more assets than liabilities. Let me just double check that. Let me go back here. Yes, we have more assets than liabilities, so it's 55,000 minus, so by the end of the year we were positive, so 55,000 minus 32, not the other way around, 55,000 minus 32,000, okay. So we need to reconcile the difference between two. So what affect those? First, let's convert the non-monetary position. We're going to be using the 0.98, which is the beginning of the year rate. Let's convert this. So what affect the monetary position? What's going to affect it is increase in sales, increase in cash, increase in receivables. What do we have? We have 75,000 increase in sales, so that's going to be converted using the average rate. Remember, sales is using the average rate. Then we're going to deduct from that. What affected our net monetary position? Operating expenses other than depreciation because depreciation did not really affect cash. So we're going to take this, multiply it by, oops, just put the rate. We're going to use the average rate, 0.5654. Then dividend also affected our net monetary position. It brought it down because we paid the dividend of 15,000 and we used the dividend date or declaration date. Now, what's going to happen is this. When we use those rates, we find out our net asset position, let me highlight this in different color, red, our net asset position translated using rate and effect of the transaction is 12,473. But if we convert, if we convert the 23,000 at the last day of the year, 8.5321, it should be 12,238. So if we convert 23,000, which is our net monetary position at the balance sheet as of 1231, it gave us 12,238. But if we did the rates, it's telling us that it should be 12,437. Therefore, we need an adjustment around the rounding here, but it should be 198. Therefore, this is just because of the rounding. So notice I showed you also another proof how you came up with, how you came up with the 198, which is right here. So basically, the difference between what the net position should be using the translated rate versus what it is using the last day of the year, and the difference should confirm your translation gain or loss, which is 198 or 199 dollars. Hopefully, I mean, let me just show you the difference between the current and the the current and the temporal method. This is basically a summary. And notice the difference between the current method, which we looked into in this exercise, the prior session and the temporal method. The only difference is how they convert, which rate they use to convert non-monetary assets carried at historical cost and non-monetary liabilities. So the current method, obviously it's called current for a reason, it used the current method. The temporal method for these two, they use the historical cost. So that's the mechanics. Now, to appreciate the why and the significance of it, I'm not going to go into it in this session, just get the mechanics down, read the book, and if I have time, I will have another session explaining because you need to get the mechanics down for those methods. I might work another example where we have to go through the two-step process, first use the temporal method, then use the current method. This is when we are using currency other than US dollar and other than the local currency because we already worked two examples, one using the functional currency as the local currency. This is what we did here under the current rate method. They were using the Swiss Frank in Switzerland, a US subsidiary. In this example, we assume either the Swiss is a highly inflationary economy, which is not true, but for the sake of the example, or we assume that the functional currency for them is the US dollar. And that's why we use the temporal method. The third scenario is you are operating in a third country, you're not using the local currency, you're not using the US dollar, you're using a third currency and the economy is not hyperinflationary. Therefore, we have to go through the two steps. If you have any questions, any comments by all means, email me. If you're studying for your CPA exam, always, always study hard. If you need additional lecture, go to my website farhatlactures.com. And if you happen to visit the website, please consider making a donation or a contribution. Study hard for the CPA exam. It is worth it. Good luck.