 Hello and welcome to this session. This is Professor Farhad and this session we would look at the current method that deals with the translation of foreign currency financial statements. This topic is covered in international accounting covered in advanced accounting. And by the way, I do have this topic covered and in my advanced accounting course as well. So if you if you went over this explanation, you're not you are not satisfied. You can always go to my advanced accounting. This topic also covered on the CPA exam and the ACCA exam. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is what what I house all my 5,500 plus accounting, auditing tax and finance lectures. You want to make sure to subscribe also on my website for head lectures dot com. I do offer additional resources for all the courses. Please check it out if you are interested. If you are looking for a study body, I suggest you check out study body pal dot com. It's an artificial intelligence driven study body platform that match you with a study body. They are located in 85 countries in 2800 cities. So today we're going to talk about the second method and the reason I say the second method because in the prior years in prior session, we looked at the first method and the two methods are the temporal method and the current rate method. Now, we already covered the temporal method in the prior session. In this session, we will cover the current method and one more time the terms these terms are not used by FASB or the IASP. Those just use in practice. If you'd like to learn about the temporal method, I'm going to put the description in the link link in the description so you could always look at it. So let's take a look at the current rate method. What is the current rate method? Well, let's talk about the temporal method very quickly. The temporal method basically state that you should prepare your financial statement as if the parent company entered into those transaction as if. Now, with the current rate method, it's a little bit different. The underlying concept, the underlying methodology is that you have an exposure to a foreign currency. Why? Because you are operating in that foreign country. Therefore, you have an exposure to a foreign currency risk. Therefore, your financial statements should reflect that risk. So the fundamental concept underlying the current rate method is that the parent's entire investment in a foreign operation is exposed to foreign currency risk and the translation. So when you translate the financial statement, they should reflect this risk. So simply put, if you really think about it, you'll have to report things at current rate. So if you are exposed to foreign currency risk, how do you show that risk? Well, guess what? I would report my numbers at the current rate, which shows me if I am, I have a gain or I have a loss of my adjustment. But this is what the current rate method. So remember, current rate from the word current, it means the current market value. So you have to report everything at current market value. Once again, the reason is you have exposure, show it. Now, how does your expo? How do you translate your balance sheet numbers? Okay, to measure the net investment and net investments is asset minus liability. So the foreign exchange to the foreign exchange risk, all your assets and all your liabilities of the foreign operation are translated using the current exchange rate. Quite simple, very easy to remember concept. It's the current method, translate all assets and all liabilities. Remember, when it comes to stockholders equity, as I told you in the prior session, whether you are using the current method or the temporal method, which is the remeasurement method. You would always use historical exchange rate for the stockholders equity with a slight complication for the retained earning, which we'll see next in the next session. So this is the balance sheet. So the balance sheet exposure measured by the current rate method is equal to the foreign operation net asset position, which is net asset as assets minus liability. If we have more assets than liabilities, then we have a net asset position or basically equity, net asset is equity position. Let's talk about the income statement. If you remember from the temporal method, the income statement account are supposed to be translated on the date of the exchange. So remember, I told you if McDonald sells burger throughout the day, the rate will change throughout the day. So in theory, if they want to follow the rule 100%, they're going to have to translate each transaction at a different rate, but that doesn't really happen because it's not practical. So under the current rate method income statement are translated using the exchange rate in effect at the date of the accounting recognition. Well, again, same thing, that's not possible. In most cases, an assumption is made that the revenue and expenses is incurred evenly throughout the year. Therefore, we use the average for the period exchange rate. So we cannot really keep track of the exchange rate on an hourly or minute basis for that matter. But unlike the temporal method, cost of goods sold, depreciation on property, plant and equipment and amortization of intangible also use the average exchange rate. Under the temporal method, we use the historical rate. Under this method, we use the average exchange rate, which is easier. It's just the average. Now, bear in mind, when it comes to gain and losses, however, when income items such as gain or loss on a sale of an asset occur on a specific point in time, the exchange rate at that date should be used for the translation. So for gains and losses, we cannot assume anything. For gains and losses, we have to know exactly what happened on that date, what was the exchange rate, and we'll go with that exchange rate. So gains and losses, the reason is this. I mean, let me explain the reason. Maybe it will make it easier for you to remember why revenues and expenses are, we use the average. Gains and losses don't happen very often. They happen once in a while, maybe once a month, maybe once a year, maybe twice a year, maybe five times a year. There's a specific number of events. So it's easy to keep track of those events and easy to keep track of the exchange rate of those events versus revenues and expenses that are occurring continuously throughout the day, throughout the night. I mean, if you have an online business, you're selling all night long, all day long, and if you're operating in a foreign country, how are you going to translate those transactions constantly? So that's why we use the average. But for gains and losses, those transactions are considered to be incidental, very specific events. Therefore, we can keep track of the date. Now eventually we're going to have to make a translation adjustment, which we'll talk about when we look at the numbers, but here's what you need to know. Assuming that assets are more than your liabilities, you'll have a positive translation adjustment when the foreign currency appreciate and a negative translation adjustment when the foreign currency depreciate. Why? Because you have more assets than liabilities. Now, you could take the statement and flip it if liabilities are more than assets and it will work. Again, the only reason this will make sense is when we work an actual example. But if you have more assets, let's just think about it for a second here. You have a positive translation when the foreign currency appreciates. So if you have assets, let's think about assets. Assets are account receivable. Let's assume you have an account receivable. And the foreign currency goes up. That's good for you. Why it's good for you? Because if my foreign currency went up and I have receivable, let's assume I'm a U.S. company, I'm going to translate my receivable into more dollar. Now, if I have more liabilities, I have more liabilities than receivable. Let's represent liabilities by accounts payable and the foreign currency goes up. I have to pay. I have to pay. Therefore, my U.S. dollar will buy me less foreign currency than I have a negative translation. Negative translation means a loss. And the opposite is true if you have more liabilities than asset. But this is the basic idea. The translation adjustment arising when the current rate method is used is also unrealized. So also just like with the temporal method, when we did the translation, we are translating the whole financial statement. We are not dealing with one transaction. One transaction, if we have an exposure, if we buy and if we sold from one customer or we buy from one customer, eventually we're going to have to settle this transaction through cash. Foreign currency adjustments, translation adjustments apply to the whole financial statements. So they are in a sense unrealized. When do they become realized? They become realized gain or losses if the foreign operation is sold. If we sold the whole operation and the foreign currency proceeds from the sale are converted into the parent company. This is when the gain or the loss is realized now. But this happens when we actually sell the business. And that's not what we are doing here. So the point I want you to remember when we talk about the temporal method and the current rate method, which are those are translation method. You are translating the whole financial statement. You are not dealing with one transaction. Bear that in mind. Just this is the big picture. Okay. And let's take a look at the big picture again. This is the temporal method what we learned in the prior session and I showed you this earlier. Now we're going to look at the current rate method. Easy current rate method assets, everything current liabilities, everything translated at the current rate stockholders equity. As I told you in the prior session, those are used the historical rate revenues and expenses. Everything is the average notice the when it comes to the temporal method when it comes to certain expenses like cost of goods sold depreciation, amortization. They use historical and the reason is because they use historical for those related assets like property and equipment is depreciated intangible is amortized prepaid expenses. We have to use the historical because they are reported at historical rate. So notice the current rate method you can you can think of it as easier because you're using the average for the income statement and the current rate for balance sheet and liabilities stockholders equity. Either way, you would have to use the historical rate. If you have any questions, any comments about this session, please email me if you need additional resources or practice more. What I suggest you do go to my website and consider subscribing. This is an investment in your career. Good luck and study hard, especially if you're studying for your CPA exam. Good luck.