Video: Translation and Remeasurement

In this lesson, Nick Palazzolo, CPA, demystifies the complexities surrounding translation and remeasurement in the context of foreign currency transactions. With an engaging walkthrough, he clarifies the distinction between these two processes, stressing that translation adjustments are reported in Other Comprehensive Income (OCI) and not remeasurement. Nick meticulously unpacks scenarios in which a business must remeasure its financial statements from local currency to functional currency and subsequently translate to the reporting currency. He uses practical examples to illustrate how the functions of foreign subsidiaries influence whether translation or remeasurement is appropriate. Nick also provides a visual to reinforce the conceptual differentiation and concludes by emphasizing the significance of these adjustments within OCI. This lesson is crucial in understanding the financial reporting for multinational operations, despite its intricate nature.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Translation Remeasurement, this is a topic that has a lot of confusion among people. So just to start out, translation is the one included in OCI, not Remeasurement. And let's talk about it a little more. Well, Remeasurement happens when the reporting currency is the functional currency.

So we will revisit this in our section on foreign currency transactions. If you learn it a little bit here, it won't hurt, but if it doesn't make full sense, we'll see it again there. So when the reporting currency, the currency that the financial statements are in, is the functional currency, meaning that's the currency that we transact in and the Remeasurement method must be used when the foreign subsidiary is highly integrated with the parent and serves primarily as a sales outlet for the parent. So day-to-day operations of the subsidiary depend on the reporting currency. So translation is more so used when a foreign subsidiary is relatively self-contained and independent and operates primarily in local markets.

So basically what that's saying is that I'm just talking this through. I know I don't have this listed out. Reporting through Remeasurement is when the subsidiary and parent are highly tied together. Translation is when you have foreign subsidiaries that are relatively self-contained. And also another note on that.

So when the functional currency of the subsidiary, meaning the currency that they transact in day-to-day, differs from both the subsidiary's local currency, meaning if you're located in Europe, you've got the Euro and the reporting currency, which is the currency they report in, which could also be the Euro, but maybe is the British pound or the Colombian peso. The subsidiaries financial statements must first be remeasured from the local currency to the functional currency and then translated from the functional to the reporting. Building on

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