Lesson: Translation Method of Converting Financial Statements

In this lesson, Nick Palazzolo, CPA, breaks down the translation method used in converting financial statements when dealing with foreign subsidiaries and different currencies. He begins by clarifying under what circumstances the translation method is employed, specifically when the functional currency differs from the reporting currency. Nick then walks through the step-by-step process, starting from the income statement and cogently explaining why this step precedes the balance sheet adjustments. With a focus on how income statement items like revenues and expenses lead to net income and eventually roll into retained earnings, he also covers the application of various exchange rates such as weighted average, historical, and current year-end rates. Moreover, Nick talks about where translation adjustments should be reflected, using the puffer mnemonic as a memorization aid, and why these are recognized in Other Comprehensive Income (OCI), offering insights into the nuances of foreign currency translation that go beyond mere operational performance.