Professional Documents
Culture Documents
In a strict sense, foreign exchange transactions are those that are to be settled in foreign
currency, regardless of the location of either party. These are accounted for by the domestic
company by translating the amounts in foreign currency with BSP-set exchange rates
For translation purposes, the exchange rates must be quoted directly, where the Peso is
expressed as the equivalent of one foreign currency. Rates displayed on news are usually on
indirect quotation. To convert, 1 ÷ (FC equivalent of Php 1). Converting from direct
quotation to indirect quotation also follows the same format
If the given exchange rates in a particular problem are not in Peso, conversion is necessary
SPOT TRANSACTIONS:
DATE MONETARY NON-MONETARY ITEMS
ITEMS At Fair Value At Historical Cost
TD @ SR (HR) @ SR (HR) @ SR (HR)
BD @ SR (CR) @ SR (CR) @ SR (HR)
SD @ SR (AR) @ SR (AR) @ SR (AR)
In an unhedged import and export transaction, the only relevant exchange rate would
be the spot rate as of the date of the transaction, balance sheet date, and the date of
settlement
Spot rates are classified as either buying or selling (also called bid and offer rates,
respectively). If the domestic entity exports, the buying rate is used since this would be the
price that the foreign buyer would pay for the goods. If the domestic entity imports, the selling
rate is used
Suppose the domestic company exports goods on F.O.B. destination freight terms. On the date
of transaction, the spot rate to be used will be as of the date when the goods reached the buyer
– the point when legal title is passed under the freight term. Of course, if on F.O.B. shipping
point, it will be when shipped
The domestic entity recognizes forex gains or losses as the spot rate changes during the
aforementioned dates only. For instance, if the domestic entity is an exporter (thus it has
outstanding accounts receivable) and the buying spot rate increases, the entity recognizes
forex gains to be recorded in profit/loss (together with an increase in accounts receivable)
The foreign entity does not record any forex gains or losses since the transaction is
denominated in their currency
The final cash payment during the date of settlement shall of course still be at the spot
rate, so is the cost at which the asset purchased is recorded
Just like purchase of commodities, forex gains/losses are also recognized in foreign debt
borrowings/grants. Also, the purchase of the goods might have been made through issuance
of promissory notes and other debt instrument
If the domestic entity is a borrower, it must use the selling spot rate, and the buying spot
rate if it lends
ILLUSTRATION Pa Rong Co. signed a two-year promissory note bearing 12% on December
1, 2016 for $10,000. Interest is to be paid monthly. Assume the selling spot rates are the
following: Php 2 (December 1), Php 3 (December 31), and Php 1.5 (December 31, 2017)
On December 31, 2016, any forex gains/losses on the loan is based on the principal alone.
Thus, there is a forex loss of Php 10,000 with a credit to Notes Payable for 2016 ($10,000
× [Php 3 – Php 2])
The actual interest expense is based on the current spot rate of the principal amount
On December 31, 2017, forex gains/losses are now based on both the principal and the
interest. The forex gains/losses from the interest is based on the forex gains/losses
computed on the principal. There is a forex gain on the principal amounting to Php 15,000
($10,000 × [Php 3 – Php 1.5]). Thus, there is also a forex gain on the interest, amounting to
Php 1,800 (Php 15,000 × .12)
There is no actual transaction taking place in a firm commitment, which can be to sell or
purchase something at a future date. This means that the purchase/the asset is not recorded
until the date of settlement, unlike the previous transaction in which the asset is already
recognized at the date of transaction. Only a memo entry is made for the asset during the
transaction date
Only forward rates are relevant in this case. At the date of settlement, the purchase is
recorded using the forward rate at the date of settlement. In a firm commitment, the buyer (or
seller) contracts that he will pay (receive) an amount at the agreed rate no matter if it changes
There is zero net forex gain/loss in a firm commitment. Suppose the domestic entity
enters in a purchase commitment, and that the forward rate increases. They would record a
forex gain on the commitment (debit Accounts Payable, credit Forex Gain) and a forex loss on
the item (debit Firm Commitment, credit Forex Loss) at the same amount. ‘Firm Commitment’
in this case is an asset account
At the date of settlement, the domestic entity pays/receives an amount equal to the
forward rate at the date of settlement. The cost of the asset, as mentioned, is at the forward rate
at the date of transaction. Any difference is debited/credited to Firm Commitment account
Entities engage in hedging transactions to mitigate potential losses arising from volatile
exchange rates. To hedge is to take the position opposite that of the transaction. This means
that if the hedged item (the asset) records a forex gain, the hedge records a forex loss to even
out things
Hedging instruments are usually in the form of derivatives, financial instruments that
derive their value from another instrument. They are classified as either option-based (offers
one-sided protection against exchange rate risks, such as options and swaps) and forward-
based (offers two-sided protection, such as forward and futures contracts)
Just like in a firm commitment, there are two sets of entries to be made in a hedged
transaction – one for the hedged item (the asset) and one for the hedging instrument. Suppose
that the domestic entity sells, and the exchange rate increases. The hedged item would record a
forex gain (debit Accounts Receivable, credit Forex Gain), and the hedging instrument would
record a forex loss (debit Forex Loss, credit Forward Contract Payable)
The net forex gain/loss from the hedged item and hedging instrument is referred to as the
forex gain/loss from hedging activity
Of course, on the hedging instrument’s side, the Forward Contract Receivable account
absorbs any change in exchange rate if the domestic entity purchases, and Forward Contract
Payable if it sells. On the other side, Accounts Payable and Accounts Receivable absorbs the
changes, respectively
Note that the liability/receivable to third person is based on the entries on the hedged item,
not the hedging instrument
Forward rates are used for the hedging instrument until the date of settlement, when the
spot rate is used. Of course, if the selling spot rate is used on the hedged item, the selling
forward rate is used for the hedging instrument
Problems usually present forward rates classified as per a particular number of days. The
rate to be used is the number of days remaining until the date of settlement
On settlement date, the domestic entity either receives (debits) or pays (credits) cash
equal to the difference of the spot rate at settlement and the forward rate at the date of
transaction. This is because the agreed upon rate (the forward rate at the date of transaction) is
the amount that the parties agreed to be paid regardless of the change in the rates. A bank or
other speculators usually handle the difference
Hedging instruments are also classified as either fair value hedges (used in transactions
with recognized assets and liabilities, such as in actual purchases/sales), cash flow hedges
(used in forecasted and anticipated transactions), and net investment hedges (similar in
treatment as to cash flow hedges, used between a domestic and a foreign entity)
Recording exchange rate changes as they affect the hedging instrument can be made in
two ways – split and non-split accounting. Under split accounting, gains/losses of the
instrument is divided into the effective portion (or the intrinsic value), and the ineffective
portion (or the time value gains and losses)
In fair value hedges, both the effective and ineffective portion of the gains/losses go to
profit/loss. In cash flow/net investment
Hedges, the effective portion is a component of other comprehensive income, while the
ineffective portion goes to profit/loss
Options are contracts that grant holders the right to either buy (call) or sell (put) goods
at the future date at a predetermined price, called the strike/exercise price. This is recorded as
an investment in the balance sheet. The amount paid for an option is referred to as the option
premium
They may be classified as to the likeability of their exercise. If the option is at the money
(strike price equals current market prices), the option is likely to be exercised, bearing no loss
on the holder. If the option is in the money, it is also likely to be exercised, bearing gains on
the holder. In a put option, this is when the strike price is greater than market prices; in a call
option, this is when the strike price is less than market prices. If out of the money, the option is
likely not to be exercised, since it would bring losses to the holder
The option contact is the hedging instrument. However, it is not a derivative like
forward contracts, since it has its own cost (the option premium). Also, it is not affected by
changes in the forward rate, since its value depends on its current fair value
The change in the fair value is the fair value is total gains/losses on the hedging instrument, to
be recorded on profit/loss (if fair value hedge) or other comprehensive income (if cash flow
hedge) if the company uses non-split accounting
If problems mention that “the effect of time value gains/losses are excluded in the assessment
of hedge effectiveness”, the company
uses split accounting, wherein the fair value change is divided into the effective and
ineffective portions. Option contracts are usually classified as cash flow hedges
The intrinsic value is computed by multiplying the notional amount (the amount of the
foreign currency) by the difference of the strike price and the market price per item. The
change in the intrinsic value is the effective portion of the total gains/losses. Note that the
intrinsic value itself is not the effective portion to be sent to OCI. The same goes for the time
value gains/losses
There is only intrinsic value if the option is in the money, otherwise it shall be zero. At the
settlement date, the intrinsic value should always match the fair value of the option, resulting
to a zero time value gains/losses
The effective portion is among the components of OCI that gets transferred to profit/loss.
The amount is transferred if the asset purchased is sold or depreciated, whichever is
applicable
The forex gain/loss from the hedging activity in this case is equal only to the time value
gains/losses, since the effective portion goes to other comprehensive income
For instance, the domestic entity owns not a business but just a single asset overseas
that’s measured at fair value, such as investment property. That item’s value shall be its fair
value overseas at foreign currency, to be translated with the exchange rate as of when the fair
value was determined. No forex gains/losses are recorded, but only unrealized gains/losses.
This is because forex gains/losses only emerge from monetary assets, such as accounts
receivable/payable
If the item is measured at cost, it remains to be measured at its historical cost, using the
exchange rate when purchased
PROBLEMS & EXERCISES
PROBLEM 1
X Tradi g pur hases goods fro Y, a o pa ased o Fra e for , , Euros € . The e ha ge
rate at this ti e is P = € . . X pa s da s later he the pre aili g e ha ge rate is P = € .
How much is the foreign currency gain/loss on the books of X and Y respectively?
A. P21,000 gain; P21,000 loss
B. P21,000 gain; 0
C. P4,200,000 loss; 0
D. P4,200,000 loss; P4,200,000 gain
PROBLEM 2
Celica Motors sold a car for P180,000 pounds (£) to a customer in London on March 16, 2013 when the
spot rate was P68.45 = £1. On April 20, 2013, Celica received thirty percent of the selling price as partial
payment. The spot rate at that time was P67.48 = £1. The balance was paid on May 5 when the spot rate
was P68.63 = £1.
How much was the foreign currency gain/loss on this transaction?
A. P29,700 loss
B. P29,700 gain
C. P142,200 loss
D. P142,200 gain
PROBLEM 3
Levin intends to sell ¥400,400 under a forward contract dated December 1. At what amount must
Forward Contract Receivable and Forward Contract Payable be presented on December 31?
FC Receivable FC Payable
A. P220,220 P200,200
B. P200,200 P220,220
C. P212,212 P196,196
D. P200,200 P200,200
PROBLEM 4
On January 1, 2013 Lucky Inc. paid P9,800 to acquire a put option. This is in relation to the sale of
merchandise worth $65,000. (Strike price = P4.965)
1/1/2013 3/31/2013 6/20/2013
Spot rate P4.934 P4.908 P4.75
Fair value of option P9,800 P11,400 P13,935
How much is the foreign currency gain/loss on the intrinsic portion on March 31, 2013?
PROBLEM 5
On November 1, 2013, Word Inc. paid P45,000 to acquire call foreign exchange option for Hk$90,000.
The option is acquired to hedge the 2013 anticipated purchase of merchandise for Hk$90,000. The
option expires on March 30, 2014.
PROBLEM 6
On December 12, 2013, Winning Co. entered into a forward exchange contract to purchase 225,000
euros in 90 days. The relevant exchange rates are as follows:
The purpose of this forward contract is to hedge a purchase of inventory in November 2013, payable in
March 2014.
At December 31, 2013, what amount of foreign currency transaction from this forward contract should
Winning include in profit or loss?
A. P9,000 loss B. P6,750 gain C. 6,750 loss D. P9,000 gain
PROBLEM 7
On October 1, 2013, R Corporation purchased goods from a U.S. based corporation worth $93,750.
Payment is due in 120 days on January 30, 2014. In view of the transaction, R Corporation enters into a
forward contract to buy $93,750 from Philippine National Bank (PNB) in 120 days. The relevant
exchange rates are as follows:
PROBLEM 8
On October 31, 2013, Pointers Philippines took delivery from a British firm of inventory costing
£1,450,000. Payment is due on January 31, 2014. At the same time, Pointers paid P16,500 cash to
acquire a 90-day call option for £1,450,000.
PROBLEM 9
Manila Company sold merchandise for 315,000 pounds to a customer in London on November 01, 2013.
Collection in British pounds was due on January 30, 2014. On the same date, Manila entered into a 90-
day futures contract to sell 315,000 pounds to a bank. Exchange rate for pound on different dates are as
follows:
Nov. 1 Dec. 31 Jan. 31
Spot rate P51.3 P52.6 P51.8
30-day futures P52.2 P52.4 P53.1
60-day futures P51.7 P52.1 P52.5
90-day futures P50.5 P52.5 P53.3
How much is the net foreign exchange gain or loss on January 30, 2014?
A. P63,000 loss B. P31,500 loss C. P63,000 gain D. P31,500 gain
PROBLEM 10
On November 1, S Company entered into a firm commitment to sell a machinery. Delivery and passage
of title would be on February 28, 2014 at the price of $15,750 Singapore dollars. On the same date, S
Company entered into a 120-day forward contract with China Bank to sell the $15,750 Singapore dollars.
Exchange rate were as follows:
How much is the foreign exchange gain or loss recognized by S Company on the firm commitment on
December 31, 2013?
PROBLEM 11
How much is the foreign exchange gain/loss on the forward contract on February 28, 2014?
A. P500,000 loss B. P187,500 loss C. P187,500 gain D. P500,000 gain
PROBLEM 12
GV Company anticipates the price of cement will increase the coming months. Therefore, it decides to
purchase call options on cement as a price-risk hedging device to hedge the expected increase in prices
on a forecasted purchase of cement. On December 1, 2013, GV purchased call options for 1,200 sacks of
cement at P165 per sack at a premium of P5 per sack, with a March 31, 2014 call date. The following is
the pricing information for the term of the call:
On March 31, 2014, GV exercised the option and acquired 1,300 sacks of cement. On May 15, 2014, GV
sold all the sacks of cement for P176 per sack.
How much is the net income in 2014?
A. P13,600 B. P9,700 C. P7,600 D. P1,400
PROBLEM 13
On July 1, 2013, Peru Company purchased 1,750 shares of Lima Corp. common stock at a cost of P75 per
share and classified it as an available for sale security. On October 1, Peru Company purchased an at-the
–money put option on Lima Corp. at a premium of P24,500 with a strike price P115 per share and an
expiration date of April 2014. Peru Company specifies that only the intrinsic value of the option is to be
used to measure effectiveness. The following shows the fair value of the hedged item and the hedging
instrument.
What is the cumulative effect on retained earnings of the hedge and sale?
A. P10,500 B. P70,000 C. P45,500 D. P80,500
PROBLEM 14
TRANS Corp. owns a subsidiary in Singapore whose statement of financial position in Singapore Dollars
for the last two years follow:
Joint Operation
A joint operation is a joint arrangement whereby the parties
that have joint control of the arrangement have rights to the
assets, and obligations for the liabilities, relating to the
arrangement. Those parties are called joint operators. To manage
the activities of the joint arrangement, joint operators may
appoint an operator or manager, who will be an employee of the
joint operators.
Joint Venture
ACCOUNTING PROCEDURES
Joint operations
Joint Ventures
APPENDIX
ACCOUNTING PROCEDURES
The operation of this type involves the use of the assets and
the other resources of the parties (venturer) rather than the
establishment of a corporation, partnership or other entity, or
a financial structure that is separate from the parties
themselves. Each party uses its own property, plant and
equipment and carries its own inventories. It also incurs its
own expenses and liabilities and raises its own finance, which
represent its own obligations. The activities nay be carried out
by a manager, who is an employee of the parties. The agreement
usually provides a means by which the revenue and expenses
incurred in common are shared among the parties.
Jointly Controlled Assets
This type involves the joint control, and often the joint
ownership, by the parties (venturers) of one or more assets
contributed to, or acquired for the purpose of, the joint
venture and dedicated to the purposes of the joint venture.
Measurement
Cost of Acquisition
2012:
Co. R and Co. S contributed P10 million each for one-half
interest in the net assets of Entity X.
Organization expenses incurred amounts to P100,000.
Entity X acquired land at a cost of P2 million.
Constructed a building (shopping centre) at a cost of P15
million.
Operating expenses for the year amounts to P1 million.
Rental income collected from the tenants, P10 million.
Net income or loss is distributed to the venturers in
accordance with their interest
2013:
Operating expenses (including depreciation) incurred for
the year, P3.5 million
Rental income collected for the year, P12 million
Each venturer receives a share of the income or loss from
rental income net of the operating expenses.
The assets and liabilities held in Bank X are the assets and
liabilities of Bank X and not the assets and liabilities of the
parties. Banks A and B each have a 40 percent ownership interest
in Bank X, with the remaining 20 percent being listed and widely
held. The stockholders’ agreement between bank A and bank B
establishes joint control of the activities of bank X.
a. P285,000
b. P290,000
c. P288,000
d. P260,000
For the year ended December 31, 2013 entity M recognized a loss
for P600,000. Entities A and B have no constructive or legal
obligation with respect of their jointly controlled entity’s
loss and have made no payments on its behalf.
Entity M recognized profit for the year ened December 31, 2013
of 800,000. There is no published price quotation for entity M.
Investments are accounted for using the equity method.
Entity X’s profit for the year ended December 31, 2013 is P30,
000 (after deducting depreciation expense of P10,000 on the
machine contributed by entity A). Entity A accounts for his
investment using the equity method.
ANSWERS
1. C 6. A 11. B 16. A 21. D
2. C 7. A 12. A 17. A 22. A
3. A 8. D 13. C 18. A 23. C
4. B 9. A 14. B 19. B
5. A 10. B 15. A 20. A
SOLUTIONS
1. Construction revenue P24M
Construction cost 18M
Gross profit P6M
12. At December 31, 2014, the venturers must report their investment
in entity X ( a jointly controlled entity) at P300,000 (at cost).
There is no impairment loss, because the fair value (P425,000) exceeds
its carrying amount P300,000.
15. At December 31,2013 the venturers must each report its investment
in entity X at P425,000 (at fair value). Even though the venturers
each used the cost model as its accounting policy for investment in
entity X they account for their investments using the fair value model
because entity Z has a published price quotation.
16. At December 31, 2013 entities A and B must each report their
investment in entity AB at P290,000 (at recoverable amount 293,000 –
3,000).
18. At December 31, 2013 entities A and b must each report its
investment in entity Z at P285,000 computed as follows:
19. At December 31, 2012 each venture must measure its investment in
entity M at P0 computed as follows:
X Trading Y
(Peso) (Euros) Please note that the exchange rate is for problem use only.
Date of purchase (1200000/12.5) 96,000.00 1,200,000.00 Real exchange rates are not taken into consideration.
Date of payment (1200000/16) 75,000.00 1,200,000.00
Forex Gain / (Loss) 21,000.00 -
The exchange rate used herein is indirect. To get the direct exchange rate:
2 (A)
It was a loss because at the time of purchase, the peso value was 12,321,000.
The peso value received by the seller for down payment and balance is only 12,291,300.
Thus, there is a forex loss of P29,700.
To a seller, any decline in currency value of a receivable is a loss, because he would be receiving less.
To a buyer, any decline in currency value of a payable is a gain, because he would be paying less.
Vice versa for an increase in currency value.
3 (A)
Levin is a buyer of goods, and a seller of foreign currency under a forward contract. Hedging is setting aside a fund to a bank or financial institution that is willing to absorb any gain or loss resulting from a hedged transaction.
It is called a hedged transaction because, no matter what the spot rates are, the buyer (or seller) who made a hedged contract, he would be paying (or receiving) the stated amount in the hedge contract.
FC Receivable FC Payable
400400 x 0.55 220,220.00
400400 x 0.50 200,200.00
As a buyer of goods (hedged transaction), he would be recording his payable using current rates. So, on December 31, his payable is 400400 x 0.50. You use the forward rates because it was done through a forward contract.
As a seller of forex (hedging instrument), he would be recording the value of the forward contract at its value upon incepcion (December 1). So, it would be 400,400 x 0.55.
4 (A) Correction on the problem: The FV of option on 6/20/2013 is 13,975.
1/1 3/31 6/20
Fair value of put option 9,800.00 11,400.00 13,975.00
- Intrinsic value 2,015.00 3,705.00 13,975.00
Time value 7,785.00 7,695.00 -
The intrinsic value may be computed as (Strike price minus spot rate) x foreign currency.
On March 31, the gain would be 3705 minus 2015 = 1690. (The intrinsic value increased, so it's a gain.)
5 D
There's that phrase "anticipated purchase". The purchase hasn't happened yet although they already acquired a hedging instrument.
Since the purchase hasn't occurred yet, no merchandise would be recorded.
6 B
The focus was the forward contract, which was entered into on 12/12, the forward rate was 0.60.
The report period being asked was 12/31, the forward rate was 0.63.
Profit or loss is computed as (0.60 - 0.63) x 225000 = 6750.
The transaction is a purchase, so the hedging instrument was a receivable. The value increased, so it was a gain.
7 D
The rate used in the forward contract on Jan. 30 (settlement date) is actually the spot rate. It just so happens that the spot rate and the forward rate are both 50.
Just keep in mind that it's the spot rate to be used in there.
8 A
Change in time value on 12/31 - from 2000 to 5000, that's a gain of 3000.
Change in intrinsic value on 1/31 - from 29000 to 58000, that's a gain of 29000.
The rate to be used in the futures contract is 90-day futures on Nov. 1, since there are 90 days before settlement date; 30-day futures on Dec. 31,
since there are 30 days before settlement, and spot rate on settlement date.
10 D
Forex gain or loss on firm commitment on Dec. 31 (46.70 minus 44.30) x 15750 = 37800
S Company is a seller, from that transaction it will have a receivable. The value of forex using the forward rates increased, so it's a gain.
11 B
Forex gain or loss on the forward contract on Feb 28 (62.05 minus 62.35) x 625000 = 187500
SBC company is the buyer, it has a payable. The forward contract would then be a receivable. As such, the decrease in rates would mean a loss.
13 C
Forex gain of 10500 on fair value of option, increase from 24500 to 35000.
14 A 2012 2013
Assets 361,781,250.00 407,906,250.00
2012 - Loss 6,000,000.00
2013 - Gain 15,093,750.00 Liabilities 240,656,250.00 256,500,000.00
Cumulative adjustment 9,093,750.00 Common stock 77,625,000.00 77,625,000.00
Retained earnings 52,500,000.00 64,687,500.00
Dividends 3,000,000.00
- 6,000,000.00 9,093,750.00