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IAS 21
1. Initially recorded using the exchange ate at the date the transaction took place (SPOT RATE).
2. When on settlement date the exchange rate is different from the historical rate at transaction date,the
claim or obligation should be adjusted based on the rate and settlement date. The difference should be
recognized in the I/S as gain or loss on currency exchange.
3. If the transaction is settled beyond the accounting period,the resulting foreign monetary item may be
adjusted using the closing rate at the end of the accounting period wit a gain or loss recognized for the
difference .
Transaction Approach
Two-Transaction Approach - As the only monetary value is the obligation to pay, only this part is
subject to adjustment every time there is a change in foreign exchange .
One -Transaction Approach - The purchase/sales and the settlement viewed as one transaction ,thus a
change in the exchange rate will affect both the purchase/sale and the settlement .
Viewpoint of importer
1. The importer may open a letter of credit with a letter of credit with a designated bank to cover the
importation . The bank charges the importer for service provided and may require the importer to make
a marginal deposit upon opening a letter of credit .
3. Upon payment, the importer debits acceptance payable and credits marginal deposit and also cash in
bank . If upon receipt of goods importer debits acceptance payable and credits trust receipt
payable(held in trust for the bank ).
Viewpoint of exporter
1. Upon confirmation of the bank that a letter of credit has been opened by the importer , the exporter
may avail of a packing credit line to fun the exportation.
2. If the foreign customer issues an interest bearing note the rule for the computation of interest is
based on foreign currency to be collected .Total proceeds should first be stated in foreign currency
before it is the local currency using the foreign exchange.
FOREIGN TRANSACTIONS
Rate of Exchange
-The rate of exchange expresses the ratio between the currencies of two countries (foreign and
domestic currency). Usually the rate exchange used is the official rate of exchange as defined by the
government or the free market rates of exchange arising from the demand and supply factors .
1. Direct quote- one where it the number of domestic currency required to acquire a foreign unit .
2. Indirect quote-one where states the number of foreign currency units required to a domestic currency
unit.
-The forward rate basis quotes a price available now to purchase /sell foreign currency in the future.The
forward rate is usually higher than the sport rate .
IAS 39 /PAS 39 three types of hedging one of which is the fair value hedge which is a hedge for
exposures to change in the fair value of assets and liabilities presented in the statement of financial
position .A hedging derivative as three qualities :
a. ) A financing contract whose value changes to changes in specified rate such as foreign
exchange ,index price or credit index .
b.)No initial net investment is required or if there is,it is a lesser investment than would be required like
in a call option on a share of stock.
-The hedging procedure for net asset position is when the exporter is facing a dilemma if domestic
currency is appreciating.To minimize the risk of exposing the asset position ,exporter may enter into a
forward rate.
-The hedging procedure for net liability position is when the importer faces a dilemma if domestic
currency depreciating.
- A corporation may enter into a forward contract to buy foreign currencies for delivery in the future
which may be used by the corporation to pay future foreign purchases/obligations. The transaction
gain/loss is to be recognized between the agreed forward rate and current forward rate .
A firm foreign commitment is a contract entered into whereby goods ordered will be delivered and paid
sometime in the future. Between order time and payment time the contract will be exposed to
fluctuations in exchange currency rates .The recourse at the importer is to enter into a forward contract
to the hedge an order made now and minimize the loss that will incur for goods to be delivered and
paid in the future.
FACTORS TO BE CONSIDERED:
b.) A forward contract is entered into hedge the fluctuation in the rates from order date to delivery dates
to determine change in value of purchase commitment.
When domestic currency is different from functional currency ,the temporal method should be
used and remeasurement will be as follows:
1. All monetary assets/liabilities at current .
5. Costs and expenses will follow the related assets and liabilities specially if non monetary .
-When a domestic company establishes a branch in a foreign country or invests in a foreign company.
Usually the financial reports of the foreign branch or foreign company is expressed I its local currency
or in its functional currency .Functional currency is the currency in an economic environment in which
it primarily generates and expends cash. FACTORS TO BE CONSIDERED:
1. )Principal indicators -It is the currency that mainly influences sales prices for goods and
services/mainly influences labor,material,and other costs.
2. )Secondary indicators-It is the currency that mainly generates the flow of financing and operating
activities of foreign country.
IAS 24 Provides the Following rules and procedures in translating from the functional currency to the
presentation currency:
1. All assets and liabilities ,whether monetary or not,should be translated using the closing rate at
financial position date including goodwin and any fair values of assets and liabilities arising from
acquisition of foreign subsidiary.
2. Equity accounts are translated using historical rate .IAS 21 mentions only the assets and liabilities
to be translated at closing rate ,thus it is presumed that the equity accounts will be use the historical
rate.
3. Revenue and expenses are translated based on the exchange rates at transaction date unless this is
not practical then a reasonable approximation or average may be used.