BeSlh . The Review School of becomnilorcy - Page 27 LECTURE NOTES in THEORY of ACCOUNTS (FAR & AFAR) PAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE Rates 1. The objective of PAS 21 is to prescribe how to include forcign currenet transactions and foreign srecatione in the financial statements of an entity and how to translate financial statements from 2 aera tynctional currency into the presentation currency ~ the principal issues 2Fe > Which exchange rate(s) to use, and How to report the effects of changes in exchange rate: + in the financial statements 2. FOREIGN CURRENCY TRANSACTIONS” > Initial Recognition 'A foreign currency transaction sho of the transaction. The use of average + Reporting on Subsequent Balance Sheet Dates. Reporting on Subsea etary amounts should be reported using the CLOSING RATE 2 Foreign currency monerarad a historical cost should be reported using the exchange rate at the date of the transaction. een etary items carried at far value should be reported at the rate th the fair values were determined. + Recognition of Exchange Differences” 2 Exchange differences arising when: monetary item exStanslated at rates cifferent from those at which they were translate Fecagnized are reported in profit or ss in the period » eeanes ferences arising on monetary items that form part of the reporting entity = At Exchange difernces ares operation” are recognized, in the consolidated financial ae eeaete that include the foreign operation, in 2 separate component of equity: upon Sieposal of the net investment, they will be recognized in profit or oss, «A SROse Orne n'a nonemonetary item 1s recognized directly 1n equity (for, oxomPIC. © prcpeaty revaluation under PAS 16), any foreign exchange component of that gain or Oss 1S flso recognized directly in equity. used to finance the acquisition of an asset could + An exchange loss on foreign currency debt Ae Tanger be added to the carrying amount of the asset even if the loss resulted from 2 ao on ovevaluation of a currency against which there was no practical means of hedging at the exchange rate at the date uid be recorded initially ble estimate of actual Ws ig pertnitted if they are a reasonal Yt existed when 16% are settled or when monetary items .d when initially 3, FOREIGN CURRENCY FINANCIAL STATEMENTS TRANSLATION REIGN cite and financial position of an entity® are trensiated into a different presentation currency using the following procedures: ee one and nabilities for each balance sheet presented are translated at the the date of that balance sheet.°° Income and expenses for each inci of the transactions’. All-resulting exchange differences are re CLOSING RATE at Lome statement are translated at exchange rates at the dates icognized as a separate component of equity. sre within the seope of PAS 39 Financial basieuments has been moved to PAS 39 in which the entity operates. ‘The print it primarily generates and expends cas tity Go PAS 21 excludes from its scope foreign curreney derivatives that ocowonition and Measurement. Similarly, the wateia on hedge account 00 Fametional currency is the currency of the primary economic environne carmornie environment in which an entity operates is normatly the one in whic 1 in whieh financial statements are presented by the report 90 Presentation currency is the cut 1 re rate isthe ratio oF exchange for two currencies. Exchange vfion ia transaction that is denominated or requires settlement in foreign currency. including 92 A foreign currency transac transactions arising when an entity: 2s MVys or sells ods or services whose prices is denominated ina foreign eurreney funds when the amounts payable oF receivable are denominated in a foreigh eurrencs inated in a foreign currency + borrows or lends equines and disposes of assets oF incurs or settles Habilitis, den 9° Clusing rate is the spot exchange rate at the balance sheet date 94 Exchange difference is the difference resulting from translating a gives arency at diferent exchange res 95 haumerary es are wit of eurrency eld and fhumber of units of currency s Nernemen aor operation sie aun oie pring’ eam assets ofthat operation daar rain tan enty that is 4 sbsiiay, associat, joint vente of branch of feporting ent. whose stiites ary other than that ofthe reporting entity 5 a currency is nt the currency of » hyperinflationary esonomy. Non the acquisition a'aforeien operation and any fui valu adjustments tothe son the easton ofthat fveign operation ae treated as part of the assets number of units of one assets and liabilities to be received and paid in # fixed or deverminabte are based in aco 98 “This refers to an entity whose fimetion: 9 This would include any goodwill ari ing amounts of assets and liabilities aris ities of Ye Foreign operation. ical reasons, the use oF awerage rate for the period ms te significantly, the use of the average rate fr a period is inappropriate be used as translation basis. However, if the exchange rates uct ex ‘S)RSQ - the Review School of Gecowiorcay Page 28 LECTURE NOTES in THEORY of ACCOUNTS (FAR & AFAH) 4. DISPOSAL OF A FOREIGN OPERATION When a foreign operation is disposed, the cumulative amount of the exchange differences deferred in the separate component of equity relating to that fereign aperation shall be recognized in profit or loss wihen the gain oF loss on disposal is recognized. 5. CONVENIENCE TRANSLATIONS. Sometimes, an entity displays its finanuial stetements or other that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation 1s that the réull:ng financial information does not comply with all PERS. In this case, the following disclosures. are required: + Clearly identify the information as suaplementary information to distinguish it from the information that complies with PERS, + Disclose the currency in which the supplementary information is displayed. + Disclose the entity's functional currency and the method of translation used to determine the supplementary information: When an entity presents its financial statements in a currency that is different from its functional currency, it may describe those financial starements as complying with PERS only if they comply with all the requirements of each applicable Standard and Interpratsinon, 6. DISCLOSURE REQUIREMENTS + The amount of exchange differences recegnized in profit or loss. + Net exchange differences classified in 3 separate component of equity arid a reconciliation of the amount of such exchange differences at the beginning and end of the period. + When the presentation currency is different from the functional currency, disclose that fact together with the functional currency and the reason for using a different presentation currency, +A change in the functional currency of either the reporting entity or a significant foreign operation and the reason therefore PAS 29: FINANCIAL REPORTING IN HYPERINSLATIONARY ECONOMIES 1, The objective of PAS 29 1s to establish specific standards ter enterprises reporting i the currency of a hyperinflationary economy, so that the financ'a! information provided is meaningful. 2. RESTATEMENT OF FINANCIAL STATEMENTS. (a) The basic principle in PAS 29 is that the financial statements of an entity that reports in the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. (b) Restatements are made by applying a general price index. Items such as monetary items that are already stated at the measuring unit at the balance sheet date are not restated. Other items ‘are restated based on the ciange in the gencra! price index between the date those items were acquired or incurred and the balance sheet date. (c) A gain or loss on the net monetary position is inclucesi in net income. Tt should be disclosed separately. 3. The Standard does not establish an absolute rate a which hyperinflation 1s deemed to arise - but allows judgment as to when restatement of financial stalemonts oecomes necessary. Characteristics of the economic environment of a country which indicate the existence of hyperinnation include: + The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency hex! are immediately invested to maintain purchasing power. + The general population regards monetary amounts not in terms of the docal currency but in terms of a relatively stable foraign currency. Prices may de quoted in that currency; + Sales and purchases on credit take place at prices tat compensate for the expected loss of purchasing power during the credit periva, even if the period ws shert, and + The cumulative inflation rate over three years aporoactes, or exceeds, 100%, 4, When an economy ceases to be hyperinflationary and an e:terprise discontinues the preparation and presentation of financial statements in accordance with PAS 29, it should treat the amounts expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements. 5. DISCLOSURE REQUIREMENTS: + Gain or loss on monetary items +The fact that financial statements and other prior period data have been restated for changes in the general purchasing power of the repw:tsig currency + Whether the financial statements art based un a historical cost or current cost approach + Identity and level of the price index at the balance sheet date and moves during the current and ©ReSU . The Rewiew School of Gecowectancy Page 29 LECTURE NOTES in THEORY of ACCOUNTS (FAR & AFAR) Accounting for BOT Transactions uitd-Operate—Transfer” (BOT) is a form of project financing wherein a private entity (“operator”) receives ONCESSION from the government (“grantor”) to finance, design, construct, and operate a facility stated in the concession contract. General features of BOT: ere GT fads extensive application in public infrastructure projects and in public-private partnership (PPP) 1 firmost BOT arrangements, the grantor gives the operator the ight to design and build infrastructure and to operate and maintain these facilities for a certain period. + During the BOT period or term: o “The operator has the responsibility to raise the funding or finance for the project 7 TNE Rerator ts entitled to retain all revenues gencrated by the project --- this enables the private operator to recover its investment, operating and maintenance expenses in the project + The operator is the owner of the regarded facility, «The facility will be transferred to the government-grantor at the end of the concession agreement, without any remuneration of the private sector entity involved. - ~ Bui Operate-Transter (GT) Weansack OVERNMENT Is also knowin as: ‘GRIVATE ENTITY” ™ Grantor P Operator Examples of countries using BOT are Thailand, Saudi Arabia, India, Japan, China, Vietnam, Malaysia, Philippines ‘and few states in the US like Texas and California. However, in some countries, such as Canada and Australia, the term used is build-own-operate-transfer (BOOT). Trarltionaily, such projects provide for the infrastructure to be transferred to the government at the end of the concession period. At present, accounting for BOT transactions is largely covered by IFRIC 12 (Service Concession Agreements) IFRIC 12: Service Concession Arrangements SERVICE CONCESSION - an arrangement whereby 2 government grants a contract to a private operator to develop, operate and maintain public infrastructures (e.9., road, expressvray, airport, bridge, hospital, prison or telecommunication network). ‘The infrastructure asset is NOT an item of property, plant and equipment of the private operator because the eee ia tne infrastructure asset lies with the government-grantor, instead, the private operator shall Fecognize the fair value of the infrastructure asset as either (3) financial asset or (2) intangible asset. IFRIC 12 draws a distinction between two (2) types of service concession arrangement: “FINANCIAL ASSET model: the operator has an unconditional contractual right to receive cash or Ehother financial asset from the government in return for constructing or upgrading the infrastructure asset. 2) INTANGIBLE ASSET model: the operator has a right to charge for use of the infrastructure ascot thar it constructs or upgrades. (NOTE: a right to charge users is not an unconditional right to tha ie “cuan because the amounts are contingent on the extent to which the public uses the service. } IFRIC 12 allows for the possibility that both types of arrangement may exist within a single contract: to the cepent that the government has given an unconditional guarantee of payment for the construction of the publi cree treture asset, the operator has a financial asset, to the extent that the operator has to rely on “is Iereral public using the service in order to obtain payment, the operator has an intangible asset FINANCIAL ASSET model Fac etor recognizes a financial asset to the extent that it has an unconditional contractual right to reccwe eae eecmother financial asset from or at the direction of the grantor for the construction services. The operaicr Hae Ut unconditional right to receive cash if the grantor contractually quarantees to pay the operator: {a) specified or determinable amounts, or {3} “Ehortali, if any, between amounts received frorn users of the public service and specified or o orenable amounts, even if payment is contingent an the operator ensuring that the infrastructure meets specified quality or efficiency requirements. ‘The operator measures the financial asset at FAIR VALUE and any BORROWING COSTS incurred for the Infrastructure project shall be expensed in the period incurred. . @”ReSQ - the Review School of Oeccourtancy = Page 30 LECTURE NOTES in THEORY of ACCOUNTS (FAR & AFAR) INTANGIBLE ASSET model The operator recognizes an intangible asset to the extent that it receives a right (a license) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. The operator measures the intangible asset at FAIR VAILUE and any BORROWING COSTS incurred for the infrastructure project shall be capitalized as part of the cost of the intangible asset. Operating revenue ‘The operator of a service concession arrangement recognizes and measures revenue in accordance with PASS 11 (Construction Contracts) and 18 (Revenues) for the services it performs. Accounting by the government-grantor IFRIC 12 does NOT address the accounting for the government side of service concession arrangements. IFRSS are not designed to apply to not-for-profit activities in the private sector or the public sector. However, the International Public Sector Accounting Standards Board (IPSASB) has its own project on service concession arrangements, which will give serious consideration to accounting by grantors. The principles applied in IFRIC 12 are considered as part of the project. Effective Date IFRIC 12 was made effective for annual periods beginning on or alter 1 January 2008. .d answers) 1, Accounting for Build-Operate-Transfer ("BOT") transactions is mostly covered by the current Philippine Financial Reporting Standards bases on: ‘A. PAS 18 (Revenues) B. PAS 11 (Construction Contracts) €. IFRIC 12 (Service Concession Arrangements) D. IFRIC 15 (Agreements for the Construction of Real Estate) MULTIPLE-CHOICE QUESTIONS (with suagest 2. Build-operate-transfer “BOT” arrangements under the scope of IFRIC 12 are usually made between (among): A. The government (grantor) and a private entity (operator) 8. The government (operator) and a private entity (grantor) C. The government (grantor), gener! public (operator) and a private entity D. General public (grantor), a private entity (operator) and the government NOTE: The general public is NOT a party in BOT or Service Concession Arrangements. 3. Which models are allowed to be used by the private operator for build-operate-transfer (BOT) schemes under IFRIC 12? 1- Financial Asset mode! If ~ Intangible Asset model III ~ Property, Plant & Equinment model A. Land IT B. Land Ill C. Wand It D. 1, Wand If 4. Under IFRIC 12 (Service Concession Arrangements), infrastructure assets under bulld- operate-transfer (BOT) scheme: ‘A. Shall be recognized as investrient property by the grantor B. Shall be recognized as investment proverty by the operator C. Shall be recognized as property, nlant and equipment by the operator D. Shall not be recognized as prozerty, piant and equipment by the operator 5. Under a build-operate-transfer (BOT) scheme covered by IFRIC 12, any borrowing costs incurred by the private operator for infrastructure projects shall be: ‘A. Expensed (Financial Asset model); Expensed (Intangible Asset model) B. Expensed (Financial Asset model); Capitalized (Intangible Asset model) C. Capitalized (Financial Asset moulc!): Expensed (Intangible Asset model) D. Capitalized (Financial Asset model); Capitalized (Intangible Asset model) oF END of LECTURE NOTES w