BSA 3106 – International Accounting Aug. 07, 2020
(Entry: Debit -
The Effect of Changes in Foreign Exchange Rate
Kunyare ang Philippine Base Company bumili ng goods sa
Japan, yung goods na binili has an invoice using Japanese
Yen. Kapag bumili sya, irerecord nya yung goods sa
PAS 21: Accounting for the Effects of Changes in Foreign Exchange Rates is applicable for Foreign Exchange Transactions.
2 WAYS OF CONDUCTING FOREIGN ACTIVITIES
2 Main Accounting Issues with respect to Foreign Currency
PAS 21 requires an entity to determine and disclose its
FUNCTIONAL currency  is the currency of the primary
economic environment in which the entity operates. Stated
differently, it is the currency in which the entities cash inflows
and cash outflows are normally denominated into. Sa
madaling salita, kung ano yung denomination ng cash inflows
at outflows ayun yung kanyang Functional currency.
Clarification: The Functional currency is NOT necessarily the
currency of the country to where the company is operating or
base. Posibleng nasa Pilipinas sya pero ang functional
currency nya ay hindi PESO. May pagkakaiba kase ang
usapan sa Functional currency is the currency of the
primary economic environment in which the entity
operates.
Factors to consider to determine the Functional currency
Accounting records dito sa Philippines.
Purchases, Credit – A/P)  irerecord nya to using the
Philippine PESO hindi Yen. Yung amount ng purchases
denominated sa Yen will be converted into Peso when the
Philippine company records the transaction.
Bale sa situation above nagkakaroon ng Exchange Rate
Transaction or Differences.
Learning Objectives:
1. Define an entity’s functional currency.
2. Account for Foreign Currency transactions.
3. Translate the financial statement of a foreign operation.
Primary factors
The entity’s functional currency is:
1. The currency that mainly influences:
 Sales prices
 Cost of goods sold/ Cost of services provided
Explanation ni Sir: Ibigsabihin the economic environment to where
the company make sales and record cost of sales, yung currency na
ginagamit doon ay malamang yun yung functional currency nya.
Secondary factors
2. The currency in which funds from financing activities are
generated.
3. The currency in which receipts from operating activities
are usually retained.
Illustration: ABC Co. is a mining company registered in
Canada whose shares are traded in the Toronto Stock
Exchange. ABS’s operating activities take place in the gold
and silver mines in the Philippines.
Analyze: Dahil nasa Philippines yung operating activities ni
ABC Co. most probably, yung denomination ng Sales at COS
nya is Philippine PESO, so ayun yung functional currency
nya.
Question:
1. What is the functional currency of ABC Co.? – Philippine PESO
2. What is the presentation currency of ABC Co.? – Canadian
Dollar
Presentation Currency  is the currency in which the
entities FS are presented. So kung magpepresent si ABC Co
ng FS gagamit sya ng Canadian Dollar. Kase kung magfifile
sya ng kanyang FS sa Toronto Stock Exchange ang currency
na gagamitin nya is Canadian Dollar.
-Nung nalaman mo na yung Functional Currency, All other
currency denominating transactions of the company are
considered as foreign currency.
Example: Ipagpalagay naten na si ABC Co. ay bumili ng mining
equipment sa Japan. Dahil sa pagbili nyang yon, naka-invoice
using Japanese Yen. Yung Japanese Yen is yung foreign
currency.
Implication: Lahat ng transactions denominated using the
foreign currency will be converted to the company’s functional
currency which is yung PESO kapag magrerecord ng
transaction. (DEBIT – Mining Eqt. CREDIT – A/P)
Kelan naman sya i-coconvert into presentation currency?
Answer: Kapag gagawa na si ABC Co. ng Financial
Statement
Illustration: ABC Philippines Co. is a branch of ABC U.S. Co.
ABC Philippines operates in a Philippine Economic Zone
Authority (PEZA) Special Economic Zone. ABC Philippines is
engaged in the apparel business. All of its raw materials are
imported from the main office in the U.S. and all its
finished products are exported directly to U.S.
customers. The U.S. customers remit payments to the U.S.
main office. The U.S. main office will then provide the
Philippine branch its working capital needs. None of ABC
Philippines’ finished products are sold in the Philippines.
The raw materials imported and finished goods exported are
denominated in U.S. dollar.
Question:
1. Functional Currency of ABC Philippines Co.? – U.S.
Dollar (kase eto yung nakaka-affect sa Sales at COS)
2. Presentation Currency of ABC Philippines Co.? –
Philippine Peso (kase ABC Phil Co. will be required to file the
FS sa Philippine SEC) Note: Tandaan na baka may mga non-monetary items ka
Foreign Currency Transactions  a transaction that is (kunyare inventory) na mayroong presentation requirement yung
denominated or required settlement in the foreign currency. standard (PAS 2), icoconsider mo pa din. Hindi purely PAS 21.
(E.g. Importation or Exportation of goods and services, Recognition of Exchange Difference
borrowing, lending or settling receivables or payables) Exchange Difference  is the difference resulting from
Initial recognition: “A foreign currency transactions is initially translating a given number of units of a currency into
recognized by translating the foreign currency amount into the another currency at different exchange rate.
functional currency using the spot exchange rate at the date Kelan nagkakaroon ng Exchange Difference?
of the transaction.”
-In the previous example, yung bumili sya ng mining
equipment sa Japan. Yung Japanese Yen will be converted
in PESO being the functional currency at the date kung
kalian nangyare yung transaction.
Spot exchange rate  eto yung current exchange rate for that day.
Example: Nangyare sya ng Aug 7, ang palitan ng Piso sa Yen
is (1 Yen = 40 cents). Kung sabihin nateng 1M Yen yun (1M x
40 cents = 400,000)
Entry: Mining Equipment 400 000
Accounts Payable 400 000  When a foreign currency transaction occurred in one period
What is the date of transaction? and settled in another period:
It is the date on which the transaction first qualifies with the a. The exchange difference between the transaction date and the end
recognition in accordance in the PFRS. Eto yung date kung of reporting period is recognized in the period of transaction,
kelan i-rerecord mo sa accounting records mo yung effects while
nung transaction b. The exchange difference between the end of the previous
Subsequent recognition: At the end of each reporting reporting period and the date of settlement is recognized in
period you should translate: the period of settlement.
1. All monetary items in foreign currency using the closing rate; Balik sa Example: Assuming 1 Million Yen
Closing Rate  eto yung spot exchange rate at Dec. 31 (end
of the reporting period kaya closing rate)
Gagamitin to kapag ang itatranslate ay MONETARY items 
are units of currency held and assets and liabilities to be received
or paid in a fixed or determinable number of units of currency. DATE OF SETTLEMENT
Feb 20 Accounts Payable 450,000 (1mx.45)
Cash 300,000 (1mx.30)
Foreign exchange Gain 150,000
 When foreign currency transaction occurred and settled in the
same period, all the exchange difference is recognized in that
period.

2. All non-monetary items measured in terms of historical cost

using the exchange rate at the date of transaction (historical rate);
3. All non-monetary items measured at fair value using the
exchange rate at the date when the fair value was
measured or determined.