BSA 3106 – International Accounting 1st Discussion Aug.

07, 2020

The Effect of Changes in Foreign Exchange Rate

Example:
Bumili ng goods
PH based Company Japan
Invoice using
Japanese Yen

will now record the goods sa Accounting records dito sa Philippines using PESO not Yen.

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 Accounting records dito sa Philippines.
(Entry: Debit - 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.

 PAS 21: Accounting for the Effects of Changes in Foreign Exchange Rates

is the applicable standards for Foreign Exchange Transactions.

2 ways of Conducting Foreign Activities

Foreign currency transactions Foreign operations

Individual entities often enter into
transactions in a foreign currency.
Explanation ni Sir:
Explanation ni Sir:
• Here there can be an importation or
exportation transactions. Importaion – ikaw
Example:
yung magpapasok ng goods sa Philippines.
Exportation – ikaw yung magbebenta sa ibang
bansa.
- Kapag may importation and exportation,
asahan mo ng yung currency involved is
FOREIGN CURRENCY so cover siya ni PAS 21.
- This transaction should be translated into
Philippine Peso bago ma-record sa
accounting records sa Philippines. (in the case
kung ditto sa Pinas nag-ooperate yung
company)
- Kung ano yung FUNCTIONAL CURRENCY kung
saan ka nag-ooperate ayun dapat yung
ginagamit sa pagrecord ng transaction.
Groups often include overseas entities.
• Here meron kang GROUP na may Parent
and Subsidiaries.
PARENT SUBSIDIARIES
(located in the PH) (located sa ibang bansa)
- Kapag group operations, the Parent
company will prepared a consolidated FS
presented using Philippine PESO kaya lang
yung subsidiaries nya naka Foreign Currency
denominated. Kung ikaw si Parent na nasa
Philippines, itatranslate mo muna into PESO
yung sa mga subsidiaries bago mo sya
maconsolidate.
- Here walang foreign currency transactions,
ang meron lang is translation ng FS into the
presentation currency.
 2 Main Accounting Issues with respect to Foreign Currency

1. Exchange rates are constantly changing.

Therefore, the principal issues in accounting for
foreign activities are determining:

• What is the exchange rate(s) to be used; and

• How to report the effects of changes in
exchange rates in the FS.

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

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.

Questions:

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.

Questions:

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)

Foreign Currency Transactions → a transaction that is denominated or required

settlement in the foreign currency. (e.g. Importation or Exportation of goods and services,
borrowing, lending or settling receivables or payables)

Initial recognition: “A foreign currency transactions is initially recognized by translating the

foreign currency amount into the functional currency using the spot exchange rate at the date
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

A/P 400,000
What is the date of transaction?

It is the date on which the transaction first qualifies with the recognition in accordance in the
PFRS. Eto yung date kung kelan i-rerecord mo sa accounting records mo yung effects nung
transaction??…… *medyo choppy si ser.

Subsequent recognition: At the end of each reporting period you should translate:

1. All monetary items in foreign currency using the closing rate;

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.

Monetary Assets Monetary Liabilities

Cash & Cash Equivalent Accounts Payable

Acc. Receivable Notes Payable

Notes Receivable Loans payable

Loans Receivable Bond Payable

FA @ Amortized Cost Cash Dividends Payable

Finance Lease Receivable FL @ Amortized Cost

Cash Surrender value of insurance policy Employee benefits to be paid in cash

Provisions and Accrual to be settled in cash

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.
 Non-monetary Assets

Inventories – (lower of Cost or NRV) if mababa Cost -> Historical gagamitin

Prepaid Asset

Goodwill -> Historical Cost talaga to

PPE -> Generally, Historical exept kung nirevalue

Investment Property -> if subsequent measure @FV -> Fair Value gagamitin pero kapag subsequent
measured @Cost model -> Historical Cost

Intangible Assets -> parang PPE din

Provisions that are to be settled by delivery of non-monetary asset

share capital & premium

Note: Tandaan na baka may mga non-monetary items ka (kunyare inventory) na mayroong presentation
requirement yung standard (PAS 2), icoconsider mo pa din. Hindi purely PAS 21.

Recognition of Exchange Difference

Exchange Difference → is the difference resulting from translating a given number of units of a
currency into another currency at different exchange rate.

Kelan nagkakaroon ng Exchange Difference?

Example: JAPANESE YEN

Dec. 31 Feb 20
Oct 15

Binili yung mining Date kung kelan

Tumawid ng Taon
equipment. mo babayaran
Spot Exchange
Spot Exchange Spot Exchange
Rate (known as
Rate: 1 yen = .40 Rate: 1 yen = .30
closing rate): 1 yen
cents in Pesos cents in Pesos
= .45 cents in
Pesos

Difference is recognized in the Difference is recognized in the

period of transaction period of settlement

• When a foreign currency transaction occurred in one period and settled in another period:
 a. The exchange difference between the transaction date and the end of reporting period is
recognized in the period of transaction, while
b. The exchange difference between the end of the previous reporting period and the date of
settlement is recognized in the period of settlement.

Balik sa Example: Assuming 1 Million Yen

Oct 15 (1Mx.40) Dec 31 (1mx.05 -eto yung itinaas)

Mining Equipment 400,000 Foreign Exchange Loss 50,000

Accounts Payable 400,000 Accounts Payable 50,000

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.