CHAPTER # 13

TITLE FOREIGN CURRENCY TRANSLATIONS

B. DEVELOPMENTAL ACTIVITIES

INTRODUCTION

Definition of Terms

The following are definition of terms provided by PAS 21:

 Closing rate is the spot exchange rate at the end of the reporting period.
 Exchange difference is the difference resulting from translating a given number of units of one currency
into another currency at different exchange rates.
 Exchange rate is the ratio of exchange for two currencies.
 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
 Foreign currency is a currency other than the functional currency of the entity.
 Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting
entity, the activities of which are based or conducted in a country or currency other than those of the
reporting entity.
 Functional currency is the currency of the primary economic environment in which the entity operates.
 A group is a parent and all its subsidiaries.
 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.
 Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of
that operation.
 Presentation currency is the currency in which the financial statements are presented.
 Spot exchange rate is the exchange rate for immediate delivery

ACCOUNTING PROCEDURES

1. Receive foreign entity’s financial statements, which are reported in foreign currency.
2. Translate the statements in foreign currency to Philippines peso. Each foreign entity account/balance must
be individually translated into the its Philippine peso equivalent, as follows:
account in foreign appropriate exchange account in Philippine
currency units x rate = peso equivalent value

3. Consolidate the translated foreign entity’s accounts, which are now stated in Philippine Peso, with the
Philippine company’s accounts.

Two Approaches to Translations

PAS 21 specifies two approaches to translations and the approach to be used depends on whether the functional
currency (is not the currency of a hyperinflationary economy) of the foreign subsidiary is the same as the
presentation currency and whether the books are kept in the functional currency:

Method 1: Current Rate Method (FCPC/Closing Rate Method/ Net Investment Method/ Translated Method)
 Translation from Functional Currency to Presentation Currency
 This method is used on the following basis:
o Foreign operations operates independently in economic and financial matters (or not an integral
part to the operations of the parent)
o Functional currency (is not the presentation currency) should be the LCU (local currency unit –
currency of the country in which the subsidiary operates) or a third country currency.
o The functional currency is not the currency of hyperinflationary economy.
 The main features of the current rate method:
o Assets and liabilities both monetary and non-monetary are translated at current rate on the
date of the balance sheet.
o Stockholder’s equity account are translated using historical rates in effect at the time equities
were first recognized (date of investment) in the foreign entity’s accounting records, except:
 Beginning retained earnings is set equal to the ending balance of last year.
  Dividends – historical rate on the date of declaration, otherwise, date of payment.
o Revenue and expense of foreign operation are translated at the dates of transactions, i.e. actual
or spot rates (historical rates). For practical reasons, the average rate is usually used for items
whose transactions are numerous and occur evenly throughout the year, for example, sales,
purchases and operating expenses, but, if the exchange rates fluctuate significantly, the use of
average for a period us inappropriate.
o Translation Gain or Losses are taken to Other Comprehensive Income until the disposal of the
foreign operation, when they are included in profit or loss.

Method 2: Temporal Method (Remeasurement Method)

 Translation into the Functional Currency/ Remeasurement of Foreign Currency Financial Statements to the
Functional Currency
 This method is used on the following basis:
o Foreign operation is integrated with parent’s operation.
o Functional currency should be the parent’s currency/ presentation or reporting currency.
 The main features of the temporal method are as follows:
o Monetary assets and liabilities shall be translated (remeasured) using closing rate.
o Non-monetary items at historical cost or carried at past exchange price shall be translated
(remeasured) using the exchange rate at the date of the transaction (historical rate)
o Non-monetary items at fair value or at current future exchange prices shall be translated
(remeasured) using the exchange rate at the date of the revaluation or fair value determination.
o Stockholders’ equity accounts are translated (or remeasured) using historical rates in effect at
the time equity were first recognized (date of investment) in the foreign entity’s accounting records,
except:
 Beginning retained earnings is set equal to the ending balance of last year.
 Dividends – historical rate on the date of declaration, otherwise, date of payment.
o Income statement items:
 Related to non-monetary items shall be translated (or remeasured) using historical rate
(either at the date of purchase for historical cost items or the date of valuation for items
carried at fair value)
 Related to monetary items shall be translated (remeasured) using actual rate (historical
rate); however, for practical reasons, an average rate may be used.
o Remasurement Gains or Losses should be reported as profit or loss for the period;
remeasurement gain or loss arising from revaluation of non-monetary item is taken to Other
Comprehensive Income if the revalution gains or losses are taken to Other Comprehensive
Income.
ILLUSTRATION

Assume that on January 2, 2020, P Company, a Philippine based company, acquired for US$2,400,000 on 80%
interest in S Company maintains its books in US dollars and they are in conformity with GAAP in the Philippines
(parent’s functional and presentation currency is the peso). S Co.’s financial statements are prepared in the local
currency unit (the foreign currency unit – dollars).

The translation process will be illustrated under two different assumptions:

1. The US dollars is the functional currency, and
2. The Philippine peso is the functional currency. The exchange rates for the US dollars for the 2020 fiscal
year are as follows:

Date Spot Rate

January 2, 2020 (Date of Acquisition) P40.00
September 1, 2020 40.10
December 31, 2020 40.25
Average for the fourth quarter 40.22
Average for the year 40.20

In translating the income statement accounts, it is assumed that revenues were generated and expenses were
incurred evenly during the year. It is also assumed that the company uses the FIFO cost flow assumption, and that
the ending inventory was acquired during the last quarter. The following accounts based on the adjusted trial balance
are given as follows:

Sales 3,624,000
 Cost of Goods Sold 2,220,000
Depreciation expese 120,000
Other Expenses 786,000
Income tax expense 98,400
Retained Earnings, 1/1/20 576,000
Dividends declared, 9/1/20 360,000
Cash 1,116,000
Accounts Receivable, net 729,600
Inventory (FIFO) 996,000
Land 600,000
Building, net 780,000
equipmen, net 516,000
Accounts payable 768,000
Short-term notes payable 762,000
Bonds payable 1,080,000
Common stock, P10 par 1,152,000
Paid in capital in excess of par 360,000

CASE 1: Functional Currency is the Local Currency Unit (US Dollars) – Current Rate Method

Combined Statement of Income Adjusted Trial Translation Adjusted Trial

and Retained Earnings Balance ($) Exchange Rate Balance (Pesos)
Sales 3,624,000 (A) 40.20 145,684,800
Less:
Cost of Goods Sold 2,220,000 (A) 40.20 89,244,000
Depreciation expese 120,000 (A) 40.20 4,824,000
Other Expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Net income to retained earnings 399,600 16,063,920
Retained Earnings, 1/1/20 576,000 40.00 23,040,000
total 975,600 39,103,920
Less: Dividends Declared, 9/1/20 360,000 (H) 40.10 14,436,000
Retained Earnings, 12/31/20 615,600 24,667,920

Balance Sheet
Cash 1,116,000 (C) 40.25 44,919,000
Accounts Receivable, net 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 (C) 40.25 40,089,000
Land 600,000 (C) 40.25 24,150,000
Building, net 780,000 (C) 40.25 31,395,000
equipmen, net 516,000 (C) 40.25 20,769,000
Total 4,737,600 190,688,400

Accounts payable 768,000 ( C) 40.25 30,912,000

Short-term notes payable 762,000 ( C) 40.25 30,670,500
Bonds payable 1,080,000 ( C) 40.25 43,470,000
Common stock, P10 par 1,152,000 (H) 40.00 46,080,000
Paid in capital in excess of par 360,000 (H) 40.00 14,400,000
Retained Earnings, 12/31/20 615,600 from above 24,667,920
Total 4,737,600 190,200,420
Foreign Currency Translation
Reserves Gain OCI - credit Balancing Amount 487,980
Total 4,737,600 190,688,400
Verification of the Translation Adjustment – Current Rate Method:
 Translation Reporting
US$
Exchange Rate Currency (Pesos)
1/2 Exposed Net Asset Position 2,088,000 40.00 83,520,000
Adjustment for changes in net asset
position during year:
Net Icome for year 399,600 40.20 16,063,920
Less: Dividends Declared 360,000 40.10 14,436,000
Exposed Net Asset Position Translated
using rate in effcet at date of each 85,147,920
transaction
12/31 Exposed Net Asset Position 2,127,600 40.25 85,635,900
Change in Cumulative Translation
Adjustment during Year - net increase 487,980
1/2 Cumulative translation adjustment -
12/31 Cumulative translation adjustment 487,980
A condensed balance sheet for S Company on January 2, 2020 was as follows:
US$ US$
Monetary Assets 1,320,000 Monetary Liabilities 2,160,000
Non-monetary Assets Common Stock 1,152,000
Inventory 912,000 Paid-in Capital in excess of par 360,000
Fixed Assets 2,016,000 Retained earnings 576,000
Total 4,248,000 Total 4,248,000

CASE 2: Translation into the Functional Currency (Philippines Peso) – Temporal Method
Adjusted Trial
Combined Statement of Income and Adjusted Trial Translation Balance
Retained Earnings Balance ($) Exchange Rate (Pesos)
Sales 3,624,000 (A) 40.20 145,684,800
Less:
Cost of Goods Sold 2,220,000 Schedule 89,041,680
Depreciation expese 120,000 (H) 40.00 4,800,000
Other Expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Net income before Remeasurement Loss 399,600 16,290,240
Remeasurement Loss -debit - Squeeze 242,220
Net income to Retaine earnings 399,600 16,048,020
Retained Earnings, 1/1/20 576,000 40.00 23,040,000
total 975,600 39,330,240
Less: Dividends Declared, 9/1/20 360,000 (H) 40.10 14,436,000
Retained Earnings, 12/31/20 615,600 from below 24,652,020

Balance Sheet
Cash 1,116,000 (C) 40.25 44,919,000
Accounts Receivable, net 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 Schedule 40,059,120
Land 600,000 (H) 40.00 24,000,000
Building, net 780,000 (H) 40.00 31,200,000
equipmen, net 516,000 (H) 40.00 20,640,000
Total 4,737,600 190,184,520

Accounts payable 768,000 ( C) 40.25 30,912,000

Short-term notes payable 762,000 ( C) 40.25 30,670,500
Bonds payable 1,080,000 ( C) 40.25 43,470,000
Common stock, P10 par 1,152,000 (H) 40.00 46,080,000
Paid in capital in excess of par 360,000 (H) 40.00 14,400,000
Retained Earnings, 12/31/20 615,600 Squeeze 24,652,020
Total 4,737,600 190,184,520
Schedule- Translation of Cost of Goods Sold:
Remeasurement
Accounts $ Pesos
Exchange Rate
Inventory, beg. (assumed) 912,000 (H) 40.00 36,480,000.00
Purchase (assumed) 2,304,000 (A) 40.20 92,620,800.00
Total 3,216,000 129,100,800.00
Less: Inventory, end 996,000 (A) 40.22 40,059,120.00
Cost of Goods Sold 2,220,000 89,041,680.00
Verification of the Translation Adjustment – Temporal Method:
 Translation Reporting Currency
US$
Exchange (Pesos)
1/2 Exposed Net Asset Position * 840,000 40.00 33,600,000
Adjustment for changes in net asset position during
year:
Less: Increase in cash and receivables from sale 3,624,000 40.20 145,684,800
Add: decrease in monetary assets or increase in
monetary liabilities:
Purchases 2,304,000 40.20 92,620,800
Other Expenses 786000 40.20 31,597,200
Income Taxes 98,400 40.20 3,955,680
Dividends declared 360,000 40.10 14,436,000
Net Monetary Liability Position translated using rate in
effect at date of each transaction 30,524,880
Less: 12/31 Exposed net monetary liability position ** 764,400 40.25 30,767,100
Remeasurement Gain (Loss) - 242,220
*The January 2, 2020 condensed balance sheet:
US$
Monetary Liabilities 2,160,000
Less: monetary assets 1,320,000
Net Monetary Liability Position 840,000

**See above:
US$
Monetary Liabilities (768k +762k + 1,080K) 2,610,000
Less: monetary assets (1,116K + 729.6K) 1,845,600
Net Monetary Liability Position 764,400

GOODWILL ARISING FROM THE ACQUISITION OF FOREIGN SUBSIDIARIES

PAS 21 provides that any goodwill arising on the acquisition of foreign operation and any fair value adjustments to
the carrying amounts of assets and liabilities arising from that acquisition of foreign operation shall be treated as
assets and liabilities of that foreign operation.

Illustration: VVL Corporation, whose functional currency is the Philippines peso, acquired the entire common stock
of JK Company, a Japanese company on December 31, 2020 at a cost of P2,000,000. At the date of acquisition, JK
Co.’s paid up capital and retained earnings were 3,000,000 yen and 5,000,000 respectively. The assets and liabilities
or JK Co. at the date of acquisition by VVL Corp. approximated their fair values except for building that was
undervalued by 100,000 yen. Deferred tax liability on the undervalued building was 20,000 yen. The exchange rate
on December 31,2020 was P 0.50 = 1 yen.

Translation of Goodwill and Fair Value Differential

Fair Value of Subsidiary
Consideration
Cash P 2,000,000
Less: Book Value of Stockholders’ JK Co. P 1,500,000
Retained Earnings 250,000 1,750,000
Allocated Excess (excess of cost over book value)
Less: Over/ Undervaluation of assets and liabilities
Increase in Building (100K yen x P.50 x 100%) 50,000
Increase in Deferred Tax Liability on Building (20K yen x (10,000)
P.50x100% 40,000
Positive excess: Goodwill P 210,000

Goodwill in Yen (P210,000 x 1 yen / P.50) 420,000 yen

Journal Entries:
Common Stock – JK Co. 1,500,000
Retained Earnings – JK Co. 250,000
1,750,000

Building 50,000
Goodwill 210,000
Deferred Tax Liability 10,000
Investment in JK Co. 250,000
Assume that the building is depreciated on a straight line basis over a period of 25 years. The exchange rate on
December 31, 2021 is 1 yen = P0.45; and the average rate for 2018 was 1 yen = P0.48.

Case 1: Current Rate Method

On Goodwill:
Goodwill on December 31, 2020 (420k yen x P.50) P210,000
Goodwill on December 31, 2021 (420k yen x P.45) 189,000
Translation adjustment loss on goodwill – OCI P (21,000)

Case 2: Temporal Method

On Goodwill:
Goodwill on December 31, 2020 (420k yen x P.50) P210,000
Goodwill on December 31, 2021 (420k yen x P.50) 189,000
Translation adjustment gain/loss on goodwill P0

FUNCTIONAL CURRENCY IS THE CURRENCY OF A HYPERINFLATIONARY ECONOMY

PAS 29 provides that the financial statements of an entity whose functional currency is the currency of a
hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be
stated in terms of the measuring unit current at the end of the reporting period.

Indicators of Hyperinflationary Economy:

Paragraph 3 of PAS 29 provides some indicators of hyperinflationary economy:

1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign
currency. Amounts of local currency held are immediately invested to maintain purchasing power;
2. The general population regards monetary amounts not in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency;
3. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing
power during the credit period, even if the period is short;
4. Interest rates, wages and prices are linked to a price index; and
5. The cumulative inflation rate over three years is approaching, or exceeds, 100%.

Restate-Translate Approach

 This approach requires that firstly, financial statement should be restated. Secondly, these statements are
translated.
 Restatement is made by applying a general price index.
o Monetary items are not restated that are already stated at measuring unit at the balance sheet date
are not restated.
o Assets and liabilities linked by agreement to changes in prices should be adjusted in accordance
with the agreement.
o All other asset and liabilities are non-monetary. Some non-monetary items are carried at amounts
current at the balance sheet date, such as net realizable value and market value, so they are not
restated. All other non-monetary assets and liabilities are restated.
o All items in the income statement are expressed in terms of the measuring unit current at the
balance sheet date. Therefore, all amounts need to be restated by applying the change in general
price index from the dates when the items of income and expenses were initially recorded in the
financial statements.
o A gain or loss on the net monetary position is included in net income. It should be disclosed
separately.
 For an entity whose functional currency is the currency of a hyperinflationary economy, and for which the
comparatives amount are translated into the currency of a different hyperinflationary shall be translated into
a different presentation currency using the following procedures:
o All amounts shall be translated at the closing rate at the date of the most recent balance sheet,
except that
o When amount are translated into the currency of a non-hyperinflationary economy, comparative
amounts shall be those that were presented in the prior year financial statements.

Illustration: VVL Co. operates in a hyperinflationary economy. Its balance sheet at December 31, 2020, follows:
FC
Cash 350,000
Inventory 2,700,000
 Property, plant and equipment 9000
Total Assets 3,950,000

Current Liabilities 700,000

Non-current Liabilities 500,000
Total Liabilities 1,200,000
Common Stock 400,000
Retained Earnings 2,350,000
Total Shareholders’ Equity 2,750,000
Total Liabilities and Equity 3,950,000

The General Price Index and exchange rates of peso to FC are as follows:
Price Index Exchange rate
2016 100 100
2017 130 130
2018 150 150
2019 240 240
2020 300 300

The property and equipment were purchase on December 31, 2018 and there is a six-month inventory held. The non-
current liabilities were a loan raised on March 31, 2020.
Restate-Translate Approach:

FC Price Index Restated (in Exchange Translated

FC) Rate Pesos
Cash (M) 350,000 - 350,000 1.75 612,500
Inventory (M) 2,700,000 300/270 3,000,000 1.75 5,250,000
PPE (N) 900,000 300/150 1,800,000 1.75 3,150,000
TOTAL 3,950,000 5,150,000 9,012,500

Current Liability (M) 700,000 - 700,000 1.75 1,255,000

Noncurrent Liability (N) 500,000 - 500,000 1.75 875,000
Common Stock (N) 400,000 300/100 1,200,000 1.75 2,100,000
Retained Earnings (N) 2,350,000 2,750,000 4,812,000
TOTAL 3,950,000 5,150,000 9,012,500

Economy Ceases to be a Hyperinflationary

When an economy ceases to be hyperinflationary and an entity discontinues the preparation and presentation of
financial statements prepared in accordance with this Standard, it shall 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. The entity must disclosed the fact that the financial statements have been restated, the price
index used for restatement and whether the financial statement are prepared on the basis of historical cost or current
cost.

HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS

 Paragraph 6.5.13 of PFRS 9 provides that hedges of a net investment in a foreign operation, including a
hedge of a monetary item that is accounted for as part of the net investment shall be accounted for similarly
to cash flow hedges:
o the portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge shall be recognised in other comprehensive income; and
o the ineffective portion shall be recognised in profit or loss.
 The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has
been accumulated in the foreign currency translation reserve shall be reclassified from equity to profit or
loss as a reclassification adjustment on the disposal or partial disposal of the foreign operation.

Illustration:

Assume that VVL Corporation, a Philippine corporation has 30% equity investment in Hongkong company, JK Inc.
On December 31, 2020, the balance in VVL’s investment in JK account is P3,120,000, equals to 30% of JK’s net
asset of 2,000,000 Hkg$ times a P5.20 year end exchange rate. On this date VVL has no translation adjustment
balance relative to its investment in JK. To hedge its net investments in JK, VVL borrows 500,000 Hkg$ for 1 year at
12% interest on January 1, 2021 at a spot rate of P5.20. The loan is denominated in Hkg$ with principal and interest
payable on January 1, 2022.

January 1, 2021
Cash 2,600,000
Loans Payable 2,600,000

Assume that on November 2, 2021, JK declares and pays 100,000 Hkg$ dividend, when the spot rate is P5.35. On
December 31, JK reports net income of 400,000 Hkg$. The weighted average exchange rate for the year is P5.30
and the closing exchange rate for December 31 is P5.40.

Hong Kong Exchange Rate Philippine Pesos

Dollars
Net Assets – 1/1/2020 2,000,000 P5.20 10,400,000
Comprehensive Income (12/31/21) 400,000 5.30 2,120,000
Dividends paid (100,000) 5.35 (535,000)
Translation Adjustment –OCI 435,000
Net Assets-12/31/2021 2,300,000 P5.40 P12,420,000

November 2, 2021
Cash 160,500
Investment in JK (100k Hkg$ x 160,500
P5.35x 30%)

December 31, 2021

Investment in JK 776,500
Income from Subsidiary (400k Hkg$ x 636,000
P5.35x 30%)
Translation Adjustment-OCI (P435,000 x 30%) 130,000

Translation Adjustment-OCI 100,000

Loan Payable [500k Hkg$ (P5.40 – P5.20)] 130,000

Interest Expense (500k Hkg$ x 12% x P5.30) 318,000

Forex Loss 6,000
Accrued Interest Payable (500k Hkg$ x 12% 324,000
x P5.40)

January 1, 2022
Loans Payable 2,700,000
Accrued Interest Payable 324,000
Cash (500k Hkg$ x P5.40 3,024,000
spot rate)

Disposal of a Foreign Operation

PAS 21 provides that on the disposal of a foreign operation, the cumulative amount of the exchange differences
relating to that foreign operation, recognised in other comprehensive income and accumulated in the separate
component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain
or loss on disposal is recognised.

C. CLOSURE ACTIVITIES

Problem 1: Certain balance sheet accounts of a foreign subsidiary of Parker company at 12-31-20 have been
restated into pesos as follows:
Current Rates Historical Rates
Cash 47,500 45,000
Account Receivables 95,000 90,000
Inventory, at market 76,000 72,000
Land 57,000 54,000
Equipment 142,500 135,000
Total 418,000 396,000

a) Assuming the functional currency of the subsidiary is the peso. What total should be included in Parker’s
consolidated balance sheet at 12-31-20 for the above items?
 b) Assuming the functional currency of the subsidiary is the local currency. What total should be included in
Parker’s consolidated balance sheet at 12-31-20 for the above items?

Problem 2: CC Corp. owns a subsidiary in Japan whose balance sheet in Japanese Yen for the last years follow:
December 31, 2020 December 31, 2021
Assets
Cash and Cash equivalents ¥ 30,000 ¥ 25,000
Receivables 122,500 147,500
Inventory 160,000 170,000
Property and Equipment, net 255,000 230,000
Total Assets ¥ 567,500 ¥ 572,500
Liabilities and Equity
Accounts Payable ¥ 55,000 ¥ 75,000
Long-term debt 322,500 285,000
Common stock 115,000 115,000
Retained earnings 75,000 97,500
Total Liabilities and Equity ¥ 567,500 ¥ 572,500

Relevant exchange rates are:

January 1, 2020 ¥ 1 = P 45
December 31, 2020 ¥ 1 = P 42.50
December 31, 2021 ¥ 1 = P 47.50
September 12, 2020 ¥ 1 = P 40
Average 2020 Y 1= P 43.75

CC formed the subsidiary on January 1, 2020. Income of the subsidiary was earned evenly throughout the years and
the subsidiary declared dividends worth ¥15,000 on September 12, 2020 and none were declared during 2019. How
much is the cumulative translation adjustment for 2021?

Problem 1: The following are taken from the records of EIB Imports Company, a foreign subsidiary in new Zealand,

NZ Dollar
Total assets 12/31/20 146,000
Total liabilities 12/31/20 45,000
Common Stock 12/31/20 60,000
Retained earnings 01/01/20 29,000
Net Income 2020 15,000
Dividends declared 12/31/20 3,000

Exchange rates:
Current rate P10
Historical rate 11
Weighted Average 12

The peso balance of retained earnings on 12/31/20 is P325,000

What amount of Cumulative Translation Adjustments is to be reported in the Consolidated Statement of

Financial Position on 12/31/20?

Problem 3: Abercrombie Co., a Phil firm, formed a foreign company in 2014 by purchasing the common stock of the
newly formed Dolce Inc. the functional currency of Dolce is the foreign currency (FC) During heir first three years.
Dolce experienced the following activity in retained earnings:
20x19 net loss 100,000 FCs
2020 net income 200,000 FCs
January 1 2021 Dividend 50,000 FCs
2021 net income 75,000 FCs
The following exchange rates were given:
Date 1FC equal to
12-31-19 P0.20
12-31-20 P0.22
Average 2020 P0.215
 01-01-21 P0.245
Average 2020 P0.24
12-31-21 P0.26
Average 2021 P0.25

Using the current rate method, what is the translated 12-31-21 balance of the retained earnings for Dolce
Inc?
Problem 4: A Phil l owned foreign subsidiary has the following beginning and ending stockholders equity for 2020:
January 1 December 31
Common Stock 120,000 FC 140,000 FC
Paid-in Capital in excess of par 30,000 40,000
Retained Earnings 60,000 100,000
210,000 280,000
The change in common stock resulted from a sale of stock to the parent firm on May 15. The changes in retained
earnings resulted from a July 1 dividend of 10,000 FC, and net income for 2020. Various exchange rates were as
follows:
Date 1FC equal to
January 1, 2020 P1.10
May 15, 2020 P1.12
July 1, 2020 P1.13
December 31, 2020 P1.15
2020 average P1.125
How much the 2020 translation adjustment for the foreign subsidiary?

Problem 5: XXX a Philippine company acquired 100% of the common stock of BB a Thailand company on January
1, 2020, for P402,000. BB subsidiary’s net income amounted to 300,000 baht on the date of acquisition. On the same
date, the book values of its identifiable assets and liabilities approximated their fair values. On December 31, 2020
BB company’s subsidiary adjusted trial balance, translated Phil. Pesos, contained P12,000 more debits than credits.
BB company reported net income of 25,000 baht for 2020 and paid a cash dividend of 5,000 baht on November 30,
2020. Included in BB subsidiary’s income statement was depreciation expense of 2,500 baht. XXX uses the basic
equity method of accounting for its in the BB subsidiary and determined goodwill in the first year and had an
impairment loss of 10% of its initial amount. Exchange rate at various dates during 2020 follows:
January 1 1 baht = P1.20
November 30 1 baht = P1.30
December 31 1 baht = P1.32
Average for 2020 1 baht = P1.24

On the consolidated statement 0f the financial position of XXX company as of December 31, 2020, what
amount should be reported for the goodwill acquired on January 1, 2020?

Problem 6: M company is a subsidiary of N Company and is located in a foreign country, Chile where the currency is
the foreign currency (FC). Data on M Company’s inventory and purchases are as follows:
Inventory, January 1, 2020 500,000 FC
Purchases during 2020 1,000,000 FC
Inventory 400,000 FC
The beginning inventory was acquired during the fourth quarter of 2020, and the ending inventory was acquired
during the fourth quarter of 2020. Purchases were made evenly over the year. Exchange rates were as follows:

Fourth quarter of 2019 1FC = P0.00148

January 1, 2020 1FC = P0.00152
Average during 2020 1FC = P0.00160
Fourth during 2020 1FC = P0.00162
December 31, 2020 1FC= P0.00165

The translation of cost of goods sold for 2020, assuming that the currency of a third country is the functional
currency is

Problem 7: PPP CO. operates in a hyperinflationary economy. Its balance sheet at 12-31-2020 follows:
Assets Baht (‘000)
Property, plant and equipment 900
Inventory 2,700
Cash 350
Share Capital (issued 2007) 400
Retained Earnings 2,350
 Non-current liabilities 500
Current liabilities 700

The general price index had moved in this way:

December 31
2016 100
2017 130
2018 150
2019 240
2020 300

The property plant and equipment was purchased on 12-31-18, and there is a six months’ inventory held. The no-
current liabilities were a loan raised on march 31,2020.
Required:
1. How much is the total assets after adjusting for hyperinflation?

2. How much is the Retained Earnings on 12-31-20?

3. How much is the Retained Earnings on 12-31-20? Assuming the following exchange rates:

December 31
2016 1.20
2017 1.24
2018 1.27
2019 1.50
2020 1.75

IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:

Net Assets @ Current/ year – end rate xx

Less: Net Asset @ roll-forward:
Net Assets @ rate of previous year – end xx
Add: Net Income @ Average Rate xx
Add: Dividends @ Rate of Declaration xx xx
Translation Gain or Loss, Bal. – OCI (Current Year)- Equity xx
Less: Translation Gain or Loss, Beg. xx
Translation Gain or Loss, Current Year (Statement of Comprehensive xx
Income)
 Where:

XG – exchange gain Assume: Philippines

(Parent Co.); and
XL – exchange loss U.S. (Subsidiary Co.)

Functional Currency Functional

is NOT the Currency Currency is the
of Hyperinflationary Currency of a
Economy (PAS 21: Hyperinflationary
20-40) Economy

Current Rate Method Temporal Method -

(Translation from Functional Foreign Operation is Restatement of F/S then
Currency to Presentation Consolidate
integral with parent's
Currency) - Foreign operation operation
operates independetly (PAS 21:
38-41)

XG/ XL 0f net monetary

Functional position - Net Income
LCU - $ Currency Peso

XG/ XL - Net Income

XG/XL - OCI

Currency of a Third
Country ( for example
(2) Then Translate Japanese Yen) (1) Remeasure first

V. EVALUATION

The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)

VI. ASSIGNMENT/ AGREEMENT

Dayag, Advanced Financial Accounting and Reporting 2019e

Dayag, Advanced Financial Accounting and Reporting Reviewer
VII. REFERENCES PAS 21 The Effects of Changes in Foreign Exchange Rates
PAS 29 Financial Reporting in Hyperinflationary Economies
Guerrero, Advanced Accounting 2017e

END OF CHAPTER 13