O° CS Chapter 19 The Effects of Changes Exchange Rat 'N Foreign es sated standard: / Re The Effects of | Changes in Foreign Exchay 1 ra 0 ofthe PERS for SMEs 8e Rates pearing Objectives j, Define an entity’s functional currency. | ‘Account for foreign currency transactions, | 4 Translate the financial statements of a foreign operation Introduction PAS 21 prescribes the accounting for foreign activities and the translation of financial statements into a presentation currency. Two ways of conducting foreign activities . Foreign currency transactions - &§» transactions that are to be settled in a forel transactions need to be translated to Philippine pesos they can be recorded in the books of accounts. 2 Foreign operations — e.g, a branch in another country. Ps overseas branch will normally maintain its accounting es and prepare its financial statements ina forign Bs Those financial statements need to be translate atte Pesos before they can be combined with the ° financial statements. import or export ign currency. These before lo a k Main accounting issues therefore, the principal hanging: are determining: Xchi igya 8 Fates are constantly chané *Sin the accounting for foreig” activitie hich exchange rate(s) to uses a” ‘Scanned with CamScannerto report the etfects of changes in exchange rates in thy c b. How financial st arements. Functional currency PAS 21 requires an entity to de currency, which isgatre cunreney (oe environment in which the entily operates.” (PAS 21.6) / This functional currency is the currency in which the and outflows are normally denominated into of the country where the entity stermine and disclose its functional of the primary economic entity’s cash inflows sarily the currency and is not nece: is based. ‘An entity considers the following factors e s functional currency: influences the entity’s sale prices and (in descending, order) when determining i a. the currency that mainly costs of goods or services (primary factors) b. . the currency in which cash flows from financing activities and operating activities are usually generated and retained (secondary factors) Additional factors are considered in determining the functional currency of a foreign operation, such as whether the foreign operation is essentially an extension of the entity (and therefore the foreign operation’s functional currency is fhe same as that of the entity), the proportion of the foreign operation's transactions with the entity, and the nature of the foreign operation's cash flows in relation to the entity. Once determined, the functional currency is not changed unless there is a change in underlying transactions, events and conditions. In such cases, a change in functional currency is accounted for by translating the financial statements into the new functional currency prospectively from the date of change. I currencies other than the entity’ ional are considered foreign currence ee ene Saree) 7 ‘Scanned with CamScanneri EXcCHange Rates tion 1: Primary and Secondary factors ust isa mining company re 0. isa |B iradted in the Toronto Stock Exchange. gistered in Canada wi hose ABC's oj er mines in the shares Perating Philippines, ae a ties take place in the gold and sily, tive astion: What is the functional currency of ABC Co,? questi? q iswer ABC's functional currency is likely to be Philippine pesos, qven though the company is based in Canada. This is because its operating activities take place in the Philippines and so the company will be economically dependent on the pesos if most of itssales and operating expenses are in pesos, Question: What is the presentation currency of ABC Co.? 7 Presentation currency — is the currency in which the entity's financial statements are presented. Answer: ABC's presentation currency is Canadian dollars. This is a Tequirement of the Canadian financial markets regulator for listed Companies in Canada. PAS 21 requires ABC Co. to prepare its financial statements in pesos (functional currency). However, when ABC files "Ss financial statements with the Toronto Stock Exchange, it shall ‘enslate its. financial statements to the Canadian dollars ‘presentation currency). A ining equipment from Question: ABC acquired specialized mining eer ; qi ype of currency is the “Pan, invoiced in Japanese yen. What type “Panese yen under PAS 21 definitions? or than the entity’s i is currency other t reign currency — is a curre functional currency, rrenct r the freien currency for "Ser: The | panese yen is deemed a fore’s" : The Japanese yen is "Pose of preparing ABC's accounts. ‘Scanned with CamScanneret rs iilustration 2 aa ranch of ABC US. Co. ABC Phitipping ABC Philippi pine Economic Zone Authority (PEZA) Speci a ABC. Philippines is engaged in the apparel ts raw materials are imported from the i and all of its finished products are exported ers. The U.S. customers remit payments : the US. main office. The U.S. main office will then provide the Yuilippine branch its working capital needs. None of Age ished products are sold in the Philippines. The ray d finished goods exported are denominated operates in Economic Zone. busine All of t i J office in the US. directly to U.S. custom lippines’ fini erials imported an in US. dollars. : What is ABC Philippines Co.’s functional currency? Q: Z Using the primary factors listed earlier, ABC Philippines Co's functional currency is the U.S. dollar because this is the currency that mainly influences ABC Philippines Co.’s sales prices and costs of goods sold. Additionally, ABC Philippines Co. is essentially an extension of the U.S. main office. Therefore, ABC Philippines Co.'s 1 currency is the U.S. dollar, i.e., the same with the main ‘unctional currency. : What is ABC Philippines Co.’s presentation currency? : ABC Philippines Co.’s presentation currency is. the Philippine peso. : ABC Philippines Co.’s_ annual financial ents to be filed with the Philippi E e Phil SE ¢ BIR shall be Presented in Philippine pesos, ae sec a ctanee in functional currency yuan. After several none in China, where the currency is i Product £0 the Phikne ny BC Co: expanded and exported < ppines, and conducted business through @ ‘Scanned with CamScanneranch: The functional currency of the Broup paren but by the end of 20x1, goy, sy Wt? deme ted in the PhITAPpINCS, AL the ty the as conducted in Philippine pe d to be business was sinning of 0x1, 309 ‘S08, 1, 30% of the the cond pusiness On December 31, 20x1, should the yestion® remain as yuan or changed to the §roup’s functional Philippine peso? Q currency ansivel The functional currency should be changed to Philippine pesos at a: - ? pesos al the end of 20x1 if it is considered that the underlying transaction: cents, and conditions of business have changed. : The succeeding discussions are sub-divided in two parts, namely: 1. Foreign currency transactions (individual entities) 2 Foreign operations (group of entities) Foreign currency transactions A foreign currency transaction is “a transaction that is denominated or requires settlement in a foreign currency.” (PAS 21.20) Examples: purchase or sale of goods, services or other éssets at a price that is denominated in a foreign currency, and owing, lending or settling receivables or payables at amounts are denominated in a foreign currency. \ Mtlal Recognition ‘oreign currency transaction is. initially recognized by amount into the functional “anslating th . : . % the foreign currency i ° at the date of the us rate Y using the spot exchange Saction, for immediate Spo; . , ne rate Pot exchange rate is “the exchange Fat a rent exchange rate on a "(PAS 21.8) ...0r simply, the cur Biven date . date, ansaction first shicl > tr sn which the i h PERSS.” (PAS 21.22) Date © of a transaction is “the date , wi SWalifies for recognition in accordance ‘Scanned with CamScanneri »xample, goods acquire TOF 241VUU eee initia, For e translating the $100 into pesos using the ay rate on the date of acquisition. " ctical reasons, an average rate (eB. fora res, ong e used for all transactions occurring during ie if exchange rates fluctuate significantly, the = period is inappropriate. s recognized by exchange For pra month) may b riod. However, pel rate fora of the average Subsequent Measurement ; / ‘At each reporting date, the following items are translated a. follows: Items Translated using | a._Monetary items > Closing rate b. Nonmonetary items > Exchange rate at the date of measured at historical cost transaction c. Nonmonetary items >» Exchange rate at the date measured at fair value when the’ fair value was, determined. * Closing rate - the spot exchange rate at the reporting date. Monetary items vs. Non-monetary items > Monetary items are currencies held and assets and liabilities t be received or paid in a fixed or determinable amount df money. None . 7 Non-monetary items are those which do not give rise © the recei cipt or payment of a fixed or determinable amount © money Examples: =xamples: . oo etary asse Fi a. Cash ped Non-monetary items | ash e — sh equivalents a. Inventories Nts/Notes/Loang b b. receivable and . Prepaid assets int | allowance theirrelated | ¢. Property, plant & equipm™ | Sand other len eae ——l ‘Scanned with CaScannerpanied sets measured at | d. Investment property ortiz C05 €. Intangible assets Finance an seeetevee f. Goodwill cash surrender value Provision: A ‘Accounts/Notes/Loans/Bonds non-monetary pane a payable and other financial hi Share capital and share liabilities measured at premium amortized cost | . Employee benefits to be paid } incash. ¢. Provisions and accrued payables to be settled in cash. . Cash dividends payable pot exchange rate vs. Closing rate current éxchange rates on September 1, 20x1 and December 1, 20x1 are the spot exchange rates on those dates. If the entity ses a calendar year period, the closing rate is the exchange rate December 31, 20x1. irect vs. Indirect quotation change rates may be either stated in: Direct quotation — the exchange rate is stated in how much of a local currency must be exchanged to receive one unit of a foreign currency, e.g., “P45:61.” Indirect quotation — is the opposite of direct quotation. The exchange rate is stated in how much of a foreign currency Must be exchanged to receive one unit ora local currency, €.8.- “P1:$0,022." converted to an indirect A direct quotation can be lation (or vice versa) through division: _ - Direct quotation | Conversion | Indies quotation — P45:$1 | gle p45) | P1:$0.02: ‘Scanned with CamScanner| Conversion | Direct quotation | Pat Exchange Differences Exchange difference is “the jven number of units of one 8 ” 5 different exchange rates.” (?AS21.8) difference resulting, from (ranslating in) currency into another currency ap arising from settling or translating: Exchange differences 5 din profit or loss in the period in a. Monetary items are recognize which they arise. > When a foreign currency transaction occurred in one period and settled in another period: i. the exchange difference between the transaction date and the end of reporting period is recognized in the period of transaction, while ii, the exchange difference between the end of the previous reporting period and the date of settlement is recognized in the period of settlement. > When a foreign currency transaction occurred and settled in the same period, all the exchange difference is recognized in that period. b. Nonmonetary items — if the gain or loss is recognized in ¢ ; comprehensive income (OCI), the exchange component e Bain or loss is also recognized in OCI. Conversely, if the 7” or loss is recognized in profit or loss, the exchange comp is also recognized in profit or loss. Illustration 1; e On Novem Foreign currency transaction - Purchase Purchase ac 28, 20x1, ABC Co. placed a non-cance cr with a company. based in France #0 ‘Scanned with CamScannerpine for €10,000. The contract term is pac! ine was shipped on December 1, 2 4 on December 15, 20x1. The pura 3, 20x2. a january _jpefallowing are the exchange rates: November 29, 20x1 _pacumber 1, 20% “December 15, 20x1 “| pecember 31, 20x1 January 3, 20x2. Requirement: Provide the journal entries. aoe shipping point. The ; i and Was received b vase price was settled on . * No entry is made on the date of the purcha as purchase is recorded on December 1, 20% , kcause the contract term is FOB shipping point. Solution: Nov, 29, 201 No entry ; Machine (€10,000 x P58) 580,000 “ Accounts payable 580,000 to record the purchase of machine on an FOB shipping point term Accounts payable 10,000 Foreign exchange gain 10,000 to recognize the excliange difference "Notes: se order. 0x1 (shipment date) at exchange rate the purchase is initially recognized at the sp* "December 1 A -€ . er 1, 20x1 (ie., P58:€1)- i The foreign exchange (FOREX) gain oP December 15, 20x1 ! a “mputed as follows: 7 1580000 Aeena® Payable ~ Dec, 1, 20x1 (€10,000 88) 370,000 || dg tS Payable ~ Dec. 15, 201 (€10.000 857) —ia000 "Sein accounts payable ~ FOREX gai" ‘Scanned with CamScannerThe FORE. gain is recognized in profit or loss, Preferably as part of financing: » The cost of the initial recognition. | Foreign exchange loss 30,000 = Accounts payable 30 to recognize the exchange difference | machine is not re-translated subsequen, to The foreign exchange (FOREX) loss on December 31, 20,1 i, computed as follows: Accounts payable ~ Dee. 15, 20x1 (€10,000 x P57) 570,000 ‘Accounts payable — Dec. 31, 20x1 (€10,000 x P60) P 600,00 Increase in accounts payable - FOREX loss _PG0,000) pay (30,000) Jax. | Accounts payable (P580K ~ P10K + P30K) 600,000 on , Foreign exchange loss (squeeze) 10,000 Cash (€10,000x P61) 610,000 to record the settlement of the purchase transaction “| © Notes: The effects of the transaction in profit or loss are analyzed « follows: FOREX gain ~ Dec. 15, 20x1 . P 10,000 PORE loss - Dee. 31, 20x1 (30,000) Ve o — let FOREX loss recognized in 20x1 ~ reo,00 FOREX los: ized i ° " 85 recognized in 20x2 = (Jan, 3, 20x2) __Pagune otal net FOREX loss on the transacti 0) nsaction toe Monetary i yns are ary items arising f, sactio Y arising from foreign currency trans: tions translated on initi subsequent ® initial recognition and re-translated a © Nona! period until settlement date. -moneta i vom etary items arising from foreign at e are measured using historical cost ency transacti curren sactions : ns th: a ‘Scanned with CamScannera — — jated-on initial recognition . and are ont periods. Me trams! gubseque NOt re-translated in stration 2: Foreign currency transacti usta action ~ Direct quota quotation — gale dy November 29, 20x1, ABC Co, received from 7 -cance aT a UK-based jompany @n0N cancellable sale order for inventories with a sal ” Sale priee of £10,000 (pound sterling). The contract term is FOB chipping point. The inventories were shipped on December 1 2x1. The sale was settled on January 3, 20x2. 4 The following are the exchange rates: November 29, 20x1 December 1, 20x1.. December 31, 20x1 January 3, 20x2.. Requirement: Provide the journal entries. Solution: | No entry [eae = 5 - = 00 | Accounts receivable (£10,000 x P68) | 680,000 | Sale to record the sale of inventories on an FOB __t rae shipping point 39,00 | | , 20,000 Accounts receivable Foreign exchange gai" | to recaguize the exchange differeme —— yx Pos) wos 7) ivable — Dee. 1, 2081 (E1008 CCOUNtS receivable ~ Dec. 31, 2081 10% Neve, 2X gait Tease in accounts receivable ~ FOREX S Accounts rec nt to it po-translated subseque ne Notice that the sale is "? ‘al recognition. ‘Scanned with CaScannerTAO,000 j wi) fan] Cals C1 naam « 2K) 70 eonntn receiv ( fee change wait (ogee) ane _ Fc ent of Ie parton Ht - a _ si reaund ty octtement a Hee MeL | fF the transaction 1 profit or loss are analyzed ay The effects 0 : ; POREN 31, 20x P 20 i i sain recognized 20x (Dee, 31, 20: Dp 200 Tor X lows vecoguized 0x2 = (Jan. 3, 2082) a 1000 RIX loss ree ; x Total FOREX gain on the transaction 0 iilustrations above that only ABC Co, : the Deere The counter-parties (ic recognizes FOREX yains/losses. the { company) do not recognize French company and the UK-bi FOREX — gains/lo: FOREX gains/losses arise only when transactions are to be settled in foreign currency. 1.1 Remember the following: © An inercase in payable results to loss. © An increase in receivable results to gain. Mlustration 3: Foreign currency transaction - Indirect quotation ABC Co, had the following transactions during the period: * Purchased raw materials from Pakistani Co., a company based in Pakistan, for 100,000 rupees on December 17, 20x1 to be settled on January 5, 20x2. Sold inventory to Swedish Co,, a company based in Sweden, for 20,000 kroners January 5,20%2, on December 20, 20x1 to be settled on re » £0x2, The exchange rates are as follows: Rupee Dec. 17, 2044 fT 7 Kroner Dec. 20, 20.4 MP I:PKR 2.04 Dee. 31, 20x) .Php 1: Jan.5, 20%0,. Php d: PKR P Php 1: SEK 0.2000 Php tp PL PKR 2.053 Php. 1:SEK 0.2400 ‘Scanned with CaScanner| a I 465 pesuireert5: 5 How much are the FOREX gaingjoace " Co. from the purchase and sale ieee How much are the total FOR “prized by ABC described above? EX pains/| Pakistani Co. and Swedish Co. from ee recognized by transactions, respectively? Purchase and sale Solutions: Requirement (a): FOREX gain/loss recognized by ABC Co Purchase transaction with Pakistan Co. Accounts payable ~ Dec. 17, 20x1 (rk 100,000 PER 208) "49,020 Accounts payable - Dec. 31, 20x1 (PKR 100,000 + PKR 2) 50,000 Increase in accounts payable — FOREX loss in 20x1 "980 Accounts payable — Dec. 31, 20x1 (PKR 100,000 + PKR 2) "50,000 Cash paid on settlement - Jan. 5, 20x2 (PKR 100,000 + PKR 2.043) 48,008 Decrease in accounts payable — FOREX gain in 20x2 11,992 Total net FOREX gain on the purchase transaction TOI Sule transaction with Sweden Co.! : 1119.97 Accounts receivable - Dec. 20, 20x1 (SEK 20,000 + SEK 0.1667) aot Accounts receivable - Dec. 31, 20x1 (SEK 20,000* SEK 029) rag) “crease in accounts receivable - FOREX loss in 20x1 ——_ ; 100,000 “counts receivable - Dec. 31, 20x1 (SEK 2009 60 83,333 A "eccived on settlement - Jan. 5, 20x2 (SEK20, ees - 16 657, Dep . in 20% “Tease in accounts receivable - FOREX loss 36683 pas Tos 7 “| FOREX oss on the sale transaction istani Co» and swedish Co- on Co. will not recognize any vedish tions 4 Zero, Pakistani Co. and swedis eT ali Bain/loss on the transactions Pea “Mirement (by: FOREX gainltoss by Pal An; iy eee ‘Scanned with Camicanner466__ — F jonal currencies, not fore; eit respective funct! ly in thel in settled currencies: ndirect quotation CC nb a Philippine-based compa he year «en exchange gain On its $1,000 receivable ang ; da ee onits 100,000 payable. If exchange rates aid ange loss (ie., $x : P1.00 and Yor : Plog) i tions irect quota . ), n been the movements in the exchange tajes Hlustratio' During, recognize 04 foreign exchan expressed in im what would h during the period? Analysis: wtb For a FOREX gain to be B dollars should have been received. For that to happen, the indirect quotation should decrease. recognized on the receivable, mor Let us assume the following information: $.020:P1 $.018:P1 (decrease) Exchange rate at initial recognition Exchange rate at settlement....... Receivable on initial recognition: ($1,000 + $.02 £50,000 8 ($1, $.020) Receivable on settlement date: ($1,000 + $.018) FOREX gain For a FOREX loss to be recognized on the payable, more yer should have been paid. For that to happen, the a quotation should also decrease Let us assi 'S assume the following information: "xchange rate at initial re Exchange rate at settle Sn "0 p58 I lement 1.50:P1 (decreas) Payable on in 7 i tial re iti oe nee Mal recognition: (¥ 100 ss Forex N settlement date: : ana . X loss 'e: (¥100,000 + a | ¥1.50) os ; ‘Scanned with CaScanner6 TEENY ase, and rates are decrease and decry respect Pecivedy nS y ‘| range yensonP |e jiustration 5; Subsequent measurement rn December 1, 20x1, ABC Co, 4 acquired eauinrne i! F Oo (Brazilian reals) when the exchange fe in Pe, He " reported foreign exchange Joss of P20,000 in its he sate : ° 7 Malas piaegit | oto loss and a P5,000 foreign exchange pain of P5144) in we yy J th its nx? statement of profit or loss. Requirements: Compute for the following: a. Exchange rates on December 31, 20x) and on wttlement date in 20x2. b. Carrying amount of accounts payable in the 201 statement of financial position. c. Cost of equipment in the 20x] and 20x2 statements of fina. position. Solutions: Requirement (a): Exchange rates Accounts payable — Dec. 1, 20x] (BRL 10,000 x24) Accounts payable — Dec. 31, 20x] (squeeze) Increase in accounts payable ~ FOREX loss in 20x1 (given) P2490) Accounts payable — Dec. 31, 20x1 Divide by: "xchange rate on December 31, 201 Accounts payable - Dec. 31, 20x1 (see above) “sh paid on settlement — 20x2 (squteez) “ease in accounts payable ~ FOREX gain 0x2 (given) ¢ £233,008 @h pai 21.10,000 | Paid on — 20x2 BRL10/ Divig settlement 5 5: BRLL le by: F255 BE ‘Xc} hange Tate on settlement date ‘Scanned with CamcannerJon ¢~ Dec. 31, samt of Acetate parable Dec 20x14 pont CD): Cary ae vend anwoist ab) 200,000 (eee sl of equipment ~ 20x1 and 20% 1 fc Cost 1p inithal recognition) Requirement! 000 x P2A exehany yo rate 0} 240,000 (10, “e ate on initial recognition ange rate on iF opnit a . tained a $10,000 loan at the middle of the year. At the eerie the loan payable 4s appropriately reported at year, z priately rey 550,000, None of the principal on the loan nee been Paid during te wear, There has been a 10% increase in the exchange rate tpn ation) from the date the loan has been Inlustration 6: Exehy end of the (expressed in direct quot oblained to the end of reporting period. Requirement: What is the exchange rate at the date the Joan was obtained? Solution: £550,000 + $10,000 = 2 P55 + 110% = PSI 1 exchange rate at the end of reporting period. : $1 exchange rate on initial recognition Illustration 7; Loan transaction On July 1, 20x, ABC Co. obtained a $10,000 loan that bears 10°% annual interest when the spot exchange rate is P50:$1. The closing Fate on December 31, 20x1 is P55:$1. No payments had been made on the loan during the year, : Requirement; Compute for the foreign excha i tbe exchange gain/loss recognized in the ye ‘oe arend statement of profit or loss. Solution Carrying amoun Loan payable Interest Pay Total payab ts at initial exe hange rate: ($10,000 x »50) ane able ($10,000 10% x 6/12 x p50) i an NZ x P50) bles at j eS at initial exchange rate 5 ‘Scanned with Camcannera ying amounts at closing rate: yin a es payable ($10,000 x P55) interest payable (510,000 » 10% » 6/12 x p55) 550,009 otal payables at closing rate 3 , 577,500 iperease it payables - FOREX toss NT Ilustration 8: Cash account ABC Co., a domestic corporation based in the Philippines, frequently sells goods overseas through the internet, i sales are on cash basis. The movements in ABC’s US dollar account are shown below: Cash in bank - U.S. dollar Jan. 1 (P48:$1) ~ $10,000 | Sept. 30 (P45:$1) 20,000 5,000. Dec. 16 (P44:51) $25,000 Dec. 31 (14551) Requirements: Compute for the following: a Amount of cash in bank to be presented in the year-end statement of financial position. b. Net foreign exchange gain or loss to be re end statement of profit or loss. ognized in the year- etirement (a): Cash in bank at year-end 5,000 x 945) = 1,125,000 Requirement (b): Net foreign exchange gain or loss” im The unadjusted balance of the cash in bank acon d ilippine pesos using, spot exchange Fale on transa etermined t translated to ction dates 15 rat as follows: CIB in Philippine pese® Ting balance 480,000 Spt. 30 (45:51) 00,000 es (rss) Dec. 16 220,000 fj. bal.) Dec. 31 (wna ‘Scanned with CamScanner© Chapter 10 4x - unadjusted balance 11,160,000 5,000 x P45) —LI25,000 reign exchange loss 35,000 ak at closing rate (s. Decrease in cash it bank - Net fo Ivzed as follows: REX loss is ane! 7 ‘Cash in bank ($20,000 x p45) 900,000, 900,000 Expenses (3,000 x P44)? a FOREX loss 20, Cash in bank (5,000 x P48)? 240,000 Dec.31 | FOREX loss* 15,000 - Cash in bank 15,000 “The withdrawal is assumed to have been made to defray expenses, » It is assumed that the amount withdrawn is from the opening balance, i.e., FIFO. «Cash in bank at spot exchange rates at dates of transaction: Opening balance net of withdrawal ($10,000 - $5,000) x P48. 240,000 Cash sale ($20,000 x P45) 900,000 Total 1,140,000 Cash in bank - adjusted yr.-end balance ($25,000 x P45) FOREX loss ~ year-end adjustment Total FOREX loss (P20,000 + P15,000) = P 35,000 lustration 9: Average rate On December 15 n December 15, 20x1, ABC Co. sent one of its key management aaa 0 @ seminar in Malaysia, ABC Co. advanced MYR ue ) (ringgits) to the manager subject to liquidation. The ‘enge rate on December 15, 20x1 is Pld: MYR1 The liquidation re following pert submitted by the key manager showed the * MYR 8,000 we ‘spent from December 15 to December 3! 1. The exchange ‘wexchange rate on December 31, 20x1 is P13: MYR 1. ‘Scanned with CamScannerAo fr 471 ere spent from yr 1,900 were SP January 1, 20.2 to Jan "re manager returned the MYR 500 excess \ mary 3, 20%2, 3, 20x2. The exchi ‘© the cashier january 3? ange Tate on January 3, 2009 is pro. wyRt ° gaguireerts: Compute for the following: : FOREX gain or loss on December 31, 201, h FOREX gain or loss on January 3, 20x2, Solutions: Requirement (a): FOREX gain or loss on December 31, 20x1 Advances spent at initial exchange rate (MYR 8,000 x P14) 112,000 Advances spent at average rate (MYR 8,000 x P1335") 108,000 Decrease in advances receivable - FOREX loss ~ Dec. 31, 20x1 4,000 * average rate = (P14 + P13) +2=P13.5 Advances unspent at initial exchange rate (MYR 2,000 x PI4) 28,000 Advances unspent at closing rate (MYR 2,000 x P13) 26,000 | Decrense in advances receivable — FOREX loss ~ Dec. 31, 20x1 ___2,000_ Total FOREX loss — Deé. 31, 20x1 (6,000 + 2.000) oe The perti nent entries are: 0,000 De 15, | Advances to officer (10,000 x P14) 390) 140,000 20x1 {_—__———* tot — aoa 108,000 an Expenses (8,000 x [(P14 + P13) * 21 4,000 FOREX loss. 112,000 a __Advances to officer 6108) 5 gg rd REX Loss [2,000 (tla P11 |___ 2,000 —~ Advances to officer ____— aaa ih 3, 20x2 Kequirement (b): FOREX gain or loss on January . 13) 19,500 Advan, ; 2 (MYR 15008 PE) 18,750 ces spe ious closing Fale . 75 spent at previous ¢ in so? pl? fa vances . Nees spent at average rate = 20x2 ase in advances receivable ~ FORE x loss — Jan 5: ‘Scanned with CamScannerrevious closing rate (MYR 500 x p13) 2 t 7 . ‘advances unspent die vate on Jar. 3, 20%2 (MYRS0O x P12) : advances USPY ioable - FOREX loss Jan. 3, 20x2 a crease in advance : = 2 (750 + 500) xX Joss - 20x 8 Total FORE! “The pertinent emis a 8 | The Expenses jx [(P13 + P12) * 2) a | yar. 3, : 2m2_| FOREX loss 70 ) ‘Advances to officer (1,500 x P13) = yan.3, | Cash (500% p12) =a | 20x2. | FOREX loss 0 ) Advances to officer (500 x P13) al Items measured at other than historical cost Some items are measured at other than historical cos i accordance with other relevant PFRSs. For example, a. Inventories are measured at the lower of cost and rm realizable value in accordance with PAS 2 Inventories. b. Property, plant and equipment are measured using either te cost model or revaluation model in accordance with PAS! Property, plant and equipment. Non-current assets are measured at the lower of amount and recoverable amount in accordance with e Impairment of Assets. foreign curr Comparing. a, (ie, the rate Measured in to the ne Ie hle "anslateg at value or recoverable amour, © exchange rate at the date whe the cost oF egy exchange When Tate at the realiza Tying amount, as appropriate, date when that amount wa an iv at the date of the transaction , ™Ms of historical cost); and 5 . red? Such an asset is non-monetary and is meas e] 7 . 1e% Mey, the carrying amount is dete™" ihe at transiated int! oF as ot vat ‘Scanned with CaScanneroo 3 was determined (e.g. the closing rate repo vrting period). at the end of the The effect of this comparison may be that . is recognized in the functional currency but din the foreign currency, or vice versa. an impairment would not be Joss ecognizZe’ Illustration: Items measured at other than historical cost ABC Co. had the following foreign currency transactions during the year: + Acquired equipment on January 1, 20x1 for THB 10,000 (bahts) from a Thailand-based company when the current exchange rate was P1.2: THB 1. The equipment is depreciated over 5 years using the straight-line method. + Purchased inventories on December 1, 20x1 for ZAR 1,000 (rands) from a company based in South Africa when the current exchange rate was P5: ZAR 1. Both the acquisitions described above are on cash basis. At year- end, ABC Co. determined the following: * The equipment was found to have a re THB 7,000. The closing rate is P1.3: THB 1. * Half of the inventories purchased remail estimated that the net realizable value of the inventories is ZAR 300. The closing rate is coverable amount of in unsold. ABC unsold Requirement; Provide the year-end adjustments. Soluti ions; at original spot Fate ‘Wipment at carrying amount translated 960) (10,000 x pment t rate “qui lated at the spor T° ‘Mpment at recoverable amount translated in Ps fihen the recoverable amount is determined, oo ©, Dec a = Dee. 31, 20x1 (7,000 x P1.3) res _-500 “ase in carrying amount ~ Impairment ‘Scanned with CaScannerin _ — t translated at original spot rate i ml I tory at carrying ames aaa ‘a " sd at the spot rate uons!875) ape value translated : p Fe al is determined, inventory ab net able value is deters when the net eallZ 9 “as 5 Laon a event a Impairment loss 700 » in carrying ame Decrease in carryi jes are as follows: The year-end adjusting entries: are as follows:_ sii D ipairment loss Dec. | Impairment loss a . 31 Accumulated impairment loss to recognize impairment it equipment “ai Dec. Impairment loss os 31 Inventory fo recognize inventory write-down Observe that the losses are charged as “impairment loss” and not as “FOREX loss.” Several exchange rates When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date. If exchangeability between two currencies is temporarily lacking, the rate used is the first subsequent rate at which exchanges could be made. ae Exchange Tates may also be classified as either buying ae a wing and selling rates refer to the rate a currency rr (e.g.,aba i ili 8a bank) is willing to Pay or sell a currency. Example 1 You have 1009 US doll dollars to pesos, The by P43 refers to buying TF you 80 to a bank to exchange Yo" ank gives you P43 for each dollar you have rate, Example 2 You ol Purchased 9, Me €d goods Worth 19 “tS. You go to 4 US @ bank to pur 0 US dollars to be settled in U chase 100 US dollars to be used ™ ‘Scanned with CamScannerhe purchase of goods you have made. Th ing t colt ing ar for every P45 you have, P45 re ¢ bank gives yusdoll Bives you fers to selling rate, examples above, the bank m; the a it purchases and sells, lakes Profit of p2 for every dollar et a0 Given different rates, an entity shall use th ipoxpects t0 realize or settle a transaction, Accord) expects to realize a foreign cu rrency recei ne rate at which ingly, if an entity ; ivable by exchanging the joreign currency with a currency broker, then the exchange rate to peused is the buying rate. On the other hand, if an entity expects to settle a foreign currency payable by purchasing foreign currency from a currency broker, then the exchange rate to be used is the selling rate. illustration: Buying and selling rates ABC Co. had the following foreign currency transactions on April 1,20x1: ; * Purchased goods worth CHF 10,000 (francs) from Swiss Company, a company based in Switzerland. ae * Sold goods with sale price of VEB 1,000 (bolivars) to Venezuelan Company, a company based in Venezuela. Both the transactions were settled on April 30, 20x1. The following “ere the spot exchange rates: Buying Selling Franes ‘ mila p44:CHFL re Pr, 20.4 cord. eal ps0. CHEL Pn 3g, 20x1 C va riz: CHEL sons p10.CHEL oes mci ple: CHEL APH 30, 201 noc FOREX ga loss from the ne e FOR s 7 arements Compute for th “aNsactions, Sclutions: ‘Scanned with CamScannerase transaction: 720,000 FOREX loss rue 148 selling rate)| > {10,000 x (P50 selling rate ~ Sale transaction: ee [1,00 x (P13 baying rate = p10 buying rate)] = 23,000 F OREX gain d “sell” are interpreted from the point of The terms “buy” an bank. =\ Guide: ncy broker, ¢-8 view of the curre! recognized in ocl a non-monetary item is recognized in other any exchange component of that gain or comprehensive income. ain or loss on a non-monetary any exchange component of d in profit or loss. losses to be Exchange differences When a gain or loss on comprehensive income, loss is recognized in other c On the other hand, when a §; item is recognized in profit or loss, that gain or loss shall also be recognizes Other PFRSs require some gains and recognized in OCI. For example, PAS 16 requires some gains and losses arising on a revaluation of property, plant and equipment to be recognized in OCI. When such an asset is measured in a foreign currency, PAS 21 requires the revalued amount to be translated using the rate at the date the value is determined, resulting in an exchange difference that is also recognized in ocl. Illustration: Revaluation of asset On Ja On Jeriary 1, 20x1, ABC Co. acquired equipment for MWK La one (kwachas) from a company based’ in Malawi The Some estimated useful life is 4 years. ABC Co. uses the ght line method of depreciation and the revaluation model. On December 31 31, 20x1, the 0 have equipment was determined t net appraised val value of rates are as follows: ea “ Jan. 1, 20x1 Dee. 31, 20x1, .P0.20: MWK 1 0.26 : MWK | ‘Scanned with Camcanner: ide the «nents Provi year-end go entry to accoy vam Int for the salto” A praised value of equipment ~ Dec. 31, 20x] (1.2M x p0.26) careying amt of equipment — Dec. 31, 20x1 (1M x 020) ey 312,000 peoaluation surplus ~ recognized in OCI “150,000 | 1 162,000 tinent entry is: Equipment a 762,000] Revaluation surplus | 162,000 to recognize revaluation surplus ; 00 | Translation of Financial Statements Anentity is required to present its financial statements using its functional.currency (i.e., Philippine pesos). However, whenever needed, the entity may translate its financial statements into any presentation currency (e.g., Japanese yen, US dollars, etc.). Example 1: ABC Co, is a stand-alone entity (i.e., itis not part ofa group)- ency and prepare its However, ABC is re-present * oa shall determine its functional cu nancial statements using that currency: Permitted to translate its financial statements and them in any other currency (presentation currency). "Co, j s a subsidiary oo is a parent based in the 7 In Hongkong, philippines: It ha its functional jal statements cS functional each determine finance % AB cu © Co, and the subsidiary shell ee ieee and each shall prepare HS separate } Sed on its functional currency: ‘Scanned with CaScanner_— parent, the subsidiary’s financja) m the ; to the parent's presentatiog is different fro’ currency ! I be translated statements consolidated financial statements may by rrency 5 ae Transaion Prom are wasted into a presentation currency as follows: T_ nal Translated using —~] y Closing rate at the date of the statement of financial a. Assets and Liabilities (including comparatives) _position > Exchange rates at the dates of the transactions ® Income and Expenses (including comparatives) > All resulting exchange differences are recognized in other comprehensive income. = “ For expediéncy reasons, an average rate for the period may be used, except when exchange rates fluctuate significantly. Mustratio n 1: Translation to a presentation currency ne oe ’fenetional currency is the Philippine peso (P). However the purpose a sent fis financial statements in U.S. dollars (5) 0" 'ssuing its debt securities in a foreign market. ABC Co’s 20x1. financi : ncial st: 0) 7 . a shown below: atements stated in Philippine pesos * ASSETS Cash (in pesos) Trade and ¢ 00 and other re p 10: Inventory Mer receivables . 35 65,000 Property 7 bet Plant and - Ssets vipment 90 - P2000 ayables n apo" ‘Scanned with CamScanner479 | pare capital 1° mium | sha’ us mings 30,000 sained earniny ia | Ret aa ronal liabilities & equity la 1200.00 i | —-Revertes Expenses P120,009 “profit for the year (90,000) other comprehensive income 30,000 Comprehensive income for the year P 30,000 The relevant exchange rates in 20x] are as follows: Jan. 1, 20x1 P1: $.026 Average for the year PL: $.027 Dec. 31, 20x1 P1: $.028 Additional information: * ABC's equity on January 1, 20x1 consists of the following: . 30,000 Share capital, Jan. 1 10,000 hare premium 20,000 Retained earnings, Jan. 1 60,000 — Total equity, Jan. 1, 20x1 hen the exchange rate was Pl ‘rom t ance. The share capital was issued w! 1, 20x1 translated to US . sulted f 5.025, The share premium resulted The retained earnings on January Jated ) slated doliars is $480, ao The curnulative translation gain : | a ) when the financial statements was #00. a vp In 20x1 ABC Co. paid Fae \ 075. exchange rate was PL: 4. 0275. . pnts into U.S. teme ; sjal sta “qirement: Translate the finan’ ‘Scanned with CamScanner(in dollars) Cast 10,000 a ash M Be rade and other receivables 35,000 0.028 (CR) a I tory 65,000 0.028 (CR) 1,820 inventory / 28 (C8 7 Property, lant & equipment 99,000 0.028 (CR) ce P200,000 LIABILITIES AND EQUITY Trade and other payables _ 1°120,000_ 0.028 (CR) 30,000 0.025 (HR) 10,000 40,000 Share capital Share premium Retained earning: slation adjustment = gain Tr Total equity 80,000 y 80,000 Total liabilities & equity 200,000. Revenues £120,000 $3,240 Expenses (90,000) 0.027 (AR) __ (2,430) Profit for the year 30,000 S10 - 145 Comprehensive income P 30,000 $ 955 © Notes: @ a sts and liabilities are translated at the closing rate (CR) a Ry income and expenses are translated at the average rate R). 7 The year-end retaine i ¢ year-end retained earnings is translated as follows: (in pesos) Rates _(indollars) Retained earnings - beg, Profit ings - beg. 20,000 (given) $ 480 Dividends 30,000 0,027 (AR) 80 073) (10,000) 0.0275 (HR) ___ P. 7 40,000 Se Retained earnings - end ‘Scanned with CamScannerre cumulative translation adjustment palancing figure” in he staten the accounts are translated, al Ge, $225); MAL Of financia ition This is the POSitiON after S MeCOpnized in ; punts are ned, sized in a separate account within equity. A credit balance (positive) represe i F while a debit balance (negative) re “ve Presents logs, The change n the cuntulative translation adjustment during the period is recognized in other comprehensive income, This is computed as follows: ($225 ending balauce fess soy beginning baimce, given = $145 increase, recognized in OCI ig 2x1). Since all assets and liabilities are translated at the consequently, total equity is automatically translated at the closing rate (P80,000 x 0,028 = $2,240). However, the individual components of equity are translated as follows: a. Share capital, share closing rate, Premium and all other components of equity, except retained earnings, are translated at historical rates (HR). Retained earnings is translated taking into account the changes during the period due to, for example, profit or loss (translated at the average rate) and dividends (translated at the historical rate). © The net difference resulting from translating the Components of equity at rates different from the closing Tate represents the cumulative translation adjustment. conciled as follows: The translation Saljustment can be recone 2 Transtati ening net assets : lation of opening ne t assets (60,000 x 0.026) ts Jan. 1 - at opening rate (60,000 x 0.028) _L eS assets, J jan. 1 - at closing rate 120 here _ “* 1 opening net assets - gain ~ ) (give Ye translation gain, Jan. 1 eriod: y the period Transtation of changes in net assets during (he } ma oy slo N00 02 0 aie Gerrctre (30,000 « 028) ow at closing rate — Ye : “se j iN profit — gain ‘Scanned with CaScannerDiontenl: Dividers Dividends at historical rate ateloning vate Increase in dividends — lowe in OC Cumulative tramilalion Alternative method: Whe reconciled as follows: 1) Translation of opening net assets Share capital: Share capital, Jan. |= at historical rate grate Share capital, Jan. 1 = at elosi Increase in share capital ~ gain Share premium: Share premium, Jan. 1 - at historical rate Share premium, Jan. 1 - at closing rate Increase in share premium ~ gain Retained earnings - Jan. 1: Ret. earnings, Jan. 1 - at previously translated amt, Retained earnings, Jan. | - at closing rate Increase in opening retained earnings ~ gain 2) Translation of changes in net asse Profit or lo: Profit at average rate Profit - at closing rate Increase in profit ~ oni Dividends: piidends “at historical rate ividends - at closing rate Increase in dividend. los: Total translation gain- Oc] (10,000 4 7; (10,009 % S14) 25 25 “translation adjustment can be further (H,000 % 0.0235) 7D) (DWV % 0.024) wD n 2x) 28) w (10,000 x 0.025) (10,000 % 0.928) (20,000 x 0.028) 80) ts during the period: (30,000 x .027) (30,000 x .028) (10,000 x .0275) (16,000 x .028) ‘Scanned with CamScanner~ i tion 2: Translation - Sh, © pustral ATC capital iss rans! ; ued duri 1 ac Co needs to translate its 20x] financial sauting the pd. vse yet (Y)- Statements to the rane “) asst / me (in pesos) oa r receivables P 15,000 _ade and other receivables if : 12,000 aventory aon opens plant and equipment an Total assets an LIABILITIES AND EQUITY Trade and other payables P 60,500 Share capital 30,000 29,500 Retained earnings Total liabilities & equity P120,000 150,000 Revenues ‘rofit for the year oer Comprehensive income P1450 it exchange rates in 20N1 are as follows: pi: ¥2.0 efor the year 20N1 Ree 1, 20x1 pl: ¥23 “HE tn formation. dx T consists of the following: R's equity on January 1, 20ST ; 120,000 hare | te PEL? 18,000 Capital, Je spot rate an an aimed ) Jan, 1 (spot rat 37 200 73,00 e a st arnings, Jan. 1 (translate © Sdaty, fan, 1, 20x1 ‘Scanned with CaScannerABC's 20x0 financial statements translated to the Japanese yen BC's Sad sported a cumulative transi ; ere ABC issued additional shares for P10,000 when the e In , ¥2.6. No share premium resulted from the ation gain of ¥2,800. spot rate was Pl: issuance. «In 20x1, AB rate was P1 : ¥2 C Co. paid dividends of P3,000 when the exchange Requirement: Translate the financial statements into Japanese yen, Solution: ASSETS (in pesos) Rates (in yens) Cash 15,000 2.3 (CR) ¥ 34,500 Trade and other receivables 12,000 2.3 (CR) 27,600 Inventory 8,000 2.3 (CR) 18,400 Property, plant and equipment _ 85,000. 2.3 (CR) 195,500 ¥276,000 —_—= 0,500 2.3(CR) —_¥139,150 Share capital 30,000 (see belovw) 62,000 Retained earnings 29,500 (see below) 62,350 Translation adjusiment ~ gain 12,500 (squeeze) _ Total equity Total equity 59,500 Total liabilities & equity 120,000 276,000, Rever nes P150,000 2.2 (AR) a Expenses 2981 Profit for the year eae iw Other comprehensive income Gain on translation 10,50 —Senprcessiveinsone Fis (¥12,500 me Fa 5 © Notes: ‘Scanned with CamScanneryear-end share capital is computed i, follows: pe (in pesos) Rates liny » yen) capital =Jan.1 "20,000 Rai) 36,000 s nal issuance — 10.000 2.6 any 26,000) jon ° / capital — Dee. 31 30,000 | e209 year-end retained earnings is translated as follows: ‘The } (in pesos) Rates (in yens) ined earnings - beg. "18,000 (ioe ys, 299 petaines 14,500 2.2 (AR) 31,900 ds (3,000) 2.25 (HR) (6,750) vidends eed a ined earnings - end. 29,500 ¥62,350 (38,000 x 2.0) 76,000 (38,000 x 2.3) _ 87,400 11,400 2,800 7 (given) ———— ative translation gain — Jan. 1, 20x1 8 ; ring the period: 'slation of changes in net assets during the p a ital: > 26,000 f additional share capital: ioams26 26 istorical rate Sa nal sh. issuance - at historical r (10,000 x 2.3) a ing rate 73,000) Onal sh. issuance - at closing rate Tao in share capital ~ loss 59) 31,900 MtOr loss: (14,500 x 2: 5 33,350 so0x 23) 333 sy ioerage rate (14,500.x2 1,450 “at closing rate _ 14 “im profit ~ gain ‘Scanned with CaScannerDividends: epee Dividends - at historical rate ae : 5) 6ny i 00 22.3 i Dividends - at closing rate ) hy Increase in dividends ~ loss 04, ‘Total translation gain ~ OCT 2m » Alternative method: The translation adjustment can be further reconciled as follows: 1) Translation of opening net assets Share capital - Jan. 1: Share capital, Jan. 1 - at historical rate Share capital, Jan. 1 - at closing rate (20,000 1.8) 36,000 (20,000 x 2.3) 46,000 Increase in share capital ~ gain 10,000) Retained earnings - Jan. 1: Ret. earnings, Jan. 1 - at previously translated amount (given) 37,20) Retained earnings, Jan. 1 - at closing rate (18,000. 2.3) 41,400 Increase in opening retained earnings ~ gain 4,20 2) Translation of changes in net assets during the period: Issuance of additional share capital: Additional sh. issuance - at historical rate (10,000 x 2.6) 26,000 Additional sh. issuance - at closing rate (10,000 x 2.3) _23,000 23,0) Decrease in share capital ~ loss 3,000) ——— Profit or loss: ae -at average rate (14,500 x22) 31,900 C -a 33,351 rofit- at closing rate (14,500 x 2.3) _ 33350, Increase in profit ~ gain 1,430, . —— Dividends: Dividends - at histori . 73 an tistorical rate (3,000x225) 6750 ividends - at closing rate 6,900 Increase in dividends — loss (3,000 x 2.3) ___ O-— mu Total translation gain ~ OC] 25 ‘Scanned with CamScannerforeign operation i jorcign operation is a subsidiary, associat f 'SOciate, a ad in’ < 4 JOINE ye . branch that is based in a fore 18M country ang is usin, ve in ; : Sing a foreig, currency ial = | he financial statements E sip js Th of 4 foreipn Operation need to be translated before they can be jn ‘corporated into the translation proces above apply to the translation of a foreign ope: statements. For foreign subsidiaries, goodwill and are translated at the closing rate. If the subsidiary is not wholly-owned, the exchange - differences are allocated to both the owners of the parent and NCI. reporting ‘dures discussed ration’s financial entity’s financial statements, The fair value adjustments Illustration 1: Translation of goodwill : . On January 1, 20x1, a Philippine holding company acquired 100 % interest in a subsidiary based in Kenya for KES 10M (shillings). The fair value of the net assets of the subsidiary at that date was KES 8 million (shillings). The following are the relevant exchange rates: Jan. 1, 20x1 Dec. 31, 20x1 «iement in goodwill. The group determined that there is nO impairment in 8 included in the odwill to * 20x1 and on Requirements: Compute for the §° January Nsolidated financial statements OF J lutions: . c3t ns: Detas B20 oa 000 Orme #1. 10,000,000 nsideration transferred aquiree . - “M-controlling interest in the ac14 = 7 10,000,000 rev. held equity interest in the aeaui® 710,000,000 ‘Scanned with CamScanner 20x71Chapter ig 488 : a (8,000,000) (8,000,099 Fair value of 2,000,000 2.000, Goodivill (in shillings) ay ‘ng rate/ Closing rate 005 Multiply by: Open rate/ Satna 100,0 Goodwill (in esos) = net assets ac uired Exchange difference recognized in OCI med subsidiary in Indonesia. The Jable about the subsidiary for the Tilustration 2: ABC Co. has a wholly-own following information is aval ber 31, 20x1: year to Decembe pe Net assets, Jan. 1, 20x1 100,000,000 Profit for the year 40,000,000 Dividends = Net assets, Dec. 31, 20x1 140,000,000 Goodwill of IDR 2,000,000 was recognized on the business combination. There were no impairment losses on the goodwill. There were no translation adjustments recognized in the previous years. The following are the relevant exchange rates: Jan. 1, 20x1.... .P0.003 : IDR 1 Average for the year Dec. 31, 20x1.. Requirement: Compute for the total gain or loss on translation. Solution: } Translation of opening net assets Net assets, Jan. 1 - at ope : enti re xy 0 Netascta\ anti eae amen (100M x po.003) 300,008 at closing rate Sa SSelS ~ gain ‘ — Cumulative tray islation differe ference ~ Jan, 1 d —_ ‘Scanned with CamScannerthe £ any jon of changes in net assets 5) rranslat f it ets during the perio fit al average rate arene D4 OM » PO.004 prot at closing rare oh P0.004) 160,000 . Mx P0005) 909 rerease it profit ~ gain ™) 200,000 In 40,600 — 3) qranslation of goodwill Goodwill, Dec. 31 - at opening rate Goodwill, Dec. 31 - at closing rate Increase in goodwill — gain (2M x P0.003) 6,000 (2M « P0.005) 10,000 4,000 Total FOREX translation gain - OCI 244,000 — Illustration 3: Translation of a subsidiary’s financial statements On January 1, 20x1, ABC Co. acquired 80% ownership interest in XYZ, Inc, a Korean company, for 1,500,000 wons. XYZ's functional currency is the won (KRW). On this date, XYZ’s retained earnings balance was 800,000 wons and the fair value of the net identifiable assets was 1,400,000 wons, which included a fair value adjustment to a land. NCI is measured at proportionate share, The relevant exchange rates are as follows: Date Exchange rates Jan. 1, 20%1 70.03: aA 70.0 0.05: KRW 1 Average for the year.. Dec. 31, 201. ments of the entities at dual financial state Asi aT “Ummary of the indi below: shown below: the o, | end of reporting period are State, Mtements of financial position December 31, 20x1 apcco, X¥ZIne: ae (wons) (pesos) 5,000 ° 0) 1,300,000. 1,300,000 1,300,000, ‘Scanned with CamScanner“ RQUITY AND FQUIT 400,000 LIABILITIES. 600% Liabilities - 1,000,000 2009) Share capital 645,000 1,040,044, jed earnings p “Total equity TOTAL LIABILITIES A WLOTAL™ 1,645,000 1.240, 2,045,000 1,300,009) ND LQUITY Statements of profit or loss year ended December 31, 20x1 For the feces (pesos) (wons) Revenues 900,000 600,000 Expenses cf ie bee VS (540,000) (360,000) “Profit for the year 360,000 240,000 Profit for the year vere no changes in the subsidiary’s share capital during the Requirement: Prepare the consolidated financial statements. Solutions: Step 1: Analysis of effects of intercompany transaction We can leave this out because there are no intercompany transactions in the proble Step 2: Analysis of net assets Acquisition Consolidation Net date date change (in wons) (in wons) _(in wo 200,000 200,000 ____- 800,000 __1,040,000_— XYZ, Inc. pital Retain 4 earnings Totals at carrying amounts lsat carry 1,000,00 240,000 ae at acquisition dates 400, po ‘o 000 Subrequen depreciation of EVA Nil ; t asse ir bah NI 0 meats al fair value (in wons) 1,400,009 ,640,000_ 20.0 * The fair value adj Justment at acquisition date is determined as follow>’ ‘Scanned with CamScanner