Closing Rate Method/

Foreign Currency Transaction

Third Year

Ma’am Jissle Lapig

Teacher

Rosalie C. Langbay
Student
 The effects of Changes in Foreign Exchange Rates
FOREIGN CURRENCY TRANSACTION
- Transaction to be settle in a foreign currency of
financial statements in affiliate maintained in a foreign
currency are converted into by a direct exchange rate
peso by multiplying the number of units in the foreign
currency.
FOREIGN CURRENCY TRANSLATION
- Is the process of expressing monetary amounts that are
stated in terms of a foreign currency into the currency
of the reporting entity by using an appropriate exchange
rate
- Prepared when an entity has a foreign operation

 FOREIGN CURRENCY TRANSLATION PROCESS

a. Determine the functional currency of the foreign
entity
b. Re-measure the financial statements of the foreign
entity into the functional currency
c. Record gains and losses on the translation of
currencies

2 TYPES OF EXPOSURE OF AN ENTITY TO RISK ATTRIBUTABLE TO FOREIGN

EXCHANGE RATE FLUCTUATION

1. TRANSACTION EXPOSURE – Arises directly as the consequence of

the business firm’s foreign currency transaction.
2. TRANSLATION EXPOSURE – Arise due to the requirements to
translate to the financial statement prepares in a foreign
currency to the presentation currency.

 Local Currency
- The currency of the country where the entity operates

 Presentation Currency
- The currency in which the financial statements are
presented
  Functional Currency
- The currency of the primary economic environment in which
the entity operates

CURRENT-RATE CURRENCY TRANSLATION TAKES PLACE IN 3 STEPS:

1. Income statement translation using the weighted average

exchange rate
2. Asset and liability translation at the current exchange rate
3. Rebalancing the balance sheet
 TEMPORAL METHOD FOREIGN
CURRENCY FINANCIAL STATEMENTS
Third Year

Ma’am Jissle Lapig

Teacher

Rosalie C. Langbay
Student
 FOREIGN CURRENCY FINANCIAL STATEMENTS

TEMPORAL OR RE-MEASUREMENT METHOD

PAS 21, par. 34:
When an entity keeps its books and records in a currency other
than its functional currency, at the time the entity prepares its
financial statement all amounts are translate into the functional
currency in accordance with paragraphs 20 – 26. This produces the
same amounts in the functional currency as would have occurred
had the items been recorded initially in the functional currency.
For example, monetary and non-monetary items that are measure on
a historical cost basis are translate using the exchange rate at
the date of transaction that resulted in their recognition.
FOREIGN CURRENCY TRANSACTION
WITHOUT HEDGING ACTIVITIES
Third Year

Ma’am Jissle Lapig

Teacher

Rosalie C. Langbay
Student
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Types of foreign currency exchange rate.

Spot rate Rate for the immediate
delivery of currencies
exchanged.
Forward or future rate The rate at which currencies
can be exchange at some future
date.
Fixed rate Rates set by a government and
do not change as results of
changes in world currency
markets.
Free or floating exchange Those that reflect fluctuating
rates market prices for a currency
based on supply and demand and
other factors in the world
currency markets.
Current rate The rate at which one unit of
currency can be exchange for
another currency at the
balance sheet date or the
transaction date.
Historical rate The rate in effect at the date
a specific transaction or
event occurred.

EXCHANGE RATE – is the ratio of exchange for two currencies.

DIRECT QOUTATION INDIRECT QOUTATION

Description Exchange rate is
quote in terms of how Opposite of direct
many units in quotation.
domestic currency can
be convert into one
unit of foreign
currency.
Format P40 : $1 $ 0.25 : P1
Relationship to
strength of FCU Direct Inverse
 INITIAL RECOGNITION

PAS 21, par. 20&21: A foreign currency transaction is a

transaction that is denominated or requires settlement in a
foreign currency, including transactions arising when an entity:

a. Buys or sells goods or services whose price is denominated

in foreign currency.
b. Borrows or lends funds when the amounts payable or
receivable are denominated in a foreign currency ; or
c. Otherwise acquires or disposes of assets, or incurs or
settles; liabilities, denominated in foreign currency.

A foreign currency transaction shall be record on initial

recognition in the functional currency, by applying to the
foreign currency amount the spot exchange rate between the
functional currency and the foreign currency at the date of the
transaction.

Functional Currency = Foreign CU x Spot exchange rate

YEAR 1 YEAR 2

Date of Transaction
(Initial Recognition) Date of
Settlement
The reporting date

 Only monetary items and nonmonetary items measured at fair

value at reporting date are translate to the functional
currency using the closing rate.
 Any change in the foreign currency exchange rate between
date of transaction and date of settlement is recognize in
profit and loss.
 SUBSEQUENT MEASUREMENT

PAS 21, par. 23: At the end of each reporting period:

 Foreign currency monetary items shall be translated using
the closing rate;
 Non-monetary items that are measured in terms of historical
cost in a foreign currency shall be translated using the
exchange rate at the date of the translated; and
 Non-monetary items that are measure at fair value in a
foreign currency shall be translate using the exchange rates
at the date when the fair value was measure.

Par. 25: The carrying of some items is determine by the

comparing two or more amounts. For example, the carrying
amount of inventories is the lower cost and net realizable
value in accordance with IAS 2 inventories. Similarly, in
accordance with IAS 36 impairment of assets, the carrying
amount of an asset for which there is an indication of
impairment is the lower of its carrying amount before
considering possible impairment losses and its recoverable
amount. When such an asset is non-monetary and is measure in a
foreign currency, the carrying amount is determined by
comparing:

A. The cost or carrying amount, as appropriate, translated at

the exchange rate at the date when that amount was
determined; and
B. The net realizable value or recoverable amount, as
appropriate translated at the exchange rate at the date when
that value was determined.

The effect of this comparison may be that an impairment loss

is recognize in the functional currency but would not be
recognize in the foreign currency, or vice versa.