GLOBAL RECIPROCAL COLLEGES

College of Accountancy
First Semester A.Y. 2023 – 2024

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

ACCOUNTING FOR BUSINESS COMBINATION ML M. DELA CRUZ, CPA, CTT

AFAR-12
FOREIGN CURRENCY TRANSACTIONS

Introduction to Foreign Activities

An entity may engage internationally and undertake foreign activities which we can classify into two
approaches, such as
1. Foreign currency transaction – a transaction that is denominated or requires settlement in
foreign currency.
2. Foreign operations – an entity based in another foreign country the activities of which are
maintained in the currency other than those of the reporting entity—a parent, investor or home
office based in domestic country.

AFAR-12 focuses on foreign currency transaction while foreign operations will be discussed on AFAR-14
Translation of Foreign Currency Financial Statements.

Accounting for Foreign Activities

In accounting foreign activities, it is imperative to determine the major issue which are:
1. Exchange rate(s) to be used; and
2. Reporting the effects of changes in exchange rates in the financial statements.

Foreign Exchange Rate

A foreign exchange rate is the price of a currency expressed in terms of another currency. The foreign
exchange rate, or simply exchange rate, may be stated as:
1. Direct quotation – the exchange rate is stated in how many units of domestic currency must be
exchanged to receive one unit of foreign currency.
2. Indirect quotation – the exchange rate is stated in how many units of foreign currency must be
exchanged to receive one unit of domestic currency. An exact opposite of direct quotation.

An exchange rate may be quoted as either:

1. Spot rate – the rate in which the foreign currency can be exchanged today; or
2. Forward rate – the rate in which the foreign currency can be exchanged at some future date.

Foreign Exchange Exposure

Foreign exchange rates are constantly changing. Since foreign activities are denominated in a foreign
currency, an entity conducting such activities are exposed into foreign exchange risks. Foreign exchange
exposure refers to the risk that a company takes on when making transactions in foreign currencies.

There are three main types of foreign exchange exposure:

1. Transaction exposure – the risk an entity is exposed to as a result of entering into foreign
currency transactions.
2. Translation exposure – the risk an entity is exposed to as a result of having to translate the
foreign currency financial statements of a foreign operations to the group’s reporting currency for
the purpose of preparing consolidated financial statements.
3. Economic exposure – the extent to which an entity’s overall value is directly impacted by foreign
exchange.

The first two exposures are collectively known as “accounting exposures” and comparing to economic
exposure, accounting exposures measure an entity’s risk in specific circumstances while economic
exposures measure an entity’s overall risk as a result of foreign exchange volatility.

Accounting Exposures
Transaction Exposure Translation Exposure
Nature Arises from foreign currency Arises from translation of foreign currency
transactions. financial statements of foreign
operations.

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This will be discussed in detail in AFAR-

14.
Effects Results in transactions gain or losses. Results in transactions gain or losses.

Affects the cash flows of an entity. Does not affect the cash flows of an
entity.
Presentation Recorded in the books of the individual Presented in the consolidated financial
entity. statements (group level).

Functional Currency
The functional currency is the currency of the primary economic environment in which the entity operates.
It is not necessarily the currency in which the entity is based. All currencies other than the entity’s functional
currency are considered foreign currencies.

As set out in PAS 21 The Effects of Changes in Foreign Exchange Rates, the following factors assist to
determine the functional currency of an entity:

Primary indicators 1. The currency that mainly influences the sales prices of goods and services.
2. The currency of the country whose competitive forces and regulations
determine the sales prices of goods and services.
3. The currency that mainly influences the labor, material and other costs of
goods and services.
Secondary indicators 4. The currency in which financing is obtained.
5. The currency in which receipts from operating activities are usually
retained.

Presentation currency, on the other hand, is the currency in which the entity’s financial statements are
presented.

Foreign Currency Transactions

A foreign currency transaction is a transaction that is denominated or requires settlement in foreign

currency, including transactions arising when an entity:
1. Sells or purchases goods or services (exports or imports), the prices of which are denominated in a
foreign currency.
2. Borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency.
3. Otherwise acquires or disposes assets, or incurs or settles liabilities, denominated in a foreign currency.

Consider the following companies, whose functional currencies are the currency of the country where
they are based:
Purefoods Co. – a Philippine-based company
Ginebra Co. – a Philippine-based company
Raptors Co. – a Canada-based company

Determine whether the following transactions are foreign currency transaction (FCT) or not, as far as
Purefoods Co. is concerned:
Facts FCT or not
1. Purefoods Co. transacts with Ginebra Co. with currency denominated and settled
NOT
in Philippine Peso.
2. Purefoods Co. transacts with Ginebra Co. with currency denominated and settled
FCT
in Japanese Yen.
3. Purefoods Co. transacts with Raptors Co. with currency denominated and settled in
NOT
Philippine Peso.
4. Purefoods Co. transacts with Raptors Co. with currency denominated and settled in
FCT
Canadian dollar.
.

Exchange Differences

Exchange difference is the difference resulting from translating a given number of units of one currency
into another currency at different exchange rates.

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Exchange differences arising from monetary items are recognized in profit or loss in the period in which
they arise.

Exchange differences arising from non-monetary items are recognized in the same way as the gain or loss
on the item is recognized. If the gain or loss is recognized in profit or loss, the exchange component of the
gain or loss is recognized in profit or loss. Contrarywise, if the gain or loss is recognized in other
comprehensive income, the exchange component is recognized in other comprehensive income.

Monetary Items Non-monetary Items

Definition Units of currency held and assets and
liabilities to be received or paid in fixed
or determinable number of units of
currency.
Examples Cash and cash equivalents
Accounts, notes, and loans receivable
and their related allowances and
other financial assets measured
at amortized costs
Prepaid interests
Loans receivable
Accounts, notes, loans, bonds
payable and other financial
liabilities measured at amortized
costs
Mortgage payable
Tax payable; and
Most liabilities account
Units of currency held which do not
give rise to the receipt or payment of
a fixed or determinable number of
units of currency.
Inventories
Prepaid expenses, except prepaid
interest
Property, plant and equipment
Investment property
Investments in equity instruments
Intangible assets
Goodwill
Share capital and premium
Deferred tax asset and liabilities

Reporting as Subsequent Balance Sheet Dates

At each balance sheet date, the following rules shall be observed in measuring accounting items:
1. Monetary items have to be adjusted for exchange rate changes using the current/closing rate on
balance sheet date.
2. Non-monetary items the are measured at fair value have to be adjusted for exchange rate changes
using the current/closing rate on balance sheet date.
3. Non-monetary items that are measured in terms of historical cost are translated using the exchange
rate on the date of the transaction or historical rate.

The following direct exchange rates pertain to Mavericks Co.’s item worth $100,000:

₱50:$1........................................January 1, 2023
₱55:$1........................................June 30, 2023
₱52:$1........................................December 31, 2023

Determine the amount to be recorded if the item is: January 1, 2023 December 31, 2023
1. Monetary item ₱5,000,000 ₱5,200,000
2. Non-monetary item measured at historical cost ₱5,000,000 ₱5,000,000
3. Non-monetary item measured at fair value ₱5,000,000 ₱5,200,000
.

An accountant, when accounting for foreign currency transactions, should be mindful of these three
important dates in recognizing and recording the correct amount for a particular account item:
1. Transaction date – each account arising from foreign currency transactions are measured at the
transaction date’s spot rate.
2. Balance sheet date – (if occurring between the transaction date and the settlement date)
recorded balances that are denominated in foreign currency are adjusted using the spot rate at
the balance sheet date and transaction gain or loss is recognized currently in income statement.
3. Settlement date – remeasure and recognize necessary account items using the spot rate at the
settlement date.

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PRACTICAL ADVANCED FINANCIAL ACCOUNTING

Part 1. Discussion Problems

Item nos. 1 through 3 are based on the following information:

In January 1, 2023, the Papa Lit Money Exchange posted the following direct exchange rates in the counter
of their shop in Caloocan City:
₱55.00 = $1 (US dollar)
₱42.00 = S$1 (Singapore dollar)

1. What are the indirect exchange rates for the US dollar and the Singapore dollar?
US Singapore
a. ₱0.001 : US$0.018 ₱0.001 : S$0.024
b. ₱0.001 : US$0.055 ₱0.001 : S$0.042
c. ₱0.018 : US$0.001 ₱0.024 : S$0.001
d. ₱0.055 : US$0.001 ₱0.042 : S$0.001

2. How many US dollars must a US-based company pay to purchase goods costing ₱27,500 from a
Philippine-based company?
a. $300 b. $400 c. $500 d. $600

3. How many Philippine peso must be paid for a purchase costing S$500?
a. ₱20,000 b. ₱21,000 c. ₱22,000 d. ₱23,000

Item nos. 4 through 8 are based on the following information:

Urbano Corporation ordered machinery, FOB shipping point, from an American company for $10,000 on
December 1, 2023. The machinery was shipped and invoiced to Urbano Corporation on December 16, 2023.
Urbano Corporation paid the invoice on January 15, 2024.

Relevant spot rates for US dollars on the respective dates are as follows:

Buying Spot Rate Selling Spot Rate

December 1, 2023 ₱48.50 ₱49.00
December 16, 2023 ₱48.90 ₱50.00
December 31, 2023 ₱49.50 ₱51.00
January 15, 2024 ₱50.00 ₱50.50

4. How much is the foreign exchange gain or loss on December 16, 2023?
a. ₱10,000 loss b. ₱7,500 loss c. ₱5,000 gain d. ₱0

5. How much is the foreign exchange gain or loss on December 31, 2023?
a. ₱10,000 loss b. ₱7,500 loss c. ₱5,000 gain d. ₱0

6. How much is the foreign exchange gain or loss on January 15, 2024?
a. ₱10,000 loss b. ₱7,500 loss c. ₱5,000 gain d. ₱0

7. How much is the accounts payable to be recognized on December 31, 2023?

a. ₱480,000 b. ₱490,000 c. ₱500,000 d. ₱510,000

8. How much is the machinery to be recognized on December 31, 2023?

a. ₱480,000 b. ₱490,000 c. ₱500,000 d. ₱510,000

Item nos. 9 through 13 are based on the following information:

Exports Corporation sold merchandise to a Canadian Corporation for C$10,000. Relevant spot rates for
Canadian dollars on the respective dates are as follows:

Buying Spot Rate Selling Spot Rate

December 1, 2023 – receipt of order ₱51.50 ₱52.00
December 16, 2023 – date of shipment ₱52.50 ₱53.00
December 31, 2023 – balance sheet date ₱53.50 ₱53.75
January 15, 2024 – date of collection ₱53.00 ₱54.00

9. How much is the foreign exchange gain or loss on December 16, 2023?
a. ₱10,000 gain b. ₱7,500 loss c. ₱5,000 loss d. ₱0

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10. How much is the foreign exchange gain or loss on December 31, 2023?
a. ₱10,000 gain b. ₱7,500 loss c. ₱5,000 loss d. ₱0

11. How much is the foreign exchange gain or loss on January 15, 2024?
a. ₱10,000 gain b. ₱7,500 loss c. ₱5,000 loss d. ₱0

12. How much is the accounts receivable to be recognized on December 31, 2023?
a. ₱515,000 b. ₱525,000 c. ₱535,000 d. ₱545,000

13. How much is the sales to be recognized on December 31, 2023?

a. ₱515,000 b. ₱525,000 c. ₱535,000 d. ₱545,000

14. RPX Corporation, had the following foreign currency transactions during 2023:

• Merchandise was purchased from a foreign supplier on January 10, 2023, for the Philippine
peso equivalent of ₱600,000. The invoice was paid on April 20, 2023, at the Philippine peso
equivalent of ₱608,000.
• On September 1, 2023, RPX Corporation borrowed the Philippine peso equivalent of ₱3,000,000
evidenced by a note that was payable in the lender’s local currency on September 1, 2023. On
December 31, 2023, the Philippine peso equivalent of the principal and accrued interest were
₱3,200,000 and ₱120,000, respectively. Interest on the note is 10 percent per annum.

In RPX’s 2023 statement of comprehensive income, what amount should be included as a forex loss?
a. ₱40,000 b. ₱200,000 c. ₱228,000 d. ₱300,000

Part 2. Drills

1. If 1 Singaporean dollar can be exchanged for 75 centavos of Philippine peso, what fraction should be
used to compute the indirect quotation of the exchange rate expressed in Singaporean dollars?
a. 1.25/1 b. 1/1.25 c. 1/.75 d. .75/1

Item nos. 2 through 6 are based on the following information:

Bora Inc., a Philippine company, purchased inventory from Cay Co, a foreign supplier on November 16 for
70,000 FCUs (foreign currency units). Payment is due on January 16 and Bora Inc.’s accounting period is
on a calendar year. The spot rates on November 16, December 31, and January 16 are 1 FCU = ₱0.65,
₱0.72, and ₱0.69, respectively.

2. What is the peso amount of inventory recorded in the accounting records on November 16?
a. ₱50,400 b. ₱45,500 c. ₱48,067 d. ₱48,300

3. What is the peso amount of inventory on the December 31 balance sheet?

a. ₱50,400 b. ₱45,500 c. ₱48,067 d. ₱48,300

4. What is the peso amount of accounts payable on the December 31 balance sheet?
a. ₱50,400 b. ₱45,500 c. ₱48,067 d. ₱48,300

5. What is the peso amount of the exchange loss or gain recorded on the income statement at December
31?
a. ₱2,100 loss b. ₱2,100 gain c. ₱4,900 loss d. ₱4,900 gain

6. What is the peso amount of exchange loss or gain recorded on the income statement at January 16?
a. ₱2,100 loss b. ₱2,100 gain c. ₱4,900 loss d. ₱4,900 gain

Item nos. 7 through 9 are based on the following information:

JM Enterprises, a Philippine company, sold inventory on December 1, 2023 with payment of 10,000 FCs
(foreign currencies) to a foreign customer to be received in two months’ time. The pertinent exchange
rates were as follows:

December 1, 2023 Spot rate: ₱1.7242

December 31, 2023 Spot rate: ₱1.8182
January 30, 2024 Spot rate: ₱1.6666

7. For what amount should Sales be credited on December 1, 2023?

a. ₱5,500 b. ₱16,949 c. ₱18,182 d. ₱17,241

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8. What amount of foreign exchange gain or loss should be recorded on December 31, 2023?
a. ₱300 gain b. ₱300 loss c. ₱941 gain d. ₱941 loss

9. What amount of foreign exchange gain or loss should be recorded on January 30, 2024?
a. ₱1,516 gain b. ₱1,516 loss c. ₱500 gain d. ₱500 loss

10. On June 30, 2023, San Miguel Company lent ₱120,000 to a foreign supplier, Soju Inc., a South Korea-
based company, evidenced by an interest-bearing note due on June 30, 2024. The note is denominated
in Won, the currency of Soju Inc., and was equivalent to ₩840,000 on the loan date. The note principal
was appropriately included at ₱140,000 in the receivable section of San Miguel Co.’s December 31,
2023 balance sheet. The note principal was repaid to San Miguel Co. on the June 30, 2024 due date
when the exchange rate was ₩8 to ₱1.

In its income statement for the year ended, December 31, 2024, what amount should San Miguel Co.
include as a foreign currency transaction gain or loss?
a. ₱0 b. ₱15,000 loss c. ₱15,000 gain d. ₱35,000 loss

11. Norman Corporation had the following foreign currency transactions during 2023:
• Merchandise was purchased from a foreign supplier on January 20, 2023, for the Philippine
peso equivalent of ₱90,000. The invoice was paid on March 20, 2023, at the Philippine peso
equivalent of ₱96,000.
• On June 30, 2023, Norman Corp. borrowed from foreign corporation with a Philippine peso
equivalent of ₱500,000 evidenced by a note that was payable in the lender’s local currency on
June 30, 2024. On December 31, 2023, the Philippine peso equivalents of the principal amount
and accrued interest were ₱520,000 and ₱26,000, respectively. Interest on the note is 10%
per annum.

In Norman Corp.’s 2023 income statement, what amount should be included as foreign exchange loss?
a. ₱0 b. ₱6,000 c. ₱21,000 d. ₱27,000

When you have a dream, you’ve got to grab it and never let go.
Carol Burnett

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