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Accounting for
Foreign
Currency
Transactions 5
 Learning Objective
▰ Differentiate exchange rate, buying spot rate and
selling spot rate.
▰ Demonstrate understanding on the accounting for
foreign currency transaction.
▰ Compute and account properly foreign exchange gains
and losses.

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DEFINITION OF TERMS
DEFINITION OF TERMS

▰ Measured and Denominated

▰ Conversion and Translation

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CURRENCY EXCHANGE RATE

▰ Selling Spot Rate

▰ Buying Spot Rate

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 FOREIGN CURRENCY TRANSACTION

▰ Importing and exporting goods on credit with the

receivable or payable denominated in foreign
currency.
▰ Borrowing or lending denominated in foreign currency.

▰ Entering into a forward exchange contract to buy or

sell foreign currency.
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 IMPORTING AND EXPORTING OF
GOODS

▰ At the date the transaction is first recognized.

▰ At each balance sheet date that occurs between the

transaction date and the settlement date.

▰ At the settlement date.

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 Date of Transaction

▰ Order Date
▰ Shipment Date
▰ Invoice Date
▰ Delivery Date

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 Illustration 1: EXPORTING OF GOODS

On December 1, 2023, Pinoy Company sells agricultural products

to a US importer for $10,000. The relevant exchange rates are :

Date of Transaction: December 1, 2023 $1 = Php50

Balance Sheet Date: December 31, 2023 $1 = Php54
Settlement Date: January 30, 2024 $1 = Php49

Record the above transaction.

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 Illustration 2: IMPORTING OF GOODS

On December 1, 2023, US importer sells agricultural products to

Pinoy Company for $10,000. The relevant exchange rates are :

Date of Transaction: December 1, 2023 $1 = Php50

Balance Sheet Date: December 31, 2023 $1 = Php49
Settlement Date: January 30, 2024 $1 = Php53

Record the above transaction.

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 Illustration 3: Unusual Exchange Rate

On December 1, 2023, Pinoy Company sells agricultural products

to a US importer for $10,000. The relevant exchange rates are :

Date of Transaction: December 1, 2023 Php1=$0.02222

Balance Sheet Date: December 31, 2023 Php1=$0.02325
Settlement Date: January 30, 2024 Php1=$0.02083

Record the above transaction.

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Accounting for
Derivatives (IAS
39)
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 DERIVATIVES

Derivatives are financial contracts or other contract with

all three of the following characteristics:

▰ When the value changes (underlying)

▰ No initial net investment or small cost for contract
▰ It is settled at a future date
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 EXAMPLES OF DERIVATIVES

▰ Forward contracts
▰ Swaps
▰ Options

Derivatives are measured at fair values.

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 HEDGING

Hedging is a risk management technique that involves

using one or more derivatives or other hedging
instruments to offset changes in fair value or cash flows
of hedged items.

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 COMPONENTS OF HEDGING

1. Hedged item.
A hedge item is an asset, liability, firm commitment,
highly probable forecast transaction, or net
investment in a foreign operation.
2. Hedging instrument
A hedging instrument is a designated derivative or any
derivative instrument which are expected to offset changes
in fair value or cash flows of a designated hedged item. 21
 TYPES OF HEDGING RELATIONSHIP

1. Fair Value Hedge

2. Cash Flow Hedge

3. Foreign Currency Hedge

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Foreign Currency
Forward Contract
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 Illustration 4: Hedging an Exposed Net
Liability Position
On December 1, 2023, Manila Corporation purchased goods on account
from Crown Company for 500,000 yen. In view of the sale, Manila
Corporation enters into a forward contract to buy 500,000 yen from
Philippine National Bank in 60 days. The relevant rates are as follows:
12/01/2023 12/31/2023 1/30/2024

Spot Rate P0.45 P0.48 P0.49

60 day futures P0.45 P0.52 P0.54

30 day futures P0.48 P0.51 P0.53

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 Illustration 5: Hedging an Exposed Net
Asset Position
On December 1, 2023, Manila Corporation sold goods on account to
Crown Company for 500,000 yen. In view of the sale, Manila
Corporation enters into a forward contract to sell 500,000 yen to
Philippine National Bank in 60 days. The relevant rates are as follows:
12/01/2023 12/31/2023 1/30/2024

Spot Rate P0.45 P0.48 P0.49

60 day futures P0.44 P0.52 P0.54

30 day futures P0.48 P0.49 P0.53

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Accounting for
Option
Contracts
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DEFINITION OF TERMS

▰ Premium – option price

▰ Time Value – FV – IV
▰ Intrinsic Value – FV vs Option Price
▰ Option to buy “in the money”
▰ Option to buy “out of the money”
▰ Underlying
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Two Basic Types of Options

▰ Call Option
▻ - An option granting the right to buy.

▰ Put Option
▻ - An option granting the right to sell
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Accounting Treatment

▰ Fair Value Hedge

▻ - considers only the fair value of the option

▰ Cash Flow Hedge

▻ - FV, IV, TV
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 Illustration 6: Put Option

On November 1, 2023, the company sold inventory, with a cost of P320,000 to a

foreign Customer with payment due on February 1, 2024, in the amount of 100,000
FC. On November 1, 2023, the company purchased an out-of the money put option to
sell 100,000 FC on February 1, 2024, at a strike price of 1 FC = P5.10. An option
premium of P4,000 was paid.
11/01/2023 12/31/2023 02/01/2024

Strike Price 1FC 5.10 5.10 5.10

Spot Rate 5.15 4.98 4.95

Fair Value of Options 4,000 13,000 15,000
Intrinsic Value of option 0 12,000 15,000
Time Value of option 4,000 1,000 0
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 Illustration 7: Call Option

On November 1, 2023, the company bought inventory from a foreign Supplier with
payment due on February 1, 2024, in the amount of 100,000 FC. On November 1, 2023,
the company purchased an out-of the money call option to buy 10,000 FC on February
1, 2024, at a strike price of 1 FC = P51.00. An option premium of P2,000 was paid.
11/01/2023 12/31/2023 2/01/2024

Strike Price 1FC 51 51 51

Spot Rate 50.70 52.3 50

Fair Value of Options 2,000 14,000 0
Intrinsic Value of option 0 13,000 0
Time Value of option 2,000 1,000 0
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