EFFECTS OF CHANGES IN

FOREIGN EXCHANGE
RATES
1st Semester
SY 2022-2023
Prof. Gloria Santillan- Garcia
Why?
 Many companies in the Philippines are engage in
international transactions
Two Ways of Conducting Foreign Activities

1. Foreign currency transactions

 Individual entities often enter into a transaction in foreign
currencies
 Importing goods
 Exporting goods

2. Foreign operations
 Groups often include overseas entities
 Establishingbranches in another countries
 Holding investments in foreign companies
 Why?
 Accounting issues are encountered when transactions
are measured in a currency other than our local
currency
 Two Main Accounting Issues
 Exchange rates are constantly changing, the principal
in accounting for foreign activities are determining
1. Which exchange rate(s) to be use
2. How to report the effects of changes in exchange
rates in the financial statements
 Foreign Currency
Foreign Currency Transaction
Translation

 Are transactions to be  Is the process of

settled in foreign currency expressing monetary
and financial statements of amounts that are stated in
an affiliate maintained in terms in a foreign
foreign currency are currency into the
translated into pesos by currency of the reporting
multiplying the number of entity by using an
units of the foreign currency appropriate exchange
by a direct exchange rate rate
Accounting Standard
 IAS/PAS 21 The Effect of Changes in Foreign
Exchanges Rates
IAS 21 The Effect of Changes in Foreign
Exchanges Rates

 Employs the functional currency concept in accounting for

the effects of changes in foreign exchanges rates

 Functional currency is the currency of the primary

economic environment in which the entity operates

 The primary economic environment in which an entity

operates is normally the one in which it primarily generates
and expend cash
Factors in Determining Functional Currency

 Primary Factors
1. The currency that mainly influences:
 Sales prices
 Cost of goods sold / cost of services provided
 Secondary Factors
2. The currency in which funds from financing activities
are generated
3. The currency in which receipts from operating
activities are usually retained
 Illustration #1: Primary and Secondary
Factors
 ABS Co. is a mining company registered in Canada whose shares
are traded in the Toronto Stock Exchange. ABS reporting
activities take place in the gold and silver mines in the
Philippines

1. What is the functional currency of ABS Co.

2. What is the presentation currency of ABS Co.
3. ABS Co. acquired specialized mining equipment from Japan,
invoiced in Japanese Yen. What type of currency is the Japanese
Yen under the PAS 21 definition?
 Illustration #2: Additional Factors
 ABS Philippine Co. Is a branch of the ABS US Co. ABS Phils. Operates in a
Philippine Economic Zone Authority (PEZA). ABS Phils. engaged in the apparel
business. All of its raw materials are imported from the main office in the U.S.
And all of its finished products are exported directly to the U.S. Customers. The
U.S. Customers remit payment to the U.S. Main office. The U.S. Main office will
then provided the Philippine branch its working capital needs. None of the ABS
Phils. Finished products are sold in the Philippines. The raw materials imported
and finished goods exported are denominated in US dollars
1. What is the ABS Philippine Co.’s functional currency?
2. What is ABS Philippine Co. ‘s presentation currency?
What is a Foreign Currency Transaction?

 It is a transaction to be settled in a currency other

than the local currency
 A foreign transactions must be expressed in terms
of our local currency before they can be recorded in
the books
 Foreign currency transactions follows:
a. Purchases or sales of goods or services
b. Loans payable or receivables
 Foreign Exchange Risk

 Types of exposure risk

 Exposed liability position

 Exposed asset position

 As a result of the exposure risk, exchange differences arise when

foreign exchange rate change between dates
Time Line

Financial Year
Transaction date End Settlement Date
What is an Exchange Rate?
 It is the price of one currency in terms of another currency
 Presentation of exchange rates
 Direct quotation

 How much is 1 foreign currency unit (FCU) in terms of

local currency unit (LCU)?
 Example:

$1= P50
 Indirect quotation

 How much is 1 LCU in terms of FCU?

 Example:
 P 1= $ 0.02
Types of Exchange Rates
 Spot rate

 Forward ( or Future) rate

 Foreign Currency Transaction
Recognition
 Initial recognition
 A foreign currency is initially recognized by translating the foreign currency
amount into the local currency using the spot exchange rate at the date of
transaction
 Subsequent recognition at the end of each reporting period
 Monetary
 The foreign currency monetary items are re-translated using the closing
rate
 Non- Monetary
 items that are measured at historical cost in foreign currency shall be
translated using the exchange rate at the date of the transaction
 items that are measured at fair value in foreign currency shall be
translated using the exchange rate at the date when the fair value was
determined
 Treatment of Exchange
Differences
 Exchange differences
 is the difference resulting from transacting a given number of
units of one currency into another currency at different
exchange rates
 Treatment of Exchange
Differences
 Monetary items are recognized in profit or loss in the period in 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
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
Time Line
Financial Year
Transaction date End Settlement Date

Foreign currency Outstanding Settlement of

transactions monetary asset or monetary asset or
recorded at actual liabilities liability
exchange rate
giving rise to
monetary asset
(receivable) or
liability( payable)

Period of Transaction Period of Settlement

Time Line
Financial Year
Transaction date Settlement Date End
Foreign currency Settlement of
transactions monetary asset or
recorded at actual liability
exchange rate
giving rise to
monetary asset
(receivable) or
liability( payable)
 Treatment of Exchange
Differences
 Non- monetary items
 If the gain or loss is recognized in other comprehensive income
(OCI), the exchange component of the gain or loss is also
recognized in OCI, Conversely, if the gain or loss is recognized in
profit or loss, the exchange component of the gain or loss is also
recognized in the profit or loss
 Case 1- Importing Transactions
On November 2, 2021, ABC Company, a Philippine company, ordered
goods from a US supplier for $ 40,000.The inventory was shipped and
invoiced on December 1, 2021 to be paid in US dollars on February
28, 2022. The spot rates for the US dollars are as follows:
Selling Buying
November 2, 2021 P 50.50 49.60
December 1, 2021 51.10 50.00
December 31, 2021 51.60 51.40
February 28, 2022 51.30 51.20
Prepare the journal entries to record the above transactions in the
books of ABC Company
On November 2, 2021, ABC Company, a Philippine company, ordered goods from a US
supplier for $ 40,000.The inventory was shipped and invoiced on December 1, 2021 to be
paid in US dollars on February 28, 2022. The spot rates for the US dollars are as follows:
Selling Buying
November 2, 2021 P 50.50 49.60
December 1, 2021 51.10 50.00
December 31, 2021 51.60 51.40
February 28, 2022 51.30 51.20
Prepare the journal entries to record the above transactions in the books of ABC
Company
1. At what amount should the merchandise purchased be reported in 2021?
2. What amount should be reported as liability to the supplier ( or accounts payable) on
December 31, 2021?
3. What amount of foreign exchange gain or loss should be recorded on December 31,
2021?
4. What amount of foreign exchange gain or loss should be recorded on February 28, 2022?
5. How much peso will it cost ABC Company to finally pay the account on February 28,
2022?
 Case 2- Exporting Transactions
On November 2, 2021, ABC Company, a Philippine company, received
an order from a foreign firm for $ 40,000. ABC Company shipped the
inventory and billed the foreign firm on December 1, 2021. The foreign
firm settled its account on February 28, 2022by remitting its payment in
US dollars. The spot rates for the US dollars are as follows:
Selling Buying
November 2, 2021 P 50.50 49.60
December 1, 2021 51.10 50.00
December 31, 2021 51.60 51.40
February 28, 2022 51.30 51.20
Prepare the journal entries to record the above transactions in the
books of ABC Company
On November 2, 2021, ABC Company, a Philippine company, received an order from a foreign
firm for $ 40,000. ABC Company shipped the inventory and billed the foreign firm on December
1, 2021. The foreign firm settled its account on February 28, 2022by remitting its payment in US
dollars. The spot rates for the US dollars are as follows:
Selling Buying
November 2, 2021 P 50.50 49.60
December 1, 2021 51.10 50.00
December 31, 2021 51.60 51.40
February 28, 2022 51.30 51.20
Prepare the journal entries to record the above transactions in the books of ABC Company

Possible Questions:
1. What amount of sales should be reported for 2021?
2. What amount should be reported as receivables from foreign customer ( or accounts
receivable) on December 31, 2021?
3. What amount of foreign exchange gain or loss should be recorded on December 31,
2021?
4. What amount of foreign exchange gain or loss should be recorded on February 28,
2022?
5. How much peso amount did ABC Company received on February 28, 2022?
Other Considerations
 FOB shipping terms are also considered
 FOB shipping point
 Transaction date : Date of shipment
 FOB destinations
 Transaction date : Date of receiving goods
 Case 3
 On November 29, 2021 DEF Company places a non- cancellable
purchase order with a company based in USA to import
machinery. The machine was shipped on December 1, 2021 and
was received by DEF Company on December 15, 2021. The
purchase price was settled in US$ on January 3, 2022
1. What is the transaction date if the shipping term is FOB
shipping point

2. What is the transaction date if the shipping term is FOB

destination?
Summary

Type of exchange rate Exchange rate Exchange rate

Transaction to use

Importing Selling spot rate Forex Loss Forex Gain

Exporting Buying spot rate Forex Gain Forex Loss

Accounting Exposure

Transaction Translation
exposure exposure

Results in Results in
transaction translation gain
gain or losses or losses

Recorded in the Presented in the

books of entity consolidated financial
statement
Thank you!

To be continue………………….