POLYTECHNIC UNIVERSITY OF THE PHILIPPIN

STO. TOMAS BRANCH

ACCO 30023
ACCOUNTING FOR
FOREIGN EXCHANGE
 Learning Objectives
PUP OUS IODE
After successful completion of this module, you should be able to:
•Understand the provisions of IAS 21;
•Apply the accounting for the effects of changes in foreign exchange rates;
•Understand the nature of foreign currency transactions;
•Understand the nature of foreign operations;
•Identify and apply the basic steps in translating foreign currency amounts into
functional currency;
•Identify and apply the basic steps in translating foreign currency amounts from
functional currency to presentation currency;
•Differentiate current rate method and temporal method;
•Understand the provisions of IAS29
•Apply the principles of financial reporting in hyperinflationary economies
•Identify and incorporate required disclosures in financial statements
PUP OUS IODE
Two Ways of Conducting Foreign
1. Foreign currency Activities
transactions – individual entities
often enter into transactions in a foreign currency.
2. Foreign operations – groups often include overseas
entities.

Objective of IAS21 is to prescribe how to include foreign

currency transactions and foreign operations in the
financial statements of an entity and how to translate
financial statements into presentation currency.
PUP OUS IODE
Two Main Accounting Issues
• Exchange rates are constantly changing.
Therefore, the principal issues in accounting for
foreign activities are determining:
1.Which exchange rate(s) to use; and
2.How to report the effects of changes in exchange
rates in the financial statements.
 PAS 21
PUP OUS IODE
•Objective of PAS 21: to prescribe how to include foreign currency transactions
and foreign operations in the financial statements of an entity and how to
translate financial statements into presentation currency.

Scope of PAS 21:

PAS 21 applies to the following transactions:
1.In accounting for transactions and balances in foreign currencies, except for
hose derivative transactions and balances that are within the scope of PFRS9;
2.In translating the results and financial position of foreign operations that are
included in the financial statements of the entity by consolidation, proportionate
consolidation or the equity method;
3.In translating an entity’s results and financial position into a presentation
currency
PUP OUS IODE
Functional Currency
• When preparing financial statements, a reporting
entity must identify its functional currency. (PAS
21 requires an entity to determine and disclose its
functional currency)
• 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 expends cash.
PUPFactors
OUS IODE
in Determining Functional Currency
Primary factors
An entity’s functional currency is:
1.The currency that mainly influences:
• Sales prices (often the currency in which sales prices are denominated and
settled)
• 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.
PUP OUS IODE
Illustration: Primary and Secondary
Factors

ABC Co. is a mining company registered in

Canada whose shares are traded in the
Toronto Stock Exchange. ABC’s operating
activities take place in the gold and silver
mines in the Philippines.
PUPIllustration:
OUS IODE Primary and Secondary Factors

Question: What is the functional currency of ABC Co.?

Answer: ABC’s functional currency is likely to be

Philippine pesos, even 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 its sales and operating
expenses are in pesos.
PUPIllustration:
OUS IODE Primary and Secondary Factors
Question: What is the presentation currency of ABC Co.?

•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

requirement 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 its financial
statements with the Toronto Stock Exchange, it shall translate its
financial statements to the Canadian dollars (presentation currency).
PUPIllustration:
OUS IODE Primary and Secondary Factors

Question: ABC acquired specialized mining equipment from

Japan, invoiced in Japanese yen. What type of currency is
the Japanese yen under PAS 21 definitions?

•Foreign currency – is a currency other than the entity’s

functional currency.

Answer: The Japanese yen is deemed a foreign currency

for the purpose of preparing ABC’s accounts.
PUP OUS IODE
Foreign Currency Transactions
• Foreign currency transaction is “a transaction that is denominated
or requires settlement in a foreign currency.” (PAS21.20)
• Initial recognition of a foreign currency transaction:
the foreign currency amount is translated at the spot exchange rate at the date of
the transaction.
• Subsequent recognition: at the end of each reporting period:
•Foreign currency monetary items are re-translated using the closing rate;
•Non-monetary items that are measured at historical cost in a foreign currency shall
be translated using the exchange rate at the date of the transaction; and
•Non-monetary items that are measured at fair value in a foreign currency shall be
translated using the exchange rates at the date when the fair value was
determined.
• CLOSING RATE – The spot exchange rate at the reporting date
PUP OUS IODE
Foreign Currency Transactions
• Initial recognition:
The foreign currency amount is translated at the spot
exchange rate at the date of the transaction.
• Spot exchange rate is the “exchange rate for the
immediate delivery” (PAS21.8)… or simply, the
current exchange rate on a given date
• Date of a transaction is the “date on which the
transaction first qualifies for recognition”.
PUP OUS IODE
Direct Quotation and Indirect Quotation
• Direct Quotation – the exchange rate is stated
as a number or units of local currency in
exchange for one unit of foreign currency. (i.e., $1
= P50).
• Indirect Quotation – the exchange rate is stated
as a number or units of foreign currency in
exchange for one unit of local currency. (i.e., P1 =
$0.02).
PUP OUS IODE
Spot Rate
• Spot exchange rate – the rate of currency at
which a bank/broker is willing to buy or sell a
foreign currency
• Selling spot rate (Offer rate) – the rate of currency at
which a broker/bank is willing to sell the foreign
currency. It is normally used when engaged in an
importation transaction.
• Buying spot rate (Bid rate) – the rate of currency at
which a broker/bank is willing to buy the foreign
currency. It is normally used when engaged in an
export transaction.
PUPIllustration:
OUS IODE Importation – Exposed Liability
On Sept. 7, 2022, Jordan Company purchased merchandise from
Genting Corporation, an entity based in Kuala Lumpur, Malaysia. The
amount of transaction is 20,000 Malaysian Ringgit payable on January
31, of 2023.
Below are the relevant exchange rates between Philippine Peso and
Malaysian Ringgit on selected dates: (1 MYR in PHP equivalent)

Required: Journal entries from date of purchase up to the date of

settlement.
PUPIllustration:
OUS IODE Importation – Exposed Liability
PUP OUS IODE
Illustration: Exportation – Exposed Asset
Manila Company is engaged in exportation of its quality produced
furniture to different countries in Southeast Asia. On November 15,
2022, Manila Company sold to SG Inc., a company in Singapore,
furniture worth 12,000 Singapore Dollar (SGD). Settlement will be in
SGD on February 1, 2023.
Below are the relevant exchange rates between Philippine peso and
Singapore Dollar on selected dates: (1 SGD in PHP equivalent)

Required: Journal entries from date of sale up to the date of settlement.

PUP OUS IODE
Illustration: Exportation – Exposed Asset
PUP OUS IODE
Monetary Items and Non-monetary Items
• Monetary items – are units of currency held and assets and liabilities
to be received or paid in a fixed or determinable number of units of
currency. (e.g. cash, accounts receivable)
• Monetary items arising from foreign currency transactions are translated
on initial recognition and re-translated at each subsequent period until
settlement date.
• Non-monetary items are those which do not give rise to the receipt or
payment of a fixed or determinable amount of money. (e.g. inventory,
PPE)
• Non-monetary items arising from foreign currency transactions that are
measured using historical cost are translated on initial recognition and
not re-translated in subsequent periods.
PUP OUS IODE
Recognition of Exchange Differences
• When a foreign currency transaction occurred in one
period and settled in another period:
a. The exchange difference between the transaction date and the
end of reporting period is recognized in the period of
transaction, while
b. 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
PUP OUS IODE
Foreign Operations

• A foreign operation is an entity that is a

subsidiary, associate, joint venture or branch of a
reporting entity, the activities of which are based
or conducted in a country or currency other than
those of the reporting entity.
PUP OUS IODE
Foreign Currency FS Translation
1. Assets and liabilities, for each statement of financial position
(including comparatives) are translated at the closing rate at the
date of the statement of financial position.
2. Income and expenses, for each statement of comprehensive
income or separate IS presented (including comparatives), are
translated at spot exchange rates at the dates of the transactions.
For practical reasons, average rates for a period may be used, if
they provide a reasonable approximation of the spot rates when the
transactions took place. However, if exchange rates fluctuate
significantly, the use of the average rate is inappropriate.
3. All resulting exchange difference is recognized in other
comprehensive income.
PUP OUS IODE
Foreign Currency FS Translation
The exchange differences result from:
a.Translating income and expenses at the exchange rates at the dates of the
transactions and assets and liabilities at the closing rate. Such exchange
differences arise both on income and expense items recognized in profit or loss
and on those recognized directly in equity.
b.Translating the opening net assets at a closing rate that differs from the
previous rate.
IAS 21 presents two approaches in translation and appropriate method to be
used whether the functional currency of a foreign subsidiary is the same as the
presentation currency and whether the books are kept in the functional
currency.
1.Closing rate method (current rate method)
2.Temporal method
PUP OUS IODE
Closing Rate Method (Current Rate
Method)
This method operates on the assumption that:
•The foreign operation operates independently in economic and
financial matters and not integral to the operation of the parent.
•The functional currency (which is not the presentation currency) is the
local currency of the country in which the entity operates; and
•The functional currency is not the currency of hyperinflationary
economy (otherwise the provisions of IAS29 will apply)
PUP OUS IODE
Closing Rate Method (Current Rate
Method)
Features of the closing rate method:
•Assets and liabilities (monetary and non-monetary) are
translated using the current rate (closing rate)
•Stockholders equity accounts are translated using
historical rates, which is the rate when the equities were
recognized (issued). However, the translation for the
following equity items is an exception:
• Beginning balance of retained earnings – must be set to the amount
equal the balance of the previous period.
• Dividends – translated using the rate on date of declaration.
PUP OUS IODE
Closing Rate Method (Current Rate
Method)
Features of the closing rate method:
•Revenues and expenses shall be translated at exchange rates at the
dates of the transactions (historical rate). For practical reasons, a rate
that approximates the exchange rates at the dates of transactions, for
example an average rate for the period, is often used to translate
income and expense items.
•Translation adjustments is presented as an item in the other
comprehensive income. (it may be transferred directly to equity when
the foreign operation is disposed)
PUP OUS IODE
Illustration – Closing Rate Method / Current Rate Method

Assume that on January 4, 2022, Prosperity Company,

based in the Philippines, acquired 80% interest of
Sensation Company in the United States of America for
USD 1,200,000.
As a parent, Prosperity Company will prepare consolidated
financial statements for the year just ended. Sensation
Company submitted the following accounts (in USD) on
December 31, 2022.
PUP OUS IODE
Illustration – Closing Rate Method / Current Rate Method

Assume that on January 4, 2022, Prosperity Company,

based in the Philippines, acquired 80% interest of
Sensation Company in the United States of America for
USD 1,200,000.
As a parent, Prosperity Company will prepare consolidated
financial statements for the year just ended. Sensation
Company submitted the following accounts (in USD) on
December 31, 2022.
PUP OUS IODE
Illustration – Closing Rate Method / Current Rate Method
Below are the relevant exchange rates for the period:

It is assumed that revenues and expenses were generated and incurred evenly throughout the
year. The ending inventory was acquired during the last quarter of the year (FIFO basis).
Required: Translate the trial balance submitted by the subsidiary using the closing rate method.
PUP OUS IODE
Illustration – Closing Rate Method / Current Rate Method
PUP OUS IODE
Illustration – Closing Rate Method / Current Rate Method
PUP OUS IODE
Temporal Method
This method, sometimes called as remeasurement method,
operates on the assumption that:
•The foreign operation operates dependently in economic
and financial matters and integrated to the operation of the
parent; and
•The functional currency is the presentation or reporting
currency of the parent
PUP OUS IODE
Temporal Method
Features of the temporal method:
•Monetary assets and liabilities (cash, deposits, receivable, payables
and most of the liabilities) are translated using the current rate (closing
rate).
•Non-monetary items at historical cost (fixed assets, carried at cost
model, investments at amortized cost, prepayments, inventories and
intangibles) shall be translated using the exchange rate at transaction
date (historical date).
•Non-monetary items at fair value (fixed assets carried at revaluation
model, investment at fair value, and inventories carried at replacement
cost) shall be translated using the exchange rate at date of revaluation
or fair value measurement
PUP OUS IODE
Temporal Method
Features of the temporal method:
•Stockholders‟ equity accounts are translated using
historical rates, which is the rate when the equities were
recognized (issued). However, the translation for the
following equity items is an exception:
• Beginning balance of retained earnings – must be set to the
amount equal the balance of the previous period.
• Dividends – translated using the rate on date of declaration.
PUP OUS IODE
Temporal Method
Features of the temporal method:
•Income statement account are accounted for as follows:
• Related non-monetary items such as cost of sales, depreciation, amortization and
other allocation of non-monetary items shall be translated using the historical rate.
• Not related non-monetary items (related monetary items) such as sales,
purchases, expenses, and income items that result in an inflow / outflow of
monetary items shall be translated using the actual rate (historical rate), however,
for practical reasons, average rate is used.
•Resulting difference (measurement gain or loss) should be reported as
profit or loss for the period. Remeasurement gain or loss arising from
the revaluation of a non-monetary item is taken in the other
comprehensive income if the revaluation gain or loss are taken to the
other comprehensive income.
PUP OUS IODE
Illustration – Temporal Method
Assume that on January 4, 2022, Prosperity Company,
based in the Philippines, acquired 80% interest of
Sensation Company in the United States of America for
USD 1,200,000. On the date of purchase, the inventory in
the book of Sensation amounts to USD 456,000. Also,
during the year Sensation made a purchase with a total
amount of USD 1,152,000.
As a parent, Prosperity Company will prepare consolidated
financial statements for the year just ended. Sensation
Company submitted the following accounts (in USD) on
December 31, 2022.
PUP OUSIllustration
IODE – Temporal Method
Below are the relevant exchange rates for the period:

It is assumed that revenues and expenses were generated and incurred evenly throughout the year. The
ending inventory was acquired during the last quarter of the year (FIFO basis).
Required: Translate the trial balance submitted by the subsidiary using the temporal method /
remeasurement method.
PUP OUSIllustration
IODE – Temporal Method
PUP OUSIllustration
IODE – Temporal Method
PUP OUS IODE

FINANCIAL REPORTING IN
HYPERINFLATIONARY ECONOMIES

Related Standard:
PAS 29 Financial Reporting in
Hyperinflationary Economies
PUP OUS IODE
The Stable Monetary Assumption

• Under the stable monetary assumption, the

purchasing power of money is assumed to be
stable. Therefore, inflation is ignored.
• The exception to this concept is hyperinflation.
PUP OUS IODE
Price Level Changes
• General price level changes and the purchasing
power of money have an inverse relationship.
• If the general price level increases, this means that
the purchasing power of money has decreased – a
condition known as inflation.
• If the general price level decreases, this means that
the purchasing power of money has increased – a
condition known as deflation.
PUP OUS IODE
Hyperinflation
• Hyperinflation occurs when inflation is “very
high.”
• PAS 29 does not establish an absolute
rate at which hyperinflation is deemed to
arise. This is a matter of judgment.
PUP OUS IODE
IAS 29: Financial Reporting in Hyperinflationary
Economies
Objective of IAS 29 : to establish specific standard for entities reporting in the
currency of a hyperinflationary economy, so that the financial information
provided is meaningful.
•IAS 29 shall be applied to the financial statements, including the consolidated
financial statements, of any entity whose functional currency is the currency of a
hyperinflationary economy.
•In a hyperinflationary economy, reporting of operating results and financial
position in the local currency without restatement is not useful. Money loses
purchasing power at such a rate that comparison of amounts from transactions
and other events that have occurred at different times, even within the same
accounting period, is misleading.
•IAS 29 does not establish an absolute rate at which hyperinflation is deemed to
arise. It is a matter of judgement when restatement of financial statements in
accordance with the standard becomes necessary.
PUP OUS IODE
IAS 29: Financial Reporting in Hyperinflationary
Economies
Hyperinflation is indicated by characteristics of the economic environment of a
country which include, but are not limited to, the following:
a.the general population prefers to keep its wealth in non-monetary assets or in a
relatively stable foreign currency. Amounts of local currency held are immediately
invested to maintain purchasing power;
b.the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be quoted
in that currency;
c.sales and purchases on credit take place at prices that compensate for the
expected loss of purchasing power during the credit period, even if the period is
short;
d.interest rates, wages and prices are linked to a price index; and
e.the cumulative inflation rate over three years is approaching, or exceeds, 100%.
PUP OUS IODE
Core principle
• The financial statements of an entity whose functional
currency is the currency of a hyperinflationary economy
shall be stated in terms of the measuring unit current at
the end of the reporting period.
• The comparative information for the previous period shall
also be stated in terms of the measuring unit current at
the end of the reporting period.
• Presentation of information as a supplement to un-
restated financial statements is not permitted.
• Separate presentation of the financial statements before
restatement is discouraged.
PUP OUS IODE
Restatement of Financial Statements
Statement of financial position
•Only non-monetary items, statement of financial position amounts not
already expressed in terms of the measuring unit current at the end of
the reporting period, are restated when using the constant peso
accounting.
•Monetary items are not restated because they are already
expressed in terms of the monetary unit current at the end of the
reporting period.
Monetary items are money held and items to be received or paid in
fixed or determinable amount of money without reference to future
prices of specific goods or services. Monetary items include monetary
assets and monetary liabilities.
PUP OUS IODE
Examples of Monetary Assets
1. Cash and cash equivalents
2. Loans and receivables and their related allowances
3. Financial assets at amortized cost (debt instruments)
4. Finance lease receivables
5. Cash surrender value
PUP OUS IODE
Examples of Monetary Liabilities
1. Financial liabilities at amortized cost (debt instruments), e.g.,
accounts, notes, bonds, and finance lease payables.
2. Accrued expenses payable in fixed and determinable amounts of
money.
3. Refundable deposits, e.g., security deposits on leases to be
returned to tenants at the end of the lease term and deposits for
returnable containers.
4. Dividends payable
• All other items that cannot be classified as monetary items are non-
monetary items, except of “retained earnings.” Retained earnings
is the balancing figure after restatement.
PUP OUS IODE
Example of Nonmonetary Assets
1. Physical assets such as inventories, property, plant, and
equipment, and investment properties and their related
accumulated depreciation
2. Intangible assets
3. Financial assets measured at fair value
4. Advances and prepayments not collectible in cash
such as advances to suppliers, prepaid insurance,
prepaid rent, and the like.
PUP OUS IODE
Example of Nonmonetary Liabilities
1. Financial liabilities measured at fair value
2. Unearned items not payable in cash such as advances
from customers, unearned rent, deferred revenues, and
the like.
3. Warranty obligations to be settled by future delivery of
services (e.g., free repair service) or replacement with
other non-monetary items (e.g., free replacement of
parts or replacement of the good purchased).
• Equity items such as share capital and share premium
are also nonmonetary items and thus restated.
PUP OUS IODE
Non-monetary items carried at other than cost
• As a general guide, only non-monetary measured at cost
are restated. The following non-monetary items need not
be restated:
1.Non-monetary items measured at net realizable value
(NRV) or Fair value as at the end of reporting period*.
2.Non-monetary items measured at revalued amounts as at
the end of reporting period*.
• * If the NRV, fair value or revalued amount is determined
at a date other than the end of reporting period, the
nonmonetary item is nevertheless restated.
PUP OUS IODE
Restatement of Financial Statements
• All items in the statement of profit or loss and
other comprehensive income are restated.

Formula for restatement:

*When it is impracticable to determine the historical price indices, such as for

transactions recurring very frequently, the average general price index for
the period may be used.
PUP OUS IODE
Gain or loss on net monetary position

• The gain or loss on the net monetary position (also called

‘purchasing power gain or loss’) is recognized in profit
or loss.
PUP(IAS
OUS29)
IODE
Restatement of Financial Statements
• IAS 29 should be applied by entities whose functional currency is the
currency of the following countries:
• Argentina
• Sudan (and South Sudan)
• Zimbabwe
• Venezuela
• Iran
• Lebanon
• The IASB does not identify whether a particular jurisdiction's
economy is hyperinflationary. The International Practices Task force
(IPTF) of the Center for Audit Quality (CAQ) monitors the status of
“highly inflationary” countries.
PUP OUS IODE Disclosure Requirements
PAS 21 – Effects of Changes in Foreign Exchange Rates
An entity shall disclose:
•The amount of exchange differences recognized in profit or loss except for
those arising on financial instruments measured at fair value through profit or
loss in accordance with IFS 9; and
•Net exchange differences recognized in other comprehensive income and
accumulated in a separate component of equity, and a reconciliation of the
amount of such exchange differences at the beginning and end of the period.
When the presentation currency is different from the functional currency, that
fact shall be stated, together with disclosure of the functional currency and the
reason for using a different presentation currency. When there is a change in
the functional currency of either the reporting entity or a significant foreign
operation, that fact and the reason for the change in functional currency shall be
disclosed.
PUP OUS IODE Disclosure Requirements
PAS 21 – Effects of Changes in Foreign Exchange Rates

When an entity presents its financial statements in a currency that is different from its
functional currency, it shall describe the financial statements as complying with
International Financial Reporting Standards only if they comply with all the requirements
of each applicable Standard and each applicable Interpretation of those Standards
including the translation method. When an entity displays its financial statements or other
financial information in a currency that is different from either its functional currency or its
presentation currency, it shall:
•Clearly identify the information as supplementary information to distinguish it from the
information that complies with International Financial Reporting Standards;
•Disclose the currency in which the supplementary information is displayed; and
•Disclose the entity's functional currency and the method of translation used to determine
the supplementary information.
PUP OUS IODE Disclosure Requirements
PAS 21 – Effects of Changes in Foreign Exchange Rates
The following disclosures shall be made:
•The fact that the financial statements and the corresponding figures for
previous periods have been restated for the changes in the general
purchasing power of the functional currency and, as a result, are stated
in terms of the measuring unit current at the end of the reporting period;
•Whether the financial statements are based on a historical cost
approach or a current cost approach; and
•The identity and level of the price index at the end of the reporting
period and the movement in the index during the current and the
previous reporting period.
PUP OUS IODE
References
• Millan, Z. V. B. (2021). Accounting for Special
Transactions (Vol. 1).
• Binaluyo, J. (2022). Accounting for Business
Combination [Review of Accounting for
Business Combination].