ACCO 30023 LM 7 Effects of Changes in Foreign Exchange Rates
ACCO 30023 LM 7 Effects of Changes in Foreign Exchange Rates
ACCO 30023 LM 7 Effects of Changes in Foreign Exchange Rates
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.
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
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.
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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
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].