Topic 2: (Translations of Foreign Financial Statements)

Prepared by: HAZEL JADE E.
VILLAMAR__
E-mail Address: _hazeljade.villamar@clsu2.edu.ph________
Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines
Instructional Module for the Course

ACCTG 2215 / Accounting for Business Combinations
Module 3
Topic 2
(Translations of Foreign Financial Statements)
Overview
This course covers the concepts and application of the different

standards related to accounting for business combination. It involves
techniques and methodologies on how to deal properly with issues and
problems involving business combination that are likely to be encountered
in practice and in the National CPA Licensure Examination.
I. Objectives
At the end of the module, the following are expected to:
A. Define the terms used in translation of foreign currency statement;
B. Differentiate functional currency and presentation currency; and
C. Identify the steps in the translation of foreign currency statement.

TRANSLATION OF FOREIGN FINANCIAL STATEMENTS
DEFINITION OF TERMS
Functional currency – the currency of the primary economic environment in which the
entity operates.
Presentation currency – the currency that is used to present the financial statements.
Exchange difference – the difference resulting from translating a given number of units
of one currency into another currency at different exchange rates.
Foreign operation – a subsidiary, associate, joint venture, or branch whose activities are
based or conducted in a country or currency other than of the reporting entity.
Closing rate – the spot exchange rate at the balance sheet date.
Spot rate – the exchange rate for immediate delivery.
FUNCTIONAL CURRENCY
It should be determined by looking at several factors. This currency should be one in

which the entity normally generates and spends cash and in which transactions are normally
denominated. All transactions in currencies other than the functional currency are treated
as transactions in foreign currencies. Five factors can be considered in making this decision:
a. the currency that mainly influences the price at which goods and services are
sold;
b. the currency of the country whose competitive forces and regulations mainly
influence the entity’s pricing structure;
c. the currency that influences the costs of equity;
d. the currency in which funds are generated; and
e. the currency in which receipts from operating activities are retained.
The first three items are generally considered to be the most influential in deciding
the functional currency.
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TRANSLATION OF FOREIGN CURRENCY STATEMENTS FROM THE FUNCTIONAL

CURRENCY TO THE PRESENTATION CURRENCY
If the financial statements of the entity are not in the functional currency of a
hyperinflationary economy, then PAS 21 prescribes the following procedures to translate
foreign entity’s statements from its functional currency into the presentation currency:
a. Assets and liabilities (including any goodwill arising on the acquisition and any fair value
adjustment) are translated at the closing rate at the date of the statement of financial
position.
b. The income statement is to be translated at the spot rate at the date of the transactions.
As a practical consideration, income elements normally are translated at weighted average
rate for the period.
c. Exchange differences (translation adjustment) are recognized as component of other

comprehensive income.
Special rules apply to translate financial statements of an entity whose functional

currency is the currency of a hyperinflationary economy. All amounts are translated at the
closing spot rate. The one exception is that the comparative amounts will be shown as
presented in the previous period.
STEPS IN THE TRANSLATION AND CONSOLIDATION OF THE FOREIGN ENTITY
1. Receive foreign entity’s financial statements, which are reported in foreign currency.
2. Translate the statements in foreign currency to Philippine peso. Each foreign entity
account balance must be individually translated into its Philippine peso equivalent, as
follows:
account in Philippine peso equivalent value =
account in foreign currency units * appropriate exchange rate
3. Consolidate the translated foreign entity’s accounts, which are now stated in Philippine
peso, with the Philippine company’s accounts.
Page 3 of 4
REFERENCES:
Advanced Accounting Principles and Procedural Applications Volume 2 by Pedro P. Guerrero

and Jose F. Peralta
Page 4 of 4

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Prepared by: HAZEL JADE E.

Central Luzon State University

Instructional Module for the Course

This course covers the concepts and application of the different

A. Define the terms used in translation of foreign currency statement;

B. Differentiate functional currency and presentation currency; and

C. Identify the steps in the translation of foreign currency statement.

TRANSLATION OF FOREIGN FINANCIAL STATEMENTS

Spot rate – the exchange rate for immediate delivery.

It should be determined by looking at several factors. This currency should be one in

TRANSLATION OF FOREIGN CURRENCY STATEMENTS FROM THE FUNCTIONAL

c. Exchange differences (translation adjustment) are recognized as component of other

Special rules apply to translate financial statements of an entity whose functional

STEPS IN THE TRANSLATION AND CONSOLIDATION OF THE FOREIGN ENTITY

Advanced Accounting Principles and Procedural Applications Volume 2 by Pedro P. Guerrero

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