Learning Objectives

 Define an entity’s functional currency.

 Account for foreign currency
transactions.
 Translate the financial statements of a
foreign operation.
1. Foreign currency transactions – individual entities
often enter into transactions in a foreign currency.

2. Foreign operations – groups often include

overseas entities.
 When preparing financial statements, a reporting
entity must identify 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.
Primary factors
An entity’s functional currency is:
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.
 Initial recognition :
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:
1. Foreign currency monetary items are re-translated
using the closing rate;
2. 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
3. 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.
 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.
 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.
EXERCISES
I-Exchange Rates
Suppose the direct foreign exchange rates in Philippine peso are:
1 US dollar = P40.00
1 Singapore dollar = P32.00

Required:
•What are the direct exchange rates for the Philippine peso to US dollar
and the Singapore Dollar?

•What are the indirect exchange rates for the US dollar and the
Singapore Dollar?

•How many US dollars must a U. S. company pay to purchase goods

costing P8,000 from a Philippine company?

•How many Philippine peso must be paid for a purchase costing 4,000
Singapore dollars?
EXERCISES
II - Importing Transaction (Exposed Liability)
Assume that on November 1, 20x4 ordered 1,200 units of inventory
from a U. S. firm for $24,000. The inventory was shipped and invoiced
to the Philippine firm on December 1, 20x4, to be paid on March 1,
20x5. The firm’s fiscal year-end is December 31. Assume further that
the Philippine firm did not engage in any form of hedging activity. The
spot rates for U. S. dollars at various times are as follow:

Buying Spot Rates Selling Spot Rates

November 1, 20x4 . . . . . . . . . . P39.80 P 40.25
December 1, 20x4 . . . . . . . . . . . 40.00 40.55
December 31, 20x4 . . . . . . . . . . 40.70 40.80
March 1, 20x5 . . . . . . . . . . . . . . 40.60 40.65
Required:
Prepare all entries on Petra Corporation’s books to record the above
transactions.

Determine the following:

Foreign exchange gain or loss on:
1. December 1, 20x4
2. December 31, 20x4
3. March 1, 20x5
On December 31, 20x4:
1. Accounts payable
2. Inventory
III - Exporting Transaction (Exposed Asset)
On November 1, 20x4, a Philippine firm received an order for 120 units
of inventory for $60,000 to a U. S. firm. The Philippine firm shipped the
inventory and billed the U. S. firm on December 1, 20x4. The Philippine
firm received the customer’s remittance in full on March 1, 20x5. The
firm’s fiscal year-end is December 31. Assume

further that the Philippine firm did not engage in any form of hedging
activity. The spot rates for U. S. dollars at various times are as follow:

Buying Spot Rates Selling Spot Rates

November 1, 20x4 . . . . . . . . P39.80 P 40.25
December 1, 20x4 . . . . . . . . 40.00 40.55
December 31, 20x4 . . . . . . . 40.70 40.80
March 1, 20x5 . . . . . . . . . . . 40.60 40.65
Required:
Prepare all entries on Petra Corporation’s books to record the above
transactions.
Determine the following:
1.Foreign exchange gain or loss on:
a.December 1, 20x4
b.December 31, 20x4
c.March 1, 20x5
2.On December 31, 20x4:
a.Accounts receivable
b.Sales
 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.
1. Assets and liabilities are translated at the closing
rate at the date of the statement of financial
position.
2. Income and expenses, including other
comprehensive income, 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. The resulting exchange difference is recognized
in other comprehensive income.
 If a foreign operation’s functional currency is
the currency of a hyperinflationary economy,
the foreign operation’s financial statements
are restated first to constant peso using PAS
29 before they are translated under PAS 21.
After restatement using PAS 29, all amounts
(i.e., assets, liabilities, equity, income and
expenses, including comparatives) are
translated at the closing rate at the current
reporting date.
1. For a Philippine entity, which of the
following quotations for exchange rates is
correct?
Direct quotation Indirect quotation
A. ₱1:$0.022 ₱45:$1
B. ₱45:$65 ₱65:$45
C. ₱40:$1 ₱1:$0.025
D. ₱45:$1 ¥.002:₱40
2. A ________ transaction in the foreign
exchange market requires an almost
immediate delivery (typically within two days)
of foreign exchange.
A) spot
B) forward
C) futures
D) none of the above
3. When an entity purchases goods or services
where the settlement is in foreign currency, the
transaction is considered foreign operation.
4. The currency of the primary economic
environment in which the entity operate is
presentation currency.
5. For financial reporting purposes, foreign
currency deposits held by an enterprise at the
end of the reporting period should be
translated using the exchange rate prevailing
at the end of the reporting period.
Complex Corp. Acquired 80% of the common stocks of Basic
Corporation on January 1, 2021. The ff accounts from Basic
adjusted trial balance in dollars at December 31, 2021.

Debits Credits
Cash $10,000 Accounts Payable $8,000
Accounts Receivable 20,000 Unearned Rent 4,000
Equipment (acq. 3/1/2020) 12,000 Common Stock 20,000
Cost of Sales 4,000 Retained Earnings, 01/1 8,000
Depreciation Expenses 800 Sales 10,000
OPEX 2,700 Total $50,000
Dividends 500
Total $50,000
The relevant exchange rates in PHP for US $ is:
March 1,2020(issue date for common
stock & equipment) 50
Average Rate for 2021 52
Date of dividends declared 53
Date of dividends are paid 54
At the end of 2021 55

The Philippine peso of equivalent Retained Earnings on january 1 amounted to

P392,000. Assume that the functional currency of the subsidiary:
a. NOT Hyperinflationary economy
b. Hyperinflationary economy

Required
a.Net Income? d.Translation gain/loss
b.Dividends? e.Gain/loss on monetary position
c.RE? f.SHE?
d.Total Assets
e.Total Liabilities