Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture A

Week 1 TO 3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to:
a. Record Foreign currency transactions.
b. Translate foreign currency financial statements

Big Picture in Focus: ULOa. Record Foreign currency transactions.

Metalanguage

In this section, the essential terms relevant to the home office and branch accounting of
demonstrate ULOa will be operationally defined to establish a standard frame of reference.
You will encounter these terms as we go through this course. Please refer to these
definitions in case you will face difficulty in understanding the accounting concepts concepts.

Conversion. The exchange of one currency for another.

Foreign currency. A currency other than the functional currency of the reporting entity
being referred to (for example, the Philippine peso could be a foreign currency for a foreign
entity).

Foreign currency transactions. Transactions whose terms are denominated in a currency

other than the reporting entity’s functional currency. Foreign currency transactions arise when
an enterprise (1) buys or sells goods or services on credit whose prices are denominated in
foreign currency, (2) borrows or lends funds and the amounts payable or receivable
are denominated in foreign currency, (3) is a party to an unperformed forward exchange
contract, or (4) for other reasons, acquires or disposes of assets or incurs or settles liabilities
denominated in foreign currency.

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes), you need to fully understand
the following essential knowledge laid down in the succeeding pages. Please note that you
are not limited to exclusively refer to these resources. Thus, you are expected to utilize other
books, research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc., and even online tutorial websites.

Topic: ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS

FOREX TRANSACTIONS IN GENERAL

In a strict sense, foreign exchange transactions are those that are to be settled in foreign
currency, regardless of the location of either party. These are accounted for by the
domestic company by translating the amounts in foreign currency with BSP-set exchange
rates.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

For translation purposes, the exchange rates must be quoted directly, where the Peso is
expressed as the equivalent of one foreign currency.

Direct exchange rate

• The direct exchange rate (DER) is the number of local currency units (LCUs) needed
to acquire one foreign currency unit (FCU).
• From the viewpoint of a PH entity, the direct exchange rate can be viewed as the
peso cost of one foreign currency unit.
• The direct exchange rate ratio is expressed as follows, with the LCU, the PH peso, in
the numerator:

DER = PH peso equivalent value

1 FCU

Example: 1 FC= P 25
# of FC 20,000 FC

To convert (number of FC X DER)

20,000 *25= P 500,000

Indirect Exchange Rate

• The indirect exchange rate (IER) is the reciprocal of the direct exchange rate.
• From the viewpoint of an PH entity, the indirect exchange rate can be viewed as the
number of foreign currency units that 1 PH peso can acquire.

The ratio to compute the indirect exchange rate is:

IER = 1 FCU
PH peso equivalent value
So in the preceding example one PH peso could be converted into .04 FC (1/25)

To convert ( Number of FC/ IER)

20,000/.04 = P500,000

Also, if for example 1 PHp : 0.20 FC

Number of FC = 20,000 FC

To convert : 20,000/.20 = P100,000

Or convert to DER = (1/.20) = P5 ( so Php 5 could be converted for one 1 FC)

To convert : 20,000 *5 = P100,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Changes in Exchange Rates

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

IMPORT AND EXPORT (UNHEDGED)TRANSACTIONS

✓ In an unhedged import and export transaction, the only relevant exchange rate would
be the spot rate as of the date of the transaction, balance sheet date, and the date of
settlement.

✓ Spot rates are classified as either buying or selling (also called bid and offer rates,
respectively). If the domestic entity exports, the buying rate is used since this would
be the price that the foreign buyer would pay for the goods. If the domestic entity
imports, the selling rate is used.

✓ Suppose the domestic company exports goods on F.O.B. destination freight terms.
On the date of transaction, the spot rate to be used will be as of the date when the
goods reached the buyer the point when legal title is passed under the freight term.
Of course, if on F.O.B. shipping point, it will be when shipped.

✓ The domestic entity recognizes forex gains or losses as the spot rate changes during
the aforementioned dates only. For instance, if the domestic entity is an exporter
(thus it has outstanding accounts receivable) and the buying spot rate increases, the
entity recognizes forex gains to be recorded in profit/loss (together with an increase
in accounts receivable).

✓ The foreign entity does not record any forex gains or losses since the transaction is
denominated in their currency. The final cash payment during the date of settlement
shall of course still be at the spot rate, so is the cost at which the asset purchased is
recorded

Illustration : Importing Transaction (Exposed liability)

To illustrate an importing transaction (an exposed liability), assume that on November 1, 2014
one firm ordered 1,000 units of inventory from a U.S firm for $20,000. The inventory was
shipped and invoiced to the Philippine firm on December 1, 2014, to be paid on March 1,
2015. 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:

It should be noted that the date of commitment does not give rise to any liability because it
may be cancelled any time by the buyer; therefore, there is no required entry on November
1,2014.
The Philippine firm would prepare the following journal entry on December 1,2014:
December 1,2014 (Transaction date):

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

At the balance sheet date, the accounts payable denominated in foreign currency is adjusted
using the exchange rate (spot rate) in effect at the balance sheet date (known as the closing
or current rate). The journal entry on:
December 31,2014 (Balance sheet date):

If the exchange rate had declined below P40.55 for example to P40.50, the Philippines would
have recognized a gain of P1,000 since it would take only P810,000 ($20,000*P40.50) to
settle the P811,000 recorded liability.
On the settlement date, the Philippine firm must buy dollars in order to satisfy the liability.
With change in the exchange rate to P40.65, the firm must buy P813,000 ($20,000*P40.65)
on March 1,2015, to acquire the $20,000. The journal entry on:

March 1,2015 (Settlement date):

Over the three-month period, the decision to delay making payment cost the firm P2,000 (the
P813,000 cash paid less the original payable amount of P811,000). This net amount was
recognized as a loss of P5,000 in 2014 and a gain of 3,000 in 2015.
Note in the preceding example that on December 31, the balance sheet date, a transaction
loss was recognized on the open account payable. Such a loss is considered unrealized
because the account has not yet been settled or closed. When an account payable (or
receivable) is settled or closed, a transaction gain or loss on the settlement is considered
realized.

Illustration : Exporting Transaction (Exposed Asset)

On November 1, 2014, a Philippine firm received an order for 100 units of inventory for
$50,000 to a U.S. firm. The Philippine firm shipped the inventory and billed the U.S. firm on
December 1,2014. The Philippine firm received the customer’s remittance in full on March
1,2015. 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 for U.S. dollars at various times are
as follow:

The Philippine firm would prepare the following journal entry on December 1,2014:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

December 1,2014 (Transaction date):

At the balance sheet date, the accounts receivable denominated in foreign currency is
adjusted using the exchange rate (spot rate) in effect at the balance sheet date (known as
the closing or current rate). The entry is

December 31,2014 (Balance sheet date):

March 1, 2015 (Settlement date)

FOREIGN DEBT TRANSACTIONS

✓ Just like purchase of commodities, forex gains/losses are also recognized in foreign
debt borrowings/grants. Also, the purchase of the goods might have been made
through issuance of promissory notes and other debt instrument.

✓ If the domestic entity is a borrower, it must use the selling spot rate, and the buying
spot rate if it lends

ILLUSTRATION

Melrose issued a promissory note denominated in foreign currency for the purchase made
from an Italian supplier. The following were related transactions; ( in Italy Lire). On December
1,2016 Melrose Corporation purchased merchandise from an Italian supplier for 60- day 18%
promissory note for 108,000 Italy lire, at a selling rate 1 FC to 74.20 . On December 31, the
selling spot rate is 1FC to 74.85. On January 31, 2017 the selling spot rate is 1 FC to P 75.75.

Journal entries to record the transaction are as follows:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Self-Help: You can also refer to the sources below to help you further understand the
lesson.

Dayag, A. J. (2015). Advanced financial accounting: A comprehensive and procedural approach(2016

ed. Vol. 2). Manila: Lajara pub. House.

Guerrero, P., & Peralta, J. (2013). Advanced accounting (Vol. 2). Manila: GIC Enterprise &
Co., Inc.

Let’s Check

I. Questions:
a. What are foreign currency transactions?
_____________________________________________________________
_____________________________________________________________

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

b. Distinguish spot rates and future rates (forward rates).

_____________________________________________________________
_____________________________________________________________
_____________________________________________________________

II -Multiple Choice:
1. An entity started trading in country A, whose currency was the dollar. After several
years the entity expanded and exported its product to country B, whose currency was
the euro. The business was conducted through a subsidiary in country B. The
subsidiary is essentially an extension of the entity’s own business, and the directors
of the two entities are common. The functional currency of the subsidiary is
a. The dollar b. The euro c. The dollar or the euro d. Difficult to determine

2. Initially, a foreign currency transaction shall be recorded by applying to the foreign

currency amount
a. The spot exchange rate at the date of transaction.
b. The closing rate at the end of reporting period
c. The average exchange rate during the year
d. The spot exchange rate at the date of the settlement of the transaction

2. Exchange differences arising from foreign currency transactions shall

a. Be recognized in profit or loss of the period in which they arise
b. Be included in other comprehensive income
c. Be deferred and amortized over a reasonable period
d. Be charged to retained earnings

3. A foreign currency transaction is a transaction which is denominated or requires

settlement in a foreign currency and includes
I -Purchase and sale of goods and services whose price is denominated in a foreign
currency.
II-Borrowing and lending of funds when the amounts payable or receivable are
denominated in a foreign currency
a. I only. b. II only. c. Both I and II d. Neither I nor II

4. The forward rate may be defined as

a. The price a foreign currency can be purchased or sold today.
b. The price today at which a foreign currency can be purchased or sold in the
future.
c. The forecasted future value of a foreign currency.
d. The U.S. dollar value of a foreign currency

On November 29, 20x1, ABC Co. received a non-cancellable sale order for the exportation of
inventories from a UK-based company. The contract price is £40,000 (pound sterling). The
contract term is FOB shipping point. The inventories were shipped on December 1, 20x1. The
sale was settled on January 3, 20x2.

The following are the exchange rates:

November 29, 20x1………………………………………..₱67:£1
December 1, 20x1………………………………………….₱68:£1
December 31, 20x1………………………………………..₱70:£1
January 3, 20x2…………………………………………….₱71:£1

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

5. How much sale revenue is recognized in 20x1?

a. 2,680,000 b. 2,720,000 c. 2,800,000 d. 2,840,000

6. How much FOREX gain (loss) is recognized in 20x1?

a. 120,000 b. (120,000) c. 80,000 d. (80,000)

7. How much FOREX gain (loss) is recognized in 20x2?

a. 40,000 b. (40,000) c. 120,000 d. 160,000

8. How much is the total FOREX gain (loss) resulting from the sale transaction?
a. 160,000 b. 120,000 c. 80,000 d. 40,000

On November 29, 20x1, ABC Co. placed a non-cancellable purchase order for the importation
of a machine with a purchase price of €40,000 from a company based in France. The contract
term is FOB shipping point. The machine was shipped on December 1, 20x1 and was received
by ABC on December 15, 20x1. The purchase price was settled on January 3, 20x2.

The following are the exchange rates:

November 29, 20x1………………………………………..₱55:€1
December 1, 20x1………………………………………….₱58:€1
December 15, 20x1………………………………………..₱57:€1
December 31, 20x1………………………………………..₱60:€1
January 3, 20x2…………………………………………….₱61:€1
9. The entry on December 1, 20x1 includes
a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
10. The total FOREX gain (loss) recognized in 20x1 is
a. 40,000 b. (80,000) c. (200,000) d. (120,000)
11. The total FOREX gain (loss) recognized in 20x2 is
a. (40,000) b. (80,000) c. (200,000) d. (120,000)

ABC Co. had the following transactions during the last month of the current reporting period:
• Purchased raw materials from Pakistani Co., a company based in Pakistan, for 400,000
rupees on December 17, 20x1 to be settled on January 5, 20x2.
• Sold inventory to Swedish Co., a company based in Sweden, for 80,000 kroners on
December 20, 20x1 to be settled on January 5, 20x2.

The exchange rates are as follows:

Rupee Kroner
Dec. 17, 20x1…………Php 1 : PKR 2.04
Dec. 20, 20x1……………………………………… Php 1 : SEK 0.1667

Dec. 31, 20x1…………Php 1: PKR 2 Php 1 : SEK 0.2000

Jan. 5, 20x2…………..Php 1: PKR 2.083 Php 1 : SEK 0.2400

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

12. How much are the total FOREX gains/losses recognized by ABC Co. from the purchase
and sale transactions described above?
Purchase Sales
a. (4,048) 146,570
b. 4,048 (146,572)
c. 3,922 (66,667)
d. (3,922) 66,667
13. How much are the total FOREX gains/losses recognized by Pakistani Co. and Swedish Co.
from the purchase and sale transactions, respectively?
Pakistani Swedish
a. (4,048) 146,572
b. 3,922 (66,667)
c. (3,922) 66,667
d. 0 0

14. The accounts of San Pedro Corporation, a Filipino corporation, shows P81,300,000 accounts
receivable and P38,900,000 accounts payable at December 31, 2015, before adjusting entries are
made. An analysis of balances reveals the following:
Accounts receivable
Receivable denominated in Philippine Pesos P28,500,000
Receivable denominated in 34,700,000 Japanese Yen 11,800,000
Receivable denominated in 804,000 U.S. Dollars 41,000,000
Accounts payable
Payable denominated in Philippine Pesos P 6,850,000
Payable denominated in 200,000 Canadian Dollar 7,600,000
Payable denominated in 72,000,000 Japanese Yen 24,450,000

Current exchange rates for Japanese Yen, U.S. Dollars, and Canadian Dollars at December 31, 2015
are P0.3456, P51,39, and P38.55, respectively.
Determine the foreign currency exchange gain or loss that must appear on the income
statement of San Miguel Corporation for the year ended December 31, 2015.

a. P509,880 gain
b. P543,200 loss
c. P33,320 gain
d. P33,320 loss

Let’s Analyze

Problem 1
JOURNALIZING FOREIGN CURRENCY TRANSACTIONS
Gaw Produce Co. purchased inventory from a Japanese company on December 18, 2015.
Payment of ¥400,000 was due on January 18, 2016. Exchange rates between the dollar
and the yen were as follows:
Exchange
Date Rate
December 18, 2015 P1 = ¥125
December 31, 2015 P1 =¥122
January 18, 2016 P1 = ¥120

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase
and payment.

PROBLEM 2
Old Colonial Corp. made a sale to a foreign customer on September 15, 2009, for 100,000
FC . Payment was received on October 15, 2009. The following exchange rates applied:
Date Exchange Rate
September 15, 2009 FC1 = P.48
September 30,2009 FC1 = P.50
October 15, 2009 FC1 = P.44
Required:
Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that
the company closes its books on September 30 to prepare interim financial statements.

PROBLEM 3
On May 1, 2015 Jolibee, Inc. purchased from a Japanesse company for a Philippine peso
equivalent of P 800,000 to be paid June 30,2016. The exchange rates were:
May 1,2016 1 yen= P .40
December 1,2016 1 yen= P.45
June 30,2016 1 yen = P .42

Required: Assume the transaction is denominated in the local currency of units of the foreign
entities. Prepare the necessary journal entries to record the above transaction
Q&A List
In this section you are going to list what boggles you in this unit. You may indicate your
questions but noting you have to indicate the answers after your question is being raised and
clarified. You can write your questions below.
Questions/Issues Answers

1.

2.

3.

4.

5.

Keyword Index
• Conversion
• Foreign Currency Transactions

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOb.. Translate foreign currency

financial statements

Metalanguage
In this section, the essential terms relevant to the home office and branch accounting of
demonstrate ULOa will be operationally defined to establish a standard frame of reference.
You will encounter these terms as we go through this course. Please refer to these
definitions in case you will face difficulty in understanding the accounting concepts concepts.

Functional currency. The currency of the primary economic environment in which the
entity operates; normally, the currency of the environment in which the entity primarily
generates and expends cash.

Monetary items. Cash, claims to receive a fixed amount of cash, and obligations to pay a
fixed amount of cash.

Non-monetary items. All statement of financial position items other than cash, claims to
cash, and cash obligations.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes), you need to fully understand
the following essential knowledge laid down in the succeeding pages. Please note that you
are not limited to exclusively refer to these resources. Thus, you are expected to utilize other
books, research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc., and even online tutorial websites.

Topic: TRANSLATION OF FOREIGN CURRENCY FINANCIAL

STATEMENTS`

Overview of Translation
Accounting exposure, also called translation exposure, arises because financial statements
of foreign subsidiaries – which are stated in foreign currency – must be restated in the
parent’s reporting currency for the firm to prepare consolidated financial statements. The
accounting process of translation, involves converting these foreign subsidiaries financial
statements into Philippine Peso denominated statements.
Translation exposure is the potential for an increase or decrease in the parent’s net worth
and reported net income caused by a change in exchange rates since the last translation.
While the main purpose of translation is to prepare consolidated statements, management
uses translated statements to assess performance (facilitation of comparisons across many
geographically distributed subsidiaries).

Translation in principle is simple:

– Foreign currency financial statements must be restated in the parent company’s
reporting currency.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

– If the same exchange rate were used to remeasure each and every line item
on the individual statement (I/S and B/S), there would be no imbalances
resulting from the remeasurement
– What if a different exchange rate were used for different line items on an
individual statement (I/S and B/S)?
– An imbalance would result.
Most countries today specify the translation method used by a foreign subsidiary based on
the subsidiary’s business operations (subsidiary characterization).For example, a foreign
subsidiary’s business can be categorized as either an integrated foreign entity or a self-
sustaining foreign entity. An integrated foreign entity is one that operates as an extension
of the parent, with cash flows and business lines that are highly interrelated. A self-
sustaining foreign entity is one that operates in the local economic environment
independent of the parent company.
FUNCTIONAL CURRENCY
A foreign subsidiary’s functional currency is the currency of the primary economic
environment in which the subsidiary operates and in which it generates cash flows. In other
words, it is the dominant currency used by that foreign subsidiary in its day-to-day operations.
Functional currency determines the Translation method.
Two basic methods for the translation of foreign subsidiary financial statements are employed
worldwide:
– The current rate method
– The temporal method
Regardless of which method is employed, a translation method must not only designate at
what exchange rate individual balance sheet and income statement items are remeasured,
but also designate where any imbalance is to be recorded (current income or an equity
reserve account).
Foreign subsidiaries differentiate on the basis of functional currency, not subsidiary
characterization.
– If the financial statements of the foreign subsidiary are maintained in PH peso,
translation is not required
– If the statements are maintained in the local currency, and the local currency is
the functional currency, they are translated by the current rate method
– If the statements are maintained in local currency, and the PH peso is the
functional currency, they are remeasured by the temporal method
– If the statements are in local currency and neither the local currency or the PH
peso is the functional currency, the statements must first be remeasured into
the functional currency by the temporal method, and then translated into PH
peso by the current rate method
Example
1. An American subsidiary of a PH firm has the US$ as its functional currency.
2. A Japanese subsidiary of a PH firm has the Ph Peso as its functional currency.
3. An Australian subsidiary of a PH firm , keeping its own records in Australian
dollars, determines its functional currency is the euro.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Current Rate Method

• Assets and liabilities are translated at the current rate of exchange
• Income statement items are translated at the exchange rate on the dates they were
recorded or an appropriately weighted average rate for the period
• Dividends (distributions) are translated at the rate in effect on the date of payment
• Common stock and paid-in capital accounts are translated at historical rates
• Gains or losses caused by translation adjustments are not included in the calculation
of consolidated net income.
• Rather, translation gains or losses are reported separately and accumulated in a
separate equity reserve account (on the B/S) with a title such as cumulative translation
adjustment (CTA).
• The biggest advantage of the current rate method is that the gain or loss on translation
does not pass through the income statement but goes directly to a reserve account
(reducing variability of reported earnings).

Temporal Method
• Under the temporal method, specific assets are translated at exchange rates
consistent with the timing of the item’s creation.
• This method assumes that a number of individual line item assets such as inventory
and net plant and equipment are restated regularly to reflect market value.
• Gains or losses resulting from remeasurement are carried directly to current
consolidated income, and not to equity reserves (increased variability of consolidated
earnings).
• If these items were not restated but were instead carried at historical cost, the temporal
method becomes the monetary/nonmonetary method of translation.
✓ Monetary assets and liabilities are translated at current exchange rates
✓ Nonmonetary assets and liabilities are translated at historical rates
✓ Income statement items are translated at the average exchange rate for the
period
✓ Dividends (distributions) are translated at the exchange rate on the date of
payment
✓ Equity items are translated at historical rates

Translation to Currency of Reporting Entity as Per Account Classification

Assets

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 Department of Accounting Education
Mabini Street, Tagum City
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Telefax: (084) 655-9591, Local 116

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Note that "current" rate, as used for income statement items, is usually the average
rate for the year. Firms with seasonal business fluctuations would use a weighted
average rate.

Illustration: Translation of Foreign Subsidiary’s Financial Statements

Assume that on January 2,2014, P Company, a Philippine based company, acquired for
US$2,000,000 an 80% interest in S Company maintains its books in U.S. dollars and they
are in conformity with GAAP in the Philippines (parent’s functional and presentation currency
is the peso). S Company’s financial statements are prepared in the local currency unit (the
foreign currency unit-dollars. The translation process will be illustrated under two different
assumptions: (1) the U.S. dollars is the functional currency, and (2) the Philippine peso is the
functional currency.

Exchange rates for the US dollars for the 2014 fiscal year are as follows:

In translating the income statement accounts, it is assumed that revenues were generated
and expenses were incurred evenly during the year. It is also assumed that the company
uses the FIFO cost flow assumption, and that the ending inventory was acquired during the
last quarter.
Entries made on the books of P Company to account for the investment and the preparation
of a consolidated statements workpaper based on the translated account balances are
illustrated in the appendix to this chapter.

Functional Currency Is the Local Currency Unit – Translation into the Presentation
Currency (Currency/Closing Rate Method)
Year-end financial statements at December 31 in U.S. dollars for the subsidiary and the
translation of the account balances into pesos using the current/closing rate method.

Workpaper – Translation into the Presentation Currency (Current/Closing Rate

Method.
Functional Currency Is Local Currency Unit-US Dollars
Translation into the Presentation Currency (Current/Closing Rate Method)

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

*Include as a component of other comprehensive income

(1) Retained earnings in pesos on January 2 (date of acquisition)
(A) Average exchange rate used to approximate the rate on the date these elements were
recognized
(H) Historical exchange rate
(C) Current exchange rate
(5) B/A –balancing amount

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Verification of the Translation Adjustment – Current/Closing Rate Method (Functional

Currency – US Dollars)- Direct Method

Statement of Comprehensive Income and Statement of Shareholders’ Equity

Functional Currency Is Local Currency Unit –US$

Translation into the Presentation Currency (Current/Closing Rate Method)

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Functional Currency Is the Philippines Peso- Translation into the Functional Currency
(Remeasurement Method)
The temporal method is used to remeasure the accounts of a foreign entity when its books
are maintained in currency other than its functional currency. The objective of the
remeasurement process is to produce the same results as if the transactions of the foreign
entity had been recorded initially in its functional currency. To accomplish this, the historical
exchange rate is used to translate accounts carried at historical cost, while the current
exchange rate is used to translate other account.

Translation into the Functional Currency (Remeasurement or Temporal Method)

Functional Currency Is Philippine Peso
Translation into the Functional Currency (Remeasurement or Temporal Method)

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Verification of the Translation Adjustment – Remeasurement or Temporal Method

(Functional Currency – Philippine peso)- Direct Method

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Foreign Operations in Hyperinflationary Environment

Multinationals do not need to determine the functional currency of those foreign entities
located in a highly inflationary economy. In those cases, entities must use the temporal
method with remeasurement gains or losses reported in net income.

A country is defined as having a highly inflationary economy when its cumulative three-year
inflation exceeds 100 percent. With compounding, this equates to an average of
approximately 26 percent per year for three years in a row. In any given year, a country may
or may not be classified as highly inflationary, depending on its most recent three-year
experience with inflation.
IAS 29 characteristics that indicate hyperinflation are:
(a) The general population prefers to keep its wealth in a relatively stable foreign currency.
(b) Interest rates, wages, and other prices are linked to a price index.
(c) The cumulative rate of inflation over three years is approaching, or exceeds, 100
percent

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Illustration: Functional currency is the Currency of Hyperinflationary Economy

Elrie Company operates in hyperinflationary economy. Its balance sheet at December 31,
2014, follows:

The general price index and exchange rates of peso to FC are as follows:

The property plant and equipment were purchased on December 31, 2012 and there is a six-
month inventory held. The non-current liabilities were loan raised on March 31, 2014.

Workpaper- Translation of Financial Statements of Hyperinflationary Economy

Self-Help: You can also refer to the sources below to help you further understand the
lesson.

Dayag, A. J. (2015). Advanced financial accounting: A comprehensive and procedural approach(2016

ed. Vol. 2). Manila: Lajara pub. House.

Guerrero, P., & Peralta, J. (2013). Advanced accounting (Vol. 2). Manila: GIC Enterprise &
Co., Inc.
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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Let’s Check

I Questions:
a. Describe the basis in determining the foreign subsidiary’s fuctional currency..
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________

b. Distinguish Current rate method and Temporal rate method in translation foreign currency
financial statements?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________

II MULTIPLE CHOICE
1. An asset balance sheet exposure exists and the foreign currency depreciates. Which
of the following statements is true?
a. There is a transaction loss.
b. There is a transaction gain.
c. There is a negative translation adjustment
d. There is a positive translation adjustment

2. If the restatement method for a foreign subsidiary involves remeasuring from the
local currency into the functional currency, then translating from functional currency
to PH peso, the functional currency of the subsidiary is:
I. PH peso. II. Local currency unit. III. A third country's currency.
A. I B. III C. II D. Either I or II

3. The functional currency is:

a. the currency which is functioning in the country where the parent operates.
b. the currency of the country where an entity’s operations are based.
c. the currency of the primary economic environment in which the undertaking
operates.
d. the currency used in the group’s consolidated financial statements.

4. If the U.S. dollar is the currency in which the foreign affiliate's books and records are
maintained, and the U.S. dollar is also the functional currency,
a. the translation method should be used for restatement.
b. the remeasurement method should be used for restatement.
c. either translation or remeasurement could be used for restatement.
d. no restatement is required.

5. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's income statement accounts would be converted to peso by:
a. translation using historical exchange rates.
b. remeasurement using current exchange rates at the time of statement
preparation.
c. translation using average exchange rate for the period.
d. remeasurement using the current exchange rate at the time of statement
preparation

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

6. CC Corp. owns a subsidiary in Japan whose balance sheet in Japanese Yen for the
last years follow:
December 31, 2012 December31,2013
Assets
Cash and Cash equivalents ¥ 30,000 ¥ 25,000
Receivables 122,500 147,500
Inventory 160,000 170,000
Property and Equipment, net 255,000 230,000
Total Assets ¥ 567,500 ¥ 572,500
Liabilities and Equity
Accounts Payable ¥ 55,000 ¥ 75,000
Long-term debt 322,500 285,000
Common stock 115,000 115,000
Retained earnings 75,000 97,500
Total Liabilities and Equity ¥ 567,500 ¥ 572,500
Relevant exchange rates are:
January 1, 2012 ¥ 1 = P 45
December 31, 2012 ¥ 1 = P 42.50
December 31, 2013 ¥ 1 = P 47.50
September 12, 2012 ¥ 1 = P 40
CC formed the subsidiary on January 1, 2012. Income of the subsidiary was earned evenly
throughout the years and the subsidiary declared dividends worth ¥15,000 on September 12,
2012 and none were declared during 2011. How much is the cumulative translation
adjustment for 2013?
A. P568,750 B. P875,000 C. P625,000 D. P1,006,250

Mercury Company is a subsidiary of Neptune Company and is located in New York, USA.
Data on Mercury's inventory and purchases are as follows:
Inventory January 1, 2017 $ 500,000
Purchases during 2017 $ 1,000,000
Inventory December 31, 2017 $ 400,000
The beginning inventory was acquired during the fourth quarter of 2016, and the ending
inventory was acquired during the fourth quarter of 2017. Purchases were made evenly
over the year. Exchange rates were as follows:
4th quarter 2016 1 dollar = P 0.00148
January 1, 2017 1 dollar= P 0.00152
Average during 2017 1 dollar= P 0.00160
4 quarter of 2017
th 1 dollar= P 0.00162
December 31, 2017 1 dollar= P 0.00165

7. Refer the information provided above. Assuming PH peso is the functional currency,
what is the amount of Mercury's cost of goods sold remeasured in PH peso?
A. P1,680 B. P1,712 C. P1,700 D. P1,692

8. Based on the preceding information, the translation of cost of goods sold for 2017,
assuming that the local currency is the functional currency is:
A. P1,700. B. P1,760. C. P1,680. D. P1,692.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

On December 31, 2016 a foreign subsidiary of ABC Company, a Philippine corporation, submitted the
following balance sheet measured in its local currency.
Monetary assets FC 200,000 Monetary liabilities FC 180,000
Non-monetary assets 800,000 Non-monetary liabilities 20,000
Share capital 400,000
Share premium 100,000
Retained earnings 300,000
Total FC 1,000,000 Total FC 1,000,000
The relevant exchange rates for one (1) unit of the FC are as follows:
Current rate P 0.34 Historical rate P 0.31 Average rate P 0.30

9. Assuming the retained earnings of the subsidiary on December 31, 2016 translated at Philippine peso
is P 91,525x, what amount of cumulative translation adjustment must be reported in the consolidated
balance sheet presented in Philippine pesos on December 31, 2016?
a. P 25,000 b. P 24,525 c. P 24,255 d. P 25,47

10. How much will be the Philippine peso retained earnings of the foreign subsidiary on December 31,
2016 if the functional currency of the foreign subsidiary is also the Philippine peso rather than the local
currency?
a. P 92,000 b.P 94,100 c.P 93,60 d. P 91,525

Let’s Analyze
On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a US
Company for P312,500. Spin's net assets on the date of acquisition were 250,000 US dollars . On
January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities
approximated their fair values .Spin's trial balance on December 31, 2008, in US dollars, follows:

Debits Credits
Cash $ 70,000
Accounts receivable (net) 100,000
Inventory 120,000
Property Plant and Equipment 330,000
Accumulated depreciation 120,000
Accounts Payable 110,000
Notes Payable 90,000
Common stock 100,000
Retained earnings 150,000
Sales 420,000
Cost of goods sold 270,000
Operating expenses 60,000
Depreciation expense 30,000
Dividends paid 10,000
Total 990,000 990,000

Additional Information
1. 1 Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases
of $300,000 were made evenly throughout 2008.
2. 2 Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-
line depreciation.
3. 3 Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
4. 4 The dividends were declared and paid on November 1, 2008.
5. Exchange rates were as follows:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

March 1, 2006 P 1.20

December 31, 2007 P 1.25
January 1, 2008 P 1.25
November 1,2008 P 1.26
December 26,2008 P 1.31
December 31, 2008 P 1.35
Average for 2008 P 1.30

Required:
Case 1:
Assume the dollar is the functional currency,determine the following in Philippine Peso:
a. Net Income
b. Dividends
c. Retained earnings,end
d. Total Assets
e. Total Liabilities
f. Cumulative translation adjustment
g. Stockholder’s equity,end
Case 2: Assume the Philippine peso is the functional currency,determine the following in
Philippine Peso:
a. Net Income
b. Dividends
c. Retained earnings,end
d. Total Assets
e. Total Liabilities
f. Remeasurement gain (loss)
g. Stockholder’s equity
Q&A List
In this section you are going to list what boggles you in this unit. You may indicate your
questions but noting you have to indicate the answers after your question is being raised and
clarified. You can write your questions below.
Questions/Issues Answers

1.

2.

3.

4.

5.

Keyword Index
• Functional currency
• Current rate method
• Temporal Method

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