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    Foreign Currency Translation Dayag 2021

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    Francis Abuyuan

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    © All Rights Reserved
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    % chapter 8 - Foreign Currency translations ipieductton section shows cre @ parent of a foreign subsickxy cr an investor of foreign associate company should he the foreign Cy financiol statements of a foreign operation for the purpose of preparing fed financial statements or fnancialstotemey that incorporate exqilys cecounted results of ates, jinhventices or branches, associate. Foreign operations include subsiciries. ass conversion versus Translation conversion is the process of exchanging amounts of one foreign currency for another. Forforeign currency transactions with and without hedging, the more appropriate term ged fs conversion to determine gain or loss on foreign currency brought about by the fuetuation in exchange rates. foreign curtency translation, as distinguish from conversion, does not Involve the act of exchanging one currency for another. Translation is requied at the end of the accounting period when a company stil holds assets or liabiities in its balance sheet which were obtained or incurred in a foreign curency. presentation Currency versus Functional Currency For the purpose of translation, it is necessary to distinguish between the presentation currency and the functional currency. A stand-alone entity is required to determine its functional currency and record its hansactions in that currency. It is free, however, to present its financial statements in ony curency. The currency in which the financial statements are presented is called the presentation currency. ‘n most cases, @ stand-alone entity's presentation curency Is also its functional cureney. For example, International Container Terminal and Services, Inc (ICTS!) the functional and presentation currency is the US dollar. it may. i it chooses, present its financial statements in Philippine peso. Inthe case of a group entity (a parent and is subsidiaries), the presentation currency of the group is the presentation currency of the parent company, which is the reporting ently. It can be reasonably assumed that the parent's functional currency is also its Presentation currency. Thus, the presentation cumency of a foreign operation (subsidiary) of a Philippine parent company is the parent's reporting currency (the Fhiippine peso). Translation of Financial Statements of Foreign Operations A foreign operation is an entity that Is a subsidiary, associate, joint venture, or a branch of the reporting entity, the activities of which are based or conducted in a Country or currency other than those reporting entity. ‘Advanced Finanlal Accounting ~ A Comprehensive: Conceptual & Procedural Approach earn epoca eg aE sn pra er enema tment ene nr — ‘Seanned with CamScanner LE rent enlity yn must be located in g, Fora Philippine PO" vot fe netted ond locos inthe pp F5 subsidiary that 15 in a functional currency Other ne y in operation. uD the paren ine parent may OWN G SUbsidicy k pond te ea scary conduct bute ut that of the parent, that Fe ry chou, te, functional cures) a fobe an integral part of the pare! ' operation ler translation method, PAS 21 changes the requirem, a oI ol | foreign operations 9. original PAS 21 b) ishing between Integral ; git t distinguishing i . nt Moone ve diaries, branches, associat ns enltes, Instead all overseas subsi les ani " ign operations. row classified os foreign sional currency concept: between integral operations ong foreign tg g 3 2 z with regard to selecting As oresul of applying the func + There is no longer a distinction om lation meth oF ‘ oe rate method that was applied fo foreign enties, ‘An ISSUE: What if the ‘Accounting Records of the Foreign Operations Not Keng functional Curency - Remeosurement i jority believes that there is only ong es, implementation of PAS 21, mojoity believ e one a eneeaee the financial statements of foreign operations and that of current/closing rate method (translation from functional currency into reser currency) ‘od is prescribed for foreign operations lay Difficulty may orise ia Philippine overseas subsidiary keeps its accounting reco local cumency {normaly required for compliance with the local statutes), whichisne its functional currency. PAS 2| further clarifies that "when an entity keeps its books and records in a cures other than ils functional currency, at the time the entity prepares is inact statements all amounts are translated info the functional currency, so as fo produce ‘same amounts in the functional curency as would have occurred had the flems eet recorded initially in the functional currency", In this case, ca remeasurement enlilys accounts s required, Exchange diferences (gains and k f losse Such translation procedures for rem, method” inthe accounting iteratue, (translation into functional currency) of the tensir®® *) asing on shal be recognized in pole reasurement are. offen known as the For example, assume that a eral, US. based subsiai lip ; : keeps peaccoutng eco in dal (°F INE em I nctional cunency is the Japanese A } ‘elimi iesing Gf | ‘Seanned with CamScanner NCV TRANSLATIONS such cases, the U.S. dollars accounts of the subsidiary should fist be remeasured fo the Japanese yen functional cunency accounts before they are translated 10 the ine peso {or Consolation at the parent's group or consolidated accounts, Frdlor ransited to other currencies for presentation purposes imiarly ito subsidiary of a Philippine parent keeps ts accounting records in peso, bul 's functional currency is the US $, the peso financial statements of the subsidiary shall fist be remeasured in the US $, and then translated to the peso for consolidation. Note that the need for remeasurement can be avolded if an entity, in such crcunstonce, implements a dual accounting system by maintaining two sets of gecounts, one to comply with the local laws and the other to comply with PAS 21, therefore, PAS 21 specifies Wwo approaches: 1. curent rate method and 2, temporal method to translation and the conditions under which each approach should be used. Tne tanslation approach (current or temporal method) fo be used depends on whether the functional currency of the foreign subsidiary is the same as the presentation ¢unency and whether the books are kept in the functional currency. Its also assumed that these two approaches are in a functional currency which is not the curency of a hyperinflationary economy. functional Currency is Not the Currency of a Hyperinflationary Economy Method 1: Translation into the Presentation Currency (Translation from the Functional Curency to the Presentation Currency) ~ Current Rate Method The financial statements of an entity ore prepared in its functional cunency ond hhonslated info the presentation curency, when it is different ftom the functional curency (it means that the presentation curency is parent's presentation currency = the Phiippine peso but is functional currency is he LCU local currency uni). This method, as set out in PAS 21 paragraph 39, is applicable to the following cases: + Astand-alone entity that records its books in its functional currency and presents its financial statement in another currency, or * A foreign operation such as a foreign subsidiary, branch, joint venture or associate that records its books in its functional currency and translates its financial statements into the parent's ‘reporting cumency for the purpose of consolidation, The method whereby the financial statements are translated from the functional Cuency into the presentation currency is known as the current/closing rate method (tonsiated method or net investment method). ‘Atvnced Financial Accounting ~ A Comprehensive: Conceptuol& Procedure! Approach | / ‘Soanned with CamScanner Cumency (Remeasuremeny tional from Method 2: tanlaton in Fawn os Temporal Method)” "eh 9 r ethod 2: fo the Funellon statements of the e are ren the financial 1 lowing Cases fal ung’ P This process fs applleable Wim rency. he (l fer hg ee eee nat records Its books in a currency other M ity, + stand-alone enti cial statements in its functional CUteny fs is finan rency but present cc eee fon that records ils books os pera Mo +A foreign ee reporting Sa nal cin Hn of fax. 250) paetscreny ee fon is a remeasurement : thot should be used inthis Sey pence of . “Yorn, Serco tov cree fa me which i discussed in the Choper te ocho: ofthe remeasurement process is 10 iginaly recorded feat ay Fee re core had te ransacfons been of the Ie fave been curency. it dards but PAS 21 does nop i” is used in the US stane i wn 7 fem Ce to describe this fronton method, i procedures used in the remeasurement process is also referred to as the Teme! method" in academic literature Sie fo have the same functional ond As most stand-alone entities are likely ne cae the discussion on translation methods from this point is focused Ong, ‘operations in consolidated financial statements, |t is Clear that the choice of functional currency of a foreign operation determines translation method, However this is nota free choice as PAS 21 paragraphs He Ou! the conditions tna shoud determine the choice ofa foreign operations cies curtency Factors That Determine the Choice of a Foreign Operation’s Functional Currency A foreign operation's functional Currency can be one of the following: * The local curency, thot is the curency of the county where the subs operates (local Curency Unit or ICU): * The poren's functional curency (peso): or * Acurency of a hid country. In most situations, ihe functional Curtency of a forelgn operation is either the led Currency unit or the parents functional (and presentation) currency, the peso. In addition to the Quidelines set ‘Out in PAS 2) functional Currency of a fore; Subsidi ‘Ory will operating relationship between the Shown in Figure 8.1 ond Table gy, Parent ‘Seanned with CamScanner Poragraphs 9-10, the identification Also be determined by ne note ot Company and the’ foreign oper NM CURRENCY TR ry LATION rronsiation procedures applicable when the foreign operation's functional curency Tine local curency, the parent's curency (pet0) or o cumency of third couny ce jymmanzed in Table 8.1.11 assured that the parent's tuctonot and pretentation Eunency i the Phikopine peso. x should be noted that based on Table &.1, the standard seems to imply that the currency of 0 foreign operation i: predominantly the focal currency. and the igpression tho! the translation procedures ore mainly with respect of Ihe current) losing rate method. The US standard seems fo foke a similar view. it considers ne cose where the functional Cumency of the foregn operation is the por reporting currency 08 on exceptional case, figure 6.1: Cholce of Functional Currency = the Applicable Transiation Method Pritppines . Parent Comcny, US. edery Functional Curency i not the Curency ete Nyperitctonory Economy (aS 21: 20-42) Curent Rate Metro (ronson om Functional ‘curency ito the (rant Int the Tretentaion Fonetional Curency Curercy)~ = Fog oceraton fexegn onetation ‘sinfegral wth operates porents operations (PAS 21 20-26) Indepencenty passe) ere meonse "nan tonote 16 -exchonge goin XL= xchange bit “Riconced Financial Accounting «A Comprehensive Conceptual & Procedirel Approach ‘Seanned with CamSeanner ‘i isinkt The folowing table summarizes what M nd T Table 8.1: Functional Currency one [FaelgnOperaton | pert’ Rronclal in fected Coen eet nT cal cumency vunit ACU) |The local cureney vwnit (ACU) The parent's functional cumency The locoleuneney vit (ACU) Tfanclional cumency (LCUjs gue" anslation Process Translation oF renee resentation Currency, Fact Na’ a Parent's Currency Scena ‘ile groups presentation cueny og Transate Into Pes0 Utng cong method according 0 PAS 21-49. Mo ‘Functional curency is different femoe unils (UCU) in which transactions a ea | ransactons recorded in CU ope cumency Honsoctons (PAS 214) 2d aA, recorded in LCU need fo be re . MES fopeso according to PAS 21 me meal 20.4. Dye 2 Ettectively, the foreign operation ig y., extension of the parent (the Poreny 2% subscioy oe regarded 0 one any the foreign operation’ transactions gf! AS on i foreign currency transactions Undertor** the parent itself, The foreign . ong by} and Kcbilties ore remeasuted as if 4 Hoel parent's. When temeasuring into the 4,°¢ fe! ‘currency, consideration iS QIVEn 05 to whee“) jem's amonetary oF normonetany jet P| whether itis measured at cost oF atte, wot) The local curency | Athird curency unit (UCU) Remeasue from LCU into the func ‘uncon cures then translate into peso, rence The peso The peso functional cunency. ___|p é - _Retsoswement Enecenry# he Boks lhe een Operalons re Kept ina curehay apy No. ransotion or remeastrement paso financial statements are alteady resents | i 250 i res Source: Advanced Fanci Accounting. IFRS Approach 3 Elion by Par! Ton im Cheu Yeon ard Fhe The following table presents additional to determine functional currency: Table 8-2: Additional Factors Indicating whether Currency is the Local Currency or the Parent's Current Foreign Operation's Functiond icy (PAS 21:11) Fecfon that inicate hat the foreign | Foci thatindicate fa ean Indicator | peratonsfunetonalcurencyis ine | Pelion’ functional cunencyi ie local Curency Unit (LCu) Parent's Functional Curency (he Philippine Peso) Operating Activities of the foreign opel] telationship with Spettons oe Conied out with al are canied out as an extenson at the parent | “‘anifcant degree of autonomy"| the Parent; for example, the foregn) from the porent: for example, the Operation acts as a processta) foreign operation sources its own Center that © obtains its mote ‘moteriol’ and labor, and sels is mainly from its parent and then se | Products in its own matkats, itsfnshed goods backto pare. | i tor ¢| Transactions with frorsactons wilh the parent form q | Transactions with the faa vaio | the potent Proportion of "the foreign | Proportion of the foregr operation's activities, total transactions. } erect, 0 Nee [etiam J ‘Seanned with CamScanner ii hows tern ta acho OF Cth tows te eee : tangn oparaton cacy fect he Sepandencle | 208% benaon crn oparatin Geey pies atlecl the parent comoarr tonal fre pore } 0 nf 20lsuticiont | the foreign apenation is dopancent financial ond 8 tel me | t r 1A dependent on the | on the parent company te fnancirs | deed | yt feanceg | : se Adve none! Acovntog, Ws peach tiny ut Tan Un Ch oa and Koh o> translation from Functional to Presentation Currency (Current/Closing Rate Method) Ing main features of the Cunent/closing rate mathod are summerized 0s follows: |. Assels ond liabilities, both monetary and nor-monetory, are transla current/closing rate (CR); 7, Income and expense iter; of the foreign operation ore translated at exchange roles at the dates of the transactions, ic. actual or historical spot rates (HR). for proctical reasons, the average rate (AR) is usually used for items wtiose fransactions are numerous and occur EVENLY throughout the year, for example, sales, purchases and operating expenses: and 5, Translation gains or losses are taken to other comprehensive income uni the investment is disposed of, 1! fhe foreign cunency appreciates, the value of the investment v/icn is presumed fo be 0 passive investment under the current rate method will also appreciates and vice- verso ‘ihe effect of exchange rale movements on the value of the investment is best measured by the curent/closing rate. 4s he investment is represented by the net assets of the foreign operation (ossets minus fobiltes)''loiows, theretore, that all assets and fobilties should be tronslated using the cumrent/closing rate. Though the translation gain or loss would not have an immediate impact on the parents cash flows because the Investment in the foreign operation is presumed fo be Jong-term. Translation differences are taken to other comprehensive income rather than to the ingome statement. The cumulative translation difference (offen refered fo os translation adjustments “oF foreign cumency translation reserves) is token fo net income when the foreign operation is disposed of. Hemecsurement of Foreign Currency Financial Statements fo the Functional Currency (lemporal Method) ‘he subsidiary’s operations in a foreign county ore closely integrated with those of the arent such that they are deemed fo be merely an extension of the parent's domestic perations. Therefore. the functional currency of the subsidiary is the parent's currency, ‘Aévanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach ‘Seanned with CamScanner crores: ent ond Ie ‘ believed 10 be the fo, 1. The pate resort oe Serena eco ne tee 1 OEIAFen ig 2, The tanto the were transactions asuting the operat. -« and losses from ootand not to other at change 920! CT acome stole ne @ n 10 Tne exchange ee statements © ign operation's financigy income erent of 2 ne paren, as @ Sond. jective of emenethe cose where fhe entered iny ty The object ome results 05 ney tronsactions 0 Oy te th achieve the feng n tren curerel *% . .edures for treatment of fore, nis, the Proc’ to a forei cj era the above argue (PAS 21:20-26) apply . 0 pers romeo ofa ser ret currency. functional cunency ‘ory of ¢ Philippine parent purchased equipmeny, tig, | US. “hased the equipment in U.S. dollars from q Venda 5 the Philippine parent had a ary oset, its remeasured at the actual istey eegwomenl Es "he dote of the transaction. In SUDSEQUENT . Detiogs, fey exchange ae schon expense is remeasured at the historical SPO exchange ey trots the dale of purchase of he plant and machinery), and the net booy a the eed axsetis also remeasured ot tne historical spot exchange rate, in Odie the U.S, subsidiary had a loans receivable balance, it is as if the Philippine Pore such a loan account. 2¢'ng a monetary item, it is femeasured at the cunent/cis. 85 on the monetary item is treated ond taken to the nist income in the statement of ‘comprehs Translation Exposure For exc 05 exchange lensive income, A translation gain or oss arises when the ye exchange rates used in translating the peer rents ore diverse rom those used in franslating the previous ies trons Exposed wile those that or 4 ot the curent/closing rates are considered f Canying amounts « 5 consoled ot historical rates preserve thet of! nd do not Give rise to ae translation differences, 1, Cument, Tote method ic fh meosued by the nel oon batue (eventually itis either a gina! lount of it poloret sheet els or lables in a foreign cumency . “onal al he current/closing exchange rate, one the curentice* hranslati am en he Comprebention r= ‘Seanned with CamScanner NCE ASSeIS and igh shod. sinc labtities eg ssels (otal assets Minus tot, r. “onsate, re a operation) Of CxDOSed fo cyan Habit oy H he 6 8S © thareha ne /Cloting rate Ns in change ree eauly ot ne UIE cre mei 3 ‘Posed any thy D se asl exceeding moneta, ya ther & net my 8015 Gnd the jabilties exceedin le nel (ero '9 Monetary arse) °F @ nop onan iors j method - Hanslation ey, ilies, The net 2 ee ary labill oxy © Monetary as ever cota MON-MOnetary jenn, ol ee pe? «monetary items m + ronaonelary tems mecsureg Oa vale (such 4 ilems whose bass of measiren, 3 investment) nent example. inventory (rom histreg) costa pened ying the year, tor + land, buildings and equipment thal hove i ealizable value): aig : Nevalued dung the exchange gain or loss on such Non- lr naedint we some woy Thal the gain or 68s on the even ccm! SCCouned fora isionce, 0 goin OF 1035 On the evaluat at "m is recognized. For suchas equily instrument classiied ost fake o| bulna or on financial asset ken inte some way, the exchange compa 1, aber comprehensive income nent of the gair rela ile Is also taken fo other comprehensive income o's 0" fhe non- senion8- shows the process of: ) tnslaton of the foreign currency financial ; statements of a foreign operation te presentation curency using the curren ign operation to /closing rate method, ond 1 Remeasurement of the foreign currency financial statements to the foreign operation's functional currency Using the temporal method, {stofon 6-1: Translation of Foreign Subsidiary’s Financial Statements ne that on January 2, 20x4, P Company, a Philippine based company, acquired $82000000 on 80% interest in $ Company maintains its books in US, dolors ond ae in conformity with GAAP in the Philippines (parent's functional ond Jeetofon curency is the peso). “toary’s francial statements are prepared in the local currency unit the foreign } unit ~ dollars. The translation process wil be ilustiated under two different “olons I] the U.S. dollars is the functional curency, and (2] the Philippine peso is **rcfonal curency, “92 ates or the US dollars for the 20x4 fiscal yeor are as follows: rae ‘ Date P4000 ‘onvaiy 2, 20x4 [date of GeRUETON) == =+ 40.10 September 1, 20x4 . 40.25 December 31, 20x4,,. 4.22 Average for the fourth quarter. Average for the year. 40.20, Mm Re ‘Seanned with CamSeanner In translating the inco' generated and expe! e that the company uses ire ne inventory was acquired du" Entries made on the bo account balances are Functional Currency Is the | Currency (Current/Closing Year-end financial statemen' the translation of the accou! method are presented Figure 8-2. ae Translation into the Presentation Currency fm, Figure 8-2: Workpaper - Rate Method) Functional Currency $05... me statement 0 nses were Hl oks of P COM fidated preparation of a consoli ie reparation of al ts al Decemb int balances | ounts. it Is assumed thay ost quarter. any 10 accouNt for the inveg ‘orp ‘ rkpaper based o, mt Siatements WorkPOP 0 the appendix to this chapter, ‘wa - in US dollars for 4 cember 31 in us A he su Sones intO pesos using the camer, ng Is Local Currency Unit US Dollars Translation into the Presentation Curenc) (Current/Closint fate Method Combined Statement of Income and = iy change vies) Retained Earnings Balanc ae eset | : ee 1.880.000 (A) 40.20 egy ck i veniy during the year, "tn, incurs! low OssuMpHION, and ype cy Unit ~ Translation Ito thy», as oN Bolance "stay "| Gostot goods sold. 100,000 A) 40.20 eee 6500 Wome Income tax expense... vsesssee-+ he 00 aug Netincome to Retoined Eomings i ‘ 133846, Retcined earings. : ho ") x ToIOl. os... se tess Dvidends deciored, 91/20. 30000 (tH) 4010 lau, Retained eomings, 12/31 to Botance shee! | Balance sheet 14] Cash _ eee 930,000 {C) 40.25 DRGH) Accounts receivable (net) 608,000 (C) 40.25 ‘ua | Inventory (FIFO) 830,000 (C) 40.25 ‘ars WON a oiens a ceeenees. 500,000 (C} 40.25 mrs Bulag rel)... 60000 {(C) 025.150] Equipment (net) 430.000 (C) 2 aun) Total - 3.948.000 isi! ‘Accounts payable......... 640,000 (C) 40.25 57000 | ‘Shortterm notes payable . £35000 () 4023 5878 Bonds payable. :........., 900,000 {C} 25 475000 Common stock PIOPO.......eseeeee 960,000 (H) 40.00 Bam Poid.n copitalin excess ofpar....... 300.000 | {H) -. 40.00 aero Retained earrings, from above .. 513,000 mse! Total... fo S Foreign Curency larslation Reserve Gain OC})- mt ae credit — _ os) Told a “include as a component of oer compyehenve hears {1} Retained eomings in pesos on January 2 {date of 1A) average exchange roe wsedocoproxnate he raison fs ‘date these elements were recognized. {H) Hitoical exchonge rote (C) Curent exchange rate 8/A ~ bolancing amount nen ‘Seanned with CamScanner b ey a ¢. Netincome or ossis carted forward ftom the trast d. The foreign curency translation res Slatigy mt N brocess: oo He fa, NE Ocal ep Oe PO! ate gn fo NEE Boring in capital accounts ar bal in caphal ane Honslateg tate to which the Piste (oct ne the historical the Vjtion WOS ACCOUNed f; ‘ate (oF actual rat ition for te, but co i nds i ‘accounts ay translated us 1 historieny Man ocaison tre the ceauton of he ety interest occ um (echual rate on the dens i . late the reigned on ey e ‘ rnin Se translate, that yeat nth cae, snow GS ttre 82 eau a set equal fo the January 2 by 1 Fist year 19 bolonce f acquisit ; lance Of 19,299; CF Acquisition, the balance is the beginning retained earn, 000 900 x P40.00 ). g ings " retained earnings. It is translates aoe piteely the pre-ocquisition ote at the date of Ccauistion). However sOreA! (actual) rate (the eomings OF c composite of Pre-aegi st"® Deginning retained elcined earings, iis not posse to weeston, ond rate, as the omounts on cumulation of te fore groctice, the translated figure from wer oh MO YEO earnings. In financial statements; pre ‘dincome statement; IVE gain is a balancing amount in the bolance sheet. (The aajusiment is discussed in more delal i the nea section.) 4 Revenue ond expense accounts (including cost of goods sold and depreciation), gains, and losses are trar elements were recognized during the period, inslated using the exchange rafe when the Becouse separate translation of ‘numerous fransactions is usually impractical, the use of an appropriate average ‘ottanslate revenue and expense accounts is permitted. AnAnalyss of Foreign Currency Translation Reserve ‘hen some accounts in a trial balance are translated using one rate and other ‘counts are translated using a different rate, an inequality will result between the total Che debit account balances and the fotal of the credit account balances. “illistafon 8-1 the foreign currency translation reserved is a balancing amount that ‘nels the total debit balances with the total credit pokces aie te aie ‘nls have been translated and is reported os a component of ri from an entity's * foe’gn curency translation reserved for the period resuts tir is xd to the counting exposure to exchange risk, which in an accounting sense is relates mec ee ec ee roe Financial Accounting ~ A Comprehensive: Conceptual! & ‘Seanned with CamScanner Sh yrent/closing rate, Fuctys. \ bo ss at ae cet that re or ihe tran fey sel of accounls thal Om te have Ni sheets: Sea ‘on two balance: erved under me current/closing "tem, lation res Figure 8-3. : urency Hansie as in ce ingteyadect coma on Asien Caen Cg, lat e of atl the Trans! Figure 8-3: Verification of : Direct Method icy ~ US Dolla $s) ~ Translation i “ on ep ee uss Rate — Bpaied 7.740.000 400 tea S lion. ae er cengesnei ose Psion pie | acs s uring year Rare ce (300.000) 49.10 Sy Hel wonen a nn Dividends declared... ee si ted using aa Net asset position tronstat oe . “ effect at date ofeach ransaction cam ae 12/31 Exposed net asset position. 73,000 tment Chengeincumucive rian osiment a dang erences en | 1/2 Cumulative koniton adstment™ | iment. : iia too "Reoecttaeer en rSeerpon ot Bay rz : < eB Nomervin Common stock... Renney ask cn 760000 Poid-ncopitdlin excess of por sum invert... + 1620000 Reloined earings... fet tom “ate 1 TONG eeeccseeeececeseeees 3540000 Tot = $3540.00 74.000 = “carga ae te niece abate ern Since all assefs and liabilities ore franslated at the current rate Under the current Imethod, only net assets (assets minus lables) are exposed fo curency fuclaioy {nd result fo a translation gain or loss, To reconcile with the amount teported in the other Comprehensive income, i: necessary to add (subtract) the foreign currency translation Teserve gain or los teported in the prior period, To the extent the ‘at the translation Tes the translation 1 eserve gain or loss On the other hand, series of Odiustments in the telatively large credit debit) balance, Credit b Cumulative gains, vite debt balances refiect net he fist column in Figure 8:3 reconcile the year to the net ove estion transactions that ote . fons Cled stockhoders erve is sometimes a gain and sometimes alos, amount may remain near zero. Same direction may resut ing lances may be viewed os te! Cumulative losses. the net asset © end of th equity will cay. Position af the beginrad © year. Note that soles S€ G Change in the net o a a3 ra ‘Seanned with CamScanner we ® or tls ev y ations dotors bolances d es In ge tates. The beginnge M 2 rate in effect gt tha geno iin increases ond decreases 4.9 tthe fn : {range rte a! the date the gree! otrel ed using Ihe eposed net asset position i tanya hon pel spoglie Fc tno ending 0 ‘ting the current exchange rate. ° G0 ign of Comprehe ygrement of Ce Nslve Ing, eons remain Gide 5 to pita Molemont of shareholders’ Equity oe sjation reserved gain or Popriotene: cumency ronsiat s loss leniess of excluding foreign rerrert/closing rate” method. +" M8! Income, os umentiy done wnaer tHe adjustments represent ong 7 , x frequency of Of Several item: cer to the | enensive income, The IASB labeled such re 8-4 the stateme in al shareholder’ COMPEMeNsve income ond the recor ‘uity accounts for the year 20x4 for § Com these am Ounts Would be added to the parent's Dolan ation of @ consolidated si ater ond gated statement of shoteholdent eri) comprenersive income fon? © gure 6-4: Statement of Comprehensive : functional Currency /e Income and Statement of Shareholders’ Equity |stocal Cumency Unit-US$ + translation into the Presentation Currency (Curent/Closing Rate Method) S Company Statement of Comprehensive Income For the Year Ended, December 31, 20x4 Netincome .. net comprehensive income: eign curency tronsiation reserve gain .. orehensive Income. $Company Statement of Shareholders’ Equity For the Year Ended, December 31, 0x4 Paid-in | copital in ab | Common excessof Reta Stock por Eomings OC" _To'cl_| Bolonce, 1/1/20x4 735 400,000 —Pz.000000 P19.200000 FO P59 OOO Comprehensive Income: 13386400 13:386,400 | Netincome... | Other comprehensive 405650 __408.650 | Income... ...-++++ P83,393.250 Comprehensive Income. 12090000, 112.030.0900), | Dividends declared 7000 3b 71,363,250 Balance, 12/31 /20x4 “OCI- other comprehensive income pet liome ‘Seanned with CamScanner 700 lation Into the Function, ‘al = Transl ye Peso ional Currency Is the mnie ed) fremecsvement ‘of Tempore sed The temporal method Is ia books are maintained in asure the accounts of a foreign to ae than ifs functional currency, °Mhly ncy s Is to produce the same nement proces: ded intially nts func fone a1 Seng The objective of the remeasut rg been 1200 transactions ofthe foreign er ri hang' torical exc! vent exchange rate is used fo translate acgg, Unts, i i is to translate ot Con. To accomplish this, the his rate is used other ag, cont, historical cost, while the c' paper ~ Translation into the Functional Currency (Reto Figure 8-5: Workpaper ~ fe Temporal Method) Functional Currency Is Philippine Peso - _ curency (Remeasutement of Temporal Methoy Translation into the Functional C ‘Adjusted Remeasurement Cash, Sage ; cap Acoouns reser) .oesveeeseren 330.000 ‘eae 8s Inventory (FFO) : 500,000 {H) 40.00 x wmaiies uaa 650,000 {H) 40.00 am Buléngs ne seeeeeseeeseeeeey tH 0 i Equioment re! 0.00 (H) Total . C Ty! ‘Accounts payable... om a bd Siem, ‘Short-term notes payable . ic) 02 &: fonds payoble 900.000 {C) 4260 ‘Common stock, PIO, é . 960,000 {H) 4.00 i mon stock por i Poidin capitan excess Of por. ---sv-e---- 300000 {Hy 4000 veona| Retired earings 513.000 (8/4) s039|— Total Se aoe ian Combined Statement of Income and | Retained Eamings | i x 30x (a) 40.20 121040 | | 1,850,000 Schedule * ADIL | ai ‘ 100,000 {H) 40.00 tt | ORM ODONE ,oceeced snide ses, ae 655,000 (A) 40.20 BI. Income TOKOMENE-vsseseveecccne, #2000 (A) 00 Sa Netincome betoreremeasurement ios. Tass Remeosuementiss - debit me Nelincome toRetained Earrings. nat Retained earings, 1/1 Told)... : t) saa | ection doe sina Retained eamings, 12/31 trom | balance sheet, ponent of ‘other comprehensi re ; sare £1) Retained eamings in pesos on January 2 (date of, cemton (A) Average exchange rote wed recogni Tinton eichongeoke "0 approximate the ote on the date these elements were ré IC} Curent, exchange rate BIA~ balancing amount ‘Seanned with CamScanner ' Accom casa fee g ted in relati ould be no! ion to the ngs as Above rey me ry a ee (lot example, ae Process: eas) thal the coment 0 the balance on ‘ecehbles, ‘and most a ted using | ean sing tate, asset of : Current values ore west a cisi to a fied amount of pase Alone feta is monetay i i foot] ssels and abilities are ts and liabilities con rn Hes Caried at curent : + prestige rtelebl secuteserveroy cate te SSO fonscted ot the curent/closing exchange rte, placement cost) are rei a ee ace a oTseted Using the hstotcal (oc actual exchonge wae at the date sition, of at the date the origi ‘ fecured ifsubsequent to acquisition, iginal capital transaction|s} 5 The components that make up the ending retoined earings balance are tonsoted 05 follows: o, The beginning balance is set equal to the ending balance of the last period, b. Diidends are translated at the rate esting istorcal or actual rate) on the date of the declaration, c. Netincome or loss is Carried forward from the translated income statement. 4 Revenues and expenses related to assets and liabilties translated ot historical ‘oies or actual rates (primarily inventory cost, depreciation and amortization) are tansted at the respective historical rates used to translate the related asset or ‘biity. In other words, for items that relates to non-monetary items, the rates used are those used to translate the related non-monetary items. 1. Other revenue and expense accounts are translated in a manner that produces Coproximately the same results as if the individual transactions were translated at ‘ng fate in effect when the transaction occurred; generally a weighted average ‘e's wed on all ransactions for simp 8. The torslation/remeasurement ain or loss is reported in the income statement. ‘shoals of the Translation/Remeasurement Gain or Loss {ttconremecsue i | method of ransaton is derived ir ment loss in the temporal h ‘a calculation in Figure 8-6. Procedurally, the approach is based on the same — el ‘Seanned with CamScanner 702 to verily the translation adjustment "CPortey fo concept os tal used ed. umrent ate method was ust counts transiated ot the cureny 9 : Jossistolated 10 tha relhod in general, moneta mt, The transiation the tempor netary iHeMs Fe Hanslote ny Ory However Othe vt ate while mos! ONO! sooth, tronsiated of ‘ % rales. -—Remeasureme, lation Adjustment oy Figure 8-4: Veication of the diel Mt kect Method t cy 4 (Functional Curren Tonalin method ( — Exchange MPerng Y | | tate || pepe ee “700. billy position... +++ 1/2xposed ne! monetary Fat " _Adustments for changesin net monetary posto | during year (3.020.000 40.20 Lesheesein cosh andreceirabes tom sls ey ‘Add: Decrease in monelary assets increase monetary obits: ‘nu oe Purchases. ‘on mi Other expenses. aa cat Income taxes. tn Dividends dec! one Net monetary fobifty positon ranslated using ra a ineffect at date of each transaction....2++2+ 6 Less: 12/31 Exposed net monetary ibilty postion... 637,000 40.25 Remeasurement goin 0) ......::s2:2 sie “The January 2. 0x4 condensed bolance sheets given in Fqute 83: : 1.800000" ‘Wenelor/ abies i esc Monetay ase... ..seese 00.00 “See Fique 8S: ——— Monetary tities (640000 + 635000 * 900000)... i] ‘ a 2NS000 es: Monetry sets (930.000 + 608,00). if 538.000 Net monetary fobitly postion... Accordingly, the peso value of mo netary items is, affected b Variations i exchange rate, giving rise fo a gain or loss, po eereet On the other hand, nos item is translated in su fate, n-monetary items will not Fesult to a gain or loss because each Ccessive balance sheets u 7 sing its respective historical exchange - inl fe pehled dete _ ‘eported in the balance sheet, they will retain het exchenge rte a sa fe Secumulated amortization), even though the the exposed assels using Maintained a net monetary abit ‘Seanned with CamSeannee 1 the yeat, An increasing e, yan monetary liabili chan, me ednel 5 Fabily poston 214? 16 wl cro 6 tant io? . proach In Translation of Fnenctal statement rig we oprah 0 anda is simple) F ; (Sic atcrpaia kane (petra aaa A wo jransiation Using a Trlal Balance Approach _ wotpover ~Tesalln I he Peselafon Cuency (Cuenta 9 ef eres) ency oo ynt-US Dollars core’ 1106 pinto the presentation Currency (Current/Closing Rate Method) ‘Adjusted Trial ‘ajosied Tal Balones pecourls Bolance iiss eaten te ealance | Debit Credit Eschon Peso} | aoe Rate Debit Credit | “Hebi Ged fale est re 3000 : veo ae ie ‘ “100.000 } + 400 74370000 | | 2 esso00 Wo oan | ere. #2000 Mm. 351000 \ ; wm 8776400 | 0000 300,000 m My WAH | ano moon | 108.000 ol) 0s TAD | x (c] us, Aar2000 | 830,000 {c) 40.25 301.0 | $00,000 0125000 | 650,000 (02524162500 | 430.000 (0m 7 500 | reer payoDe =v veoeee0 om’ (0 sam “gotta notes payanle es (| 5 pare | prdspoyable...n-009 soo (c) | 08 hrs ammon sock, PIO POT... +++ e000 (Hl ‘000 yun | os contin excess oF PO mom Wo Ce 200 | ‘ubtotas aoa 6935000 6735000 Faso | 785477 | Faeign Currency | Tronsiation | | Reeve Gon 00) cre. ‘ = p00 _ 6,995.00 raga e940) Mexmsinpnesto “or comprehensive MEOMe ae erre pesron nua 2 (eae of caste) ‘iegeerchange rate wsed #0 0 ete the rate on fe dot? these elements wereracoanted Hseterchongerate {iret exchange ote ‘tena claig tal bolnce approach, ie folowing nous Pe observed Sed Sarin droid be of Depend He, “Lin te event that there are detals os 10 Ne rt fest arts forse ing average ond invention Sm be of beginning ‘opepite rate existing at the date of nv old purchases should be ce ranslated of the Seen ‘Seanned with CamSeanner Figure 8-8: Workpape! ~ Temporal Method) Functional Currency Cnt mer rt, a a tay a 000 Parchoses Smt Wy cam Depreciahonempenies.n-+ hy Wl Other expenses... S 2.000 A une } Income tax expense... +++ ; 420000 ; Retained earrings. 1/1 ety tH 10 Dividends declared. 9/1...» sand c as Cash... ie ‘ ete secre el. 20 eta tnventory (FIFO), 1/1 (assumed) 7 of (cl 400 LOW reve ; bags sou ae Sam ‘Scraps sooo 1) 035 ShorHerm notes payabie (31000 aaa Bonds payable 90.000 {(C} ns ‘Common stock, PIOpar......+ 960,000 a an Poidin copitalinexcessof por. ____ - 300.000 7 Sub-lotats.... .. 6735,000 6,935,000 Remeoszemen lit 0 Totdls... (6,735,000_ 6,935,000 | “nclude as 0 component of other comprehensive income {1 Retained eomings in pesos on January 2 (date of acquisition) (A) Average exchange rate used fo approximate the rate on the date these elements were recognized, {(H) Historical exchange rate {C) Curent exchange rate ‘Note: In the pre-closing trial balance approach, the following should be observed: |. The retained earnings shouldbe of beginning balance. 2. Inthe event that there ore delcis as fo the component of cost of goods sold purchase oid trondated using average ond inventory shoud be of @ begining balance hanises a Cent Hetorcol (a Curent ss jor ncolectiole accounts and notes (iy Current goal a Cunent tee rent C |! icone * ‘Curent tent pg otlower of Cost oF Market Current 7 | ees advertiing, and rent (y) Cent en meaner (Ml Curent teak oe deposits (M) Current pueat rpiont,ond equipment (N) Curent ron cearuoted depreciation on property, plant, and Curent Visor sf on rem FePemendervlve of ie insurance (Mt oer odemarts, icenses, and formulas (N Curent |ezol " Cuent felon ‘Oterintongible assets (N) Current Historical nesta ond Cede, excep! dfenedincoe ae Historical taeiond polcy acquistion costs for ie i soe feinsuonce ered income tox assets (N)® cc Historical : urent Curent be Cent Rie Temporal ites ethod M | eco and notes payable and overdralis [i] = fem |e erenss (M) Current Current 2h tna deposits (M) arent Soren ease depos (N} te ret fg Coret sree ass Cle = sca Fetineaned revenue (N ent at esse nent Historical se Suen Historical | st : red sock Historical” i Hisfoical car sae ee creo issuance price (N} Hofea ioc | j loical*™ ‘Historical wen 95 fi au ‘residual amount and should not be Not oF non-monetary item Nottronsiaied remecsured. = ets lems Related fo Monetary lems s 3 ne 885) "mpenses and income items that inflow of monetary Items ‘Seanned with CamScannee 708 iS ra Reh Average nf, and equipme ‘Averaget* Depreciation Peers pair 9 yrization of ir 1e taxes # Amotizaon of Fic ‘scquaion costs for fein Average" ‘Amortization of po! ‘companies 529 - Deferred fax items ore considersg. > (/cmonetay, A =nanTOTE a oeraoch unde PA : tle *- PrRIC7~Apphing the Res cine be eevee fncond hy + When ‘eno! i ier mere cat oe eet sie “eh inven ane ; cae 3 Searaestonaten te Ty inpnon of fetta pagn iene any * Trelofonathiocol OS A onyersion of al ssel, Oat 18 OF curent ry Seca 0 be Pleo component Fag ocust vs are ransiated oFe fEMeOSUTEG Ot Weighted ye. woulebote he “eu f eo eo ee ne te abled ehange rates it © soc: pe ey rates fo apprsimale fhe exChoPE cy at ne time of poyment under both there mecsreney gee rency and the lower oFcosternana rate. Then the hsericel cost net ME hg,

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