Wency Medina Giron, CPA

FOREX ACCOUNTING

PAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Foreign currency – a currency other than the functional currency of the entity
Functional currency – the currency of the primary economic environment in which the entity operates.
Presentation currency – the currency in which the financial statements are presented.
Exchange rate – the ratio of exchange for two currencies
Closing rate – the spot exchange rate at the balance sheet date
Spot exchange rate – the exchange rate for immediate delivery
Forward exchange rate – the exchange rate for two currencies set at a future date
Monetary items – units of currency held and assets and liabilities to be received or paid in a fixed or determinable
number of units of currency
Fair value – the amount for which an asset could be exchanged or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction
Foreign operation – 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
Conversion – physically changing a currency into another currency
Translation – restatement of assets or liabilities initially recognized in one currency into another presentation
currency
Exchange difference – the difference resulting from translating a given number of units of one currency into
another currency at different exchange rates
Net investment in a foreign operation – the amount of the reporting entity’s interest in the net assets of that
operation
FOREX TRANSACTIONS
Initial Recognition
Foreign currency denominated transactions shall be recognized at the spot exchange rate between the functional
currency and the foreign currency at the date of transactions.
Reporting at balance sheet date
Item Exchange Rate Disposition of Forex gain or loss
Monetary items Closing rate Income statement
Non-monetary items Rate of exchange at the date of the No gain or loss
measured at historical cost original transaction
Non-monetary items Exchange rate at the date when fair Balance sheet
measured at fair value value was determined
DETERMINATION OF EXCHANGE DIFFERENCES
1. Identify the foreign currency exposure (asset position or liability position)
2. Evaluate the exchange difference
a. Increase in asset value for asset position = forex gain
b. Increase in liability value for liability position = forex loss
TRANSLATION TO THE PRESENTATION CURRENCY
A. Foreign Operation is not hyperinflationary
1. Assets and liabilities – the closing rate
2. Income and expenditure – use exchange rates at the dates of transactions or, for practical consideration,
average rate when exchange rate do not fluctuate significantly
3. Exchange differences - recognized in other comprehensive income (balance sheet)
4. Accumulated exchange differences must be allocated to minority interest
B. Foreign Operation is hyperinflationary
1. Restate the financial statement based on PAS 29
2. Restate all account using the closing rate.
3. Exchange differences –> part of profit or loss
Restatement of Financial Statement
1. Restate non-monetary items and index-linked monetary items using the general price index
2. Monetary items and items carried at fair value are not restated

CONSOLIDATION OF FOREIGN OPERATIONS

1. Individual entity level – account for forex transaction gains or loss on presentation currency
2. Consolidation level – translate financial statement of entities to the presentation currency
a. Intra-group forex gains or loss should not be eliminated.
b. Goodwill arising from the acquisition of a foreign operation is treated as an asset of the foreign operation.
HYPERINFLATION

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Types of Price Change:
1. General price change – an average increase in a price index of different goods typically purchased; it is a
measure of the general purchasing power of money
2. Specific price change – a measure of changes in prices of specific types of goods
Characteristics of Hyperinflationary Economy:
1. the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign
currency; amounts of local currency held are immediately invested to maintain purchasing power;
2. the general population regards monetary amounts not in terms of the local currency but in terms of a relatively
stable foreign currency; prices may be quoted in that currency;
3. sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power
during the credit period, even if the period is short
4. interest rates, wages and prices are linked to a price index
5. the cumulative inflation rate over three years is approaching, or exceeds, 100%
Restatement Rules:
A. Historical Cost Financial Statements
Translation depends on whether items are monetary or non-monetary:
1. Monetary items – units of currency held, and assets and liabilities to be received or paid in a fixed or
determinable number of units of currency
Examples:
a. Cash c. Payables
b. Receivables d. Loans
- Monetary items are NOT adjusted as they are reflective of amounts current at the balance sheet date.
2. Non-monetary items – those which do not give rise to a right to receive (or an obligation to deliver) a
fixed or determinable amount of money
Examples:
a. Property, plant and equipment c. Inventories
b. Goodwill d. Intangible assets
- Monetary items are adjusted using the change in general price index.
Gain or Loss on Net Monetary Position
The gain or loss may be estimated by applying the change in a general price index for the period to the
weighted average of the difference between monetary assets and monetary liabilities.
B. Current Cost Financial Statements
The balance sheet is inherently stated currently hence it should not be restated. The income statement,
statement of comprehensive income and cash flows statement needs to be restated using the same restatement
principles as discussed above.
Economies ceasing to be hyperinflationary
Restated amounts in prior hyperinflationary reporting period shall not be adjusted retrospectively. The previously
restated amounts will be carried forward.

ILLUSTRATIVES
Case A: Monetary or Non-monetary
Determine whether the following are monetary (M) or non-monetary (N).
1. Investment in equity securities ____ 13. Advances to suppliers ____
2. Investment in bonds: 14. Discount on bonds payable ____
a. Held to maturity ____ 15. Intangible assets ____
b. Trading and AFS ____ 16. Goodwill ____
3. Accounts and notes receivable ____ 17. Accounts/Notes payable ____
4. Allowance for doubtful accounts ____ 18. Accrued expenses ____
5. Inventories ____ 19. Liability for refundable deposit ____
6. Advances to employees ____ 20. Advances from customers ____
7. Prepaid insurance, taxes and rent ____ 21. Deferred income ____
8. Prepaid interest ____ 22. Preferred stock ____
9. Receivable under finance lease ____ 23. Shares of stock ____
10. Special deposits which are recoverable ____ 24. Retained earnings ____
11. Property, plant and equipment ____ 25. Cash surrender value
12. Accumulated depreciation ____

Case B: Basic Forex Accounting

For each of the following cases, assume the following exchange rates for the Peso:
Date Peso-Dollar Exchange Rate Yen-Peso Exchange Rate
November 1, 2009 P 40 ¥2.0
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December 31 2009 P 45 ¥2.5
January 31, 2010 P 38 ¥1.8

Journalize each of the following transactions:

1. ABC, Inc. exported various raw materials to Japan for ¥5,000,000 on November 1, 2009. Settlement is due on
January 31, 2010.
2. ABC, Inc. imported various raw materials from an American supplier for $100,000 on November 1, 2009.
Settlement is due on January 31, 2010.
3. ABC, Inc. exported various raw materials to a Japanese customer for $100,000 on November 1, 2009.
Settlement is due on January 31, 2010.
4. ABC, Inc. imported various raw materials from a Japanese supplier for P5,000,000 on November 1, 2009.
Settlement is due on January 31, 2010.

REVIEWEE SELF-TEST:
1. An entity has a free choice of which of the following?
a. functional currency b. presentation currency c. Either A or B d. Both A and B
2. Statement I: An entity whose functional currency is hyperinflationary but reports in a different currency must
restate its financial statements in terms of the measuring unit current at the end of the reporting period.
Statement II: All values must be restated by making reference of the general price index between the last
reporting period and the end of the current reporting period.
Which statement is true?
a. I only b. II only c. I and II d. Neither I nor II
3. Select the correct statement.
a. Only historical cost financial statements are restated
b. Only current cost financial statements are restated
c. Both current cost and historical financial statements are restated
d. Neither current cost nor historical financial statements is restated
4. An entity operates in a hyperinflationary economy and has P5,000,000 receivables. The general price index of
its reporting currency (and the functional currency) doubles. The entity will
a. incur P5,000,000 loss on the monetary position
b. incur P2,500,000 loss on the monetary position
c. gains P5,000,000 on the monetary position
d. gains P2,500,000 on the monetary position
5. If P41 can be exchanged for $1, the direct and indirect exchange rate quotations, respectively, are:
a. P41 and $1 b. P41 and $.024 c. $.024 and P41 d. P1
and $.024
6. Units of currency held, and assets and liabilities to be received or paid in a fixed or determinable number of
units of currency
a. Financial item b. Monetary item c. Non-monetary item d. Intangible item
7. Monetary item do not include
a. Cash b. receivables c. loans d. Deferred income
8. Non-monetary item do not include
a. Goodwill b. Inventories c. Intangible assets d. Payables
9. Exchange differences in translating foreign currency items is recognized as part of
a. Profit or loss b. Equity c. Either A or B d. Both A or B
10. Subsequent to initial recognition, foreign currency monetary items should be translated at
a. closing rate b. historical rate c. average rate d. date at transaction date
11. Change in functional currency is treated
a. retrospectively b. prospectively c. Both A and B d. as disclosure.
12. Translation into the presentation currency can be undertaken when
a. an entity wants to present its financial statement in another currency
b. the group presentation currency is different from the foreign currency of the subsidiary.
c. Both A and B
d. Neither A nor B
13. Forex translation gain or loss arising from advances to a foreign subsidiary which forms part of the parent’s
net investment therein is included in
a. Profit or loss b. Other comprehensive income c. Both A and B d. Neither A nor B
14. Following a change in functional currency, all amounts are retranslated into the new functional currency
a. At the date of change
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 b. Effectively in the period end of the change
c. Retrospectively as if the new currency has always been the functional currency
d. None of these.
15. A Philippine entity purchased the following item and are appropriately classified as follows:
Exchange rate at Fair value
Cost transaction date at year-end
Trading security $ 1,000 P48:$1 $ 1,100
Equipment (under cost model) $ 5,000 P49:$1 $ 5,100
Investment property (land abroad) $10,000 P52:$1 $12,000
Available for sale investment $ 2,000 P49:$1 $ 1,900
Held to maturity investment $ 5,000 P50:$1 $ 4,800
At year-end (reporting date), the exchange rate was P55:$1.
Required: Compute the gain or loss to be recognized in profit or loss. _________
16. An entity acquires a foreign subsidiary on 15 August 2007. The goodwill arising on the acquisition is
$100,000. At the date of acquisition the exchange rate into the parent’s functional currency is P50:$1. At the
parent entity’s year end the exchange rate is P48:$1. The goodwill shall be presented in the consolidated
financial statement at
a. P4.8M b. P4.9M c. P5.0M d. P0
17. Exchange gain or loss arising from the re-translation of goodwill in acquiring a subsidiary is
a. included as part of other comprehensive income
b. included in profit or loss
c. adjusted to the translated amounts of assets and liabilities
d. ignored.
18. An entity will primarily generate and expend cash in one primary economic environment. According to
PAS21, the correct term for the currency of this primary economic environment is the
a. presentation currency c. reporting currency
b. functional currency d. foreign currency
19. According to PAS21 The effects of changes in foreign exchange rates, at which rate should an entity's non-
current assets be translated when its functional currency figures are being translated into a different
presentation currency?
a. The historical exchange rate c. The average rate
b. The closing rate d. The spot exchange rate
20. According to PAS21 The effects of changes in foreign exchange rates, exchange differences should be
recognised either in profit or loss or in other comprehensive income. Are the following statements about the
recognition of exchange differences in respect of foreign currency transactions reported in an entity's
functional currency true or false according to PAS21?
1) Any exchange difference on the settlement of a monetary item should be recognised in profit or loss.
2) Any exchange difference on the translation of a monetary item at a rate different to that used at initial
recognition should be recognised in other comprehensive income.
Statement (1) Statement (2)
a. False False
b. False True
c. True False
d. True True

21. The Wiltord Company acquired a foreign subsidiary on 15 August 20X7. Goodwill arising on the acquisition
was $175,000. Consolidated financial statements are prepared at the year end of 31 December 20X7 requiring
the translation of all foreign operations' results into the presentation currency of CU. The following rates of
exchange have been identified:
Rate at 15 August 20X7 $1.321 : CU1
Rate at 31 December 20X7 $1.298 : CU1
Average rate for the year ended 31 December 20X7 $1.302 : CU1
Average rate for the period from 15 August to 31 December 20X7 $1.292 : CU1
According to PAS21 The effects of changes in foreign exchange rates, at what amount should the goodwill be
measured in the consolidated statement of financial position?
a. CU134,409 c. CU134,823
b. CU135,449 d. CU312,475
22. The Nehupo Company acquired The Motonua Company, a foreign subsidiary, on 10 September 20X7. The
fair value of the assets of Motonua was the same as their carrying amount except for land where the fair value
was $50,000 greater than carrying amount. This fair value adjustment has not been recognised in the separate
financial statements of Motonua. Consolidated financial statements are prepared at the year end of 31
December 20X7 requiring the translation of all foreign operations' results into the presentation currency of
CU. The following rates of exchange have been identified:
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 Rate at 10 September 20X7 $1.62 : CU1
Rate at 31 December 20X7 $1.56 : CU1
Average rate for the year ended 31 December 20X7 $1.60 : CU1
Average rate for the period from 10 September to 31 December 20X7 $1.58 : CU1
According to PAS21 The effects of changes in foreign exchange rates, what fair value adjustment is required
to the carrying amount of land in the consolidated statement of financial position?
a. CU30,864 c. CU31,250
b. CU32,051 d. CU31,646
23. The Witley Company has the CU as its functional currency. On 16 October 20X7 Witley ordered some
inventory from a foreign supplier and agreed a purchase price of $160,000. The inventory was received on 15
November 20X7. At 31 December 20X7 the inventory remained on hand and the trade payable balance for
the inventory purchase remained outstanding. The supplier was paid on 27 January 20X8 and the inventory
was sold on 31 January 20X6. The following information about exchange rates is available:
16 October 20X7 CU1 = $2.60
15 November 20X7 CU1 = $2.50
31 December 20X7 CU1 = $2.40
27 January 20X8 CU1 = $2.25
According to PAS21 The effect of changes in foreign exchange rates, at what amount should the trade payable
balance due to the supplier be presented in the statement of financial position of Witley at 31 December
20X7?
a. CU61,538 c. P66,667
b. CU64,000 d. P71,111

24. Celestica ordered an item of equipment for $10,000 from a foreign supplier when the spot rate for a dollar
was P40. The equipment was delivered when the spot rate was 43.50. At the 12/31/07 balance sheet date, the
spot rate for a dollar was P41. When payment was made on February 14, 2008, the spot rate for a dollar was
P40. What is the foreign exchange gain to be reported on the 2008 financial statement?
a. P25,000 b. P0 c. P35,000 d. P10,000

25. Herma Corporation buys goods from Japanee, Inc. in Japan at terms n/30. The contract requires settlement in
Yen. The unadjusted trial balance of Herma Corporation reflects a payable representing purchase of goods
worth P400,000 when the Japanese Yen was selling for ¥2 for P1. What should be the foreign exchange
transaction gain or loss to be included in an intervening income statement if the spot rate at the intervening
balance sheet is P.40 for ¥1?
a. P80,000 loss b. P80,000 gain c. P120,000 gain d. P120,000 loss
26. XFH, Inc. purchased an equipment to a British manufacturer for P2,000,000. The spot rate at the time of
transaction was P125 for £1. At the 12/31/7 balance sheet date, the spot rate was P135 for £1. Upon payment,
the spot rate was P132 for £1. What is the gain or loss to be reported at 12/31/8 income statement?
a. P0 b. P160,000 c. P48,000 d. P112,000
27. As of the balance sheet date, HFI, Inc. reported a P4,000,000 receivable connected with an export sale. The
spot rate was then P1/$.02. Related to this, it reported a P500,000 gain on forex on its income statement.
When payment was made, HFI reported a P200,000 loss. Which statement is correct?
a. The value of the peso increased by year-end, but decreased by the date of payment
b. The value of the dollar decreased by year-end, but increased by the date of payment
c. The value of the dollar increased by year-end, but decreased by the date of payment
d. Indeterminable
28. In the preceding problem, what is the direct exchange rate quotation when the export sale was made?
a. P43.75/$1 b. P1/$0.0229 c. $.0229/P1 d. $1/P43.75

29. On December 1, 2006, Electron, a Philippine-based company ordered merchandised FOB shipping point from
a foreign company for 200,000 local currency units, the currency of the foreign company. The merchandise
was shipped and invoiced on December 15, 2006. Electron paid the invoice on January 15, 2007. The spot
rates for each local currency units on the respective dates are as follows:
December 1, 2006 P4.955
December 15, 2006 P4.875
December 31, 2006 P4.675
January 15, 2007 P4.475
In Electron’s December 31, 2006 income statement, the foreign exchange gain is:
a. P96,000 b. P80,000 c. P40,000 d. P16,000

30. On October 20, 2007, Alexander Company purchased merchandise worth ¥100,000 payable n/30 under an
open account arrangement. Alexander Company issued a 30-day 12% note payable in Yen. On November 20,
2007, Alexander Company paid the note in full. The following exchange rates for the yen are provided:
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 Buying Selling
October 20, 2007 P0.50 P0.55
November 20, 2007 P0.52 P0.56
How much did Alexander Company paid its supplier on November 20, 2007?
a. P56,560 b. P52,520 c. P50,500 d. P55,550
31. Seabreeze, Inc. purchased merchandise for 300,000 local currencies from a vendor in foreign country on
November 30, 2007. Payment in local currency was due on January 30, 2008. The exchange rate to purchase
one local currency were as follows:
Nov. 30, 2007 Dec. 31, 2007
Spot rate P1.65 P1.62
30-day rate 1.64 1.59
60-day rate 1.63 1.56
In its December 31, 2007 income statement, what amount should Seabreeze, Inc report as foreign exchange
transaction gain?
a. P12,000 b. P9,000 c. P6,000 d. P 0
32. On September 1, 2007, Supercity Corporation received an order for jeepneys from a British customer for
30,000 pounds when the peso equivalent was P1,961,000. Supercity received the customer’s remittance in full
in November 16, 2007 and sold the 30,000 pounds for P1,980,000. In its income statement for the year ended
December 31, 2007, Supercity should report a exchange gain of:
a. P0 b. P61,000 c. P19,000 d. P80,000
33. The accounts receivable of Adriatico Corporation, an export company, include the following items
denominated in foreign currency at December 31, 2002, before adjusting entries are made as follows:
Foreign currency Exchange rate on Balance per books in
units transaction date Philippine pesos
U.S. Dollar 50,000 P40.40 P2,020,000
Thailand Bath 200,000 1.08 216,000
Taiwan Dollars 100,000 1.29 129,000
Japanese Yen 10,000,000 0.3955 3,955,000
On December 31, 2002, the current exchange rate for U.S. dollars, Thailand bath, Taiwan dollars, and
Japanese Yen were P40.77, P1.07, P1.32 and P0.3677, respectively.
Calculate the exchange gain or loss that should be included in Adriatico Corporation’s 2002 income
statement.
a. P261,000 gain b. P261,000 loss c. P280,000 loss d. P258,500
loss
34. The account of Hotel Venice, a Filipino corporation, show P8,130,000 accounts receivable and P3,890,000
accounts payable at December 31, 2001, before adjusting entries were made. Analysis of the balances reveals
the following:
Accounts Receivable
Receivables denominated in Philippine pesos P 2,850,000
Receivables denominated in 57,000 German marks 1,180,000
Receivables denominated in 61,000 British pounds 4,100,000
Total P 8,130,000
Accounts Payable
Payable denominated in Philippine pesos P 685,000
Payable denominated in 25,500 Canadian dollars 760,000
Payables denominated in 36,000 British pounds 2,445,000
Total P 3,890,000
Current exchange rates for German marks, British pounds, and Canadian dollars at December 31, 2001 are
P20.604, P66.943; and P31.038, respectively.
The net exchange gain or loss that should be reflected in Hotel Venice’s income statement for 2001 from
year-end exchange adjustments must be:
a. P88,570 loss b. P88,570 gain c. P18,466 loss d. P18,466 gain
35. The amount at which the accounts receivable should be included in Hotel Venice’s December 31, 2001
balance sheet must be
a. P8,107,951 b. P4,221,534 c. P3,886,417 d. P5,257,951
Lastikman Company, a local company, bought raw materials as ingredients in its products from Superman
Corporation, a US company, for 35,000 US Dollars in 2020. Pertinent exchange rates relating to this transaction
are as follows:
Buying Rate Selling Rate
Receipt of order P47.10 P47.20

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 Date of shipment 47.25 47.45
Balance sheet date 49.50 49.60
Settlement date 49.45 49.50

RECENT CPALE QUESTIONS

1. What is the foreign exchange gain or loss of Lastikman Company for 2020? (May. 2019 CPALE)

a. 78,750 loss
b. 75,250 loss
c. 78,750 gain
d. 75,250 gain
The Nehupo Company acquired The Motonua, a foreign subsidiary, on 10 September 20x7. The fair value of the
assets of Motonua was the same as their carrying amount except for land where the fair value was $50,000 greater
that carrying amount. The fair value adjustments has not been recognized in the separate financial statements of
Motonua Consolidated financia statements are prepared at the year end of 31 December 20x7 requiring the
translation of all foreign operations’ results into the presentation current of CU. The following rates of exchange
have been identified:
Rate at 10 September 20x7 $1.62: CU1
Rate at 31 September 20x7 $1.56: CU1
Average rate for the year ended 31 December 20x7 $1.60: CU1
Average rate for the period from 10 September to 31 December 20x7 $1.58: CU1
2. According to PAS21 The effects of changes in foreign exchange rates, what fair value adjustment is
required to the carrying amount of the land in the consolidated statement of financial position? (May.
2019 CPALE)
a. CU30,864
b. CU32,051
c. CU31,250
d. CU31,646
The Wiltoird Company acquired a foreign subsidiary on 15 August 20x7. Goodwill arising on the acquisition was
$175,000. Consolidated financial statements are prepared at the year end of 31 December 20x7 requiring the
translation of all foreign operations’ results into presentation currency of CU. The following rates of exchange has
been identified
Rate at 15 August 20x7 $1.321: CU1
Rate at 31 December 20x7 $1.298: CU1
Average rate for the year ended 31 December 20x7 $1.302 CU1
Average rate for the period from 15 August to 31 December 20x7 $1.292: CU1

3. According to PAS21 The effects of changes in foreign exchange rates, at what amount of goodwill be
measured in the consolidated statement of financial position? (May. 2019 CPALE)
a. CU134,409
b. CU135,449
c. CU134,823
d. CU312,475
On November 1, 2020 Entity A, entered into a firm commitment with a Japanese Company for the export of dried
mangoes with a contract price of 1,000 Yen. The goods will be delivered to Entity A on January 30, 2021. On the
same day, in order to protect itself from the risk of changes in fair value of the firm commitment due to changes in
underlying foreign currency, Entity A entered into a forward contract with a bank for the sale of 1,000 Yen at the
forward rate on November 1, 2020. IAS 29 provides that hedge of the foreign currency risk of a firm commitment
may be accounted for either fair value hedge or cash flow hedge. Entity A elected to account for the hedge of the
firm commitment using fair value hedge. The following direct exchange rates are provided:
November 1, 2020 December 31, 2020 January 30, 2021
Buying spot rate P10 P13 P12
Selling spot rate P13 P15 P16
Forward buying 90-days P11 P14 P15
Forward selling 90-days P13 P16 P17
Forward buying 60-days P14 P17 P16
Forward selling 60-days P15 P18 P14
Forward buying 30-days P11 P15 P12
Forward selling 30-days P13 P11 P14
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 4. What is the book value of firm commitment asset(liability) on December 31, 2020? (May. 2019 CPALE)
a. 4,000 asset
b. 3,000 asset
c. 2,000 liability
d. 1,000 liability
5. What is the amount recognized as sales on January 30, 2021? (May. 2019 CPALE)
a. 14,000
b. 12,000
c. 13,000
d. 11,000
On November 1, 2020 Entity A entered into a forward contract to buy $2,000 with a bank to speculate on the
changes in the value of USA Dollar. It will be delivered on January 31, 2021. The following direct exchange rates
are provided by the bank:
November 1, 2020 December 31, 2020 January 31, 2021
Buying spot rate P40 P37 P38
Selling spot rate P45 P50 P48
Forward buying 30-days P38 P32 P35
Forward selling 30-days P34 P41 P36
Forward buying 60-days P43 P35 P46
Forward selling 60-days P40 P41 P43
Forward buying 90-days P42 P40 P38
Forward selling 90-days P43 P40 P36

6. What is the foreign currency gain or (loss) for the year ended December 31, 2020? (May. 2019 CPALE)
a. 2,000 loss
b. 4,000 loss
c. 6,000 gain
d. 8,000 gain

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