PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE

RATES

I. NATURE
PAS 21 prescribes the accounting for foreign activities and the translation of financial
statements into a presentation currency.
2 ways of conducting foreign activities:
1. Foreign currency transactions – e.g., import or export transactions that are to be
settled in a foreign currency. These transactions need to be translated to
Philippine pesos before they can be recorded in the books of accounts.
2. Foreign operations – e.g., a branch in another country. The overseas branch will
normally maintain its accounting records and prepare its financial statements in a
foreign currency. Those financial statements need to be translated to Philippines
pesos before they can be combined with the home office’s financial statements.

II. RECOGNITION
A foreign currency transaction is initially recognized by translating the foreign currency
amount into the functional currency using the spot exchange rate at the date of the
transaction.
Spot exchange rate is “the exchange rate for immediate delivery.”… or simply,
the current exchange rate on a given date.
Date of a transaction is “the date on which the transaction first qualifies for
recognition in accordance with PFRSs.”
III. MEASUREMENT
ITEMS TRANSLATED USING
a. Monetary items Closing rate.
b. Nonmonetary items measured at Exchange rate at the date of transaction.
historical cost
c. Nonmonetary items measured at Exchange rate at the date when the fair
fair value value was determined.

Closing rate – the spot exchange rate at the reporting date.

Monetary items vs. Non-monetary items
Monetary items are currencies held at assets and liabilities to be received or paid in a
fixed or determinable amount of money.
Non-monetary items are those which do not give rise to the receipt or payment of a
fixed or determinable amount of money.
 IV. PRESENTATION
An entity is required to present its financial statements using its functional currency (i.e.,
Philippine pesos). However, whenever needed, the entity may translate its financial
statements into any presentation currency (e.g., Japanese yen, US dollars, etc.), as
follows:
ITEMS TRANSLATED USING
a. Assets and liabilities (including Closing rate at the date of the statement
comparatives) of financial position.
b. Income and Expenses (including Exchange rates at the dates of the
comparatives) transactions
c. All resulting exchange differences are recognized in other comprehensive
income.

V. DISCLOSURE
a. Exchange differences recognized in profit or loss and OCI.
b. The fact and the reason for using different presentation currency from entity’s
functional currency.
c. The fact and reason for a change in functional currency.