ACCOUNTING FOR THE EFFECTS OF FOREIGN

EXCHAGE RATES
INTRODUCTION

Many companies in the Philippines engage in activities in other foreign

entities such as exporting, importing, lending and borrowing transactions,
or having foreign operations which involves foreign currencies. These
transactions may result to problems on recording the transactions in the
company’s books and reporting the financial statements because it involves
transactions which must be settled in a currency other than Philippine
Currency.
Under PAS 21, an entity may carry on foreign activities in two ways:
1. It may have foreign currency transactions;
2. It may have foreign operations

Scope
The standard shall be applied:
a. In accounting for transactions and balances in foreign currencies, except for those derivative transactions and
balances that are within the scope of PFRS 9 Financial instruments ;
b. In translating the results and financial position of foreign operations that are included in the financial statements
of the entity by consolidation, or the equity method ; and
c. In translating an entity’s results and financial position into a presentation currency

PAS 21
DEFINITION OF TERMS
1. Closing rate is this path exchange rate at the end of Reporting period.
2. Exchange difference is the difference resulting from translating a given number of units one currency into
another currency at different exchange rates.
3. Exchange rate is the ratio of exchange for two currencies.
4. Foreign currency is a currency other than the functional currency of the entity.
5. Foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the
activities of which are based or conducted in any country or currency other than those of the reporting entity.
6. Functional currency is the currency of the primary economic environment in which the entity operates.
7. Monetary items are the units of currency held and assets and liabilities to be received or paid in a fixed or
determinable number of units of currency.
8. Net investment in a foreign operation is the amount of the reporting entities interest in the net assets of
the operation.
9. Presentation currency is the currency in which the financial statements are presented.
10. Spot exchange rate is the exchange rate for immediate delivery .
INITIAL RECOGNITION

On initial recognition, a foreign currency transactions shall be

recorded by applying to the foreign currency amount the
spot exchange rate between the functional currency and the
foreign currency at the date of transaction.
The spot rate may be stated at :
 Direct Quotation – it is when one unit of foreign
currency is expressed in terms of domestic currency. It
may also be defined as the exchange rate is stated on
how much of the domestic currency can be converted or
exchanged into one unit of foreign currency ($1 = ₱ 55)
 Indirect quotation –when one unit of domestic
currency is expressed in terms of foreign currency (₱1 =
$0.02)
TWO TYPES OF SPOT RATES

Selling Spot Rate

Buying spot rate
 Also known as foreign currency
 also known as foreign exchange
excelling price.
purchase price
 It is the exchange rate usually used by
 it is this price used by the bank to buy
bank to sell foreign currency to its
foreign currency from its customers
customers
At the end of each reporting period:
a. Foreign currency monetary items shall be translated using the closing rate (the
spot rate exchange rate at the end of the reporting period)
b. Non-monetary items that are measured in terms of historical cost in a foreign
currency shall be translated using the exchange rate at the date of the transaction
c. Non-monetary items that are measured at fair value in a foreign currency
shall be translated using the exchange rates at the date when the fair value
was determined .

SUBSEQUENT MEASUREMENT
 MONETARY ASSETS

Cash and cash equivalents

Loan and receivables including allowances

Financial assets at amortized costs

Financial lease receivable

Cash surrender value

Special deposits which are recoverable

Advances to employees
 MONETARY LIABILITIES

Trade Payables

Cash dividends that are to be recognized as a liability

Bonds payable

Accrued expense

Provisions that are to be settled in cash

Obligations under finance lease

Liability for refundable deposits

 NON-MONETARY ASSETS

Inventories

Prepaid insurance, taxes, rent

PPE

Intangible assets & Goodwill

Financial assets held for trading

Financial assets at FV through OCI

Advances to suppliers
NON-MONETARY LIABILITIES

Deferred Revenue

Provisions that are to be settled by

delivery of non-monetary assets

Advances from customers

NON-MONETARY EQUITY

NCI

Share Capital (ordinary and

preference share)

Share premium
 RECOGNITION OF EXCHANGE DIFFERENCES
 Transaction date – On the transaction date the company should recognize asset, liability, revenue or expense in
the transaction by multiplying the foreign currency by the spot rate on a given date. No gain or loss shall be
recognized in the converting the foreign currency domestic currency in the transaction date.
 Balance sheet date - on this date, Monetary items are adjusted to its closing rate or balance sheet spot rate
and the entity shall recognize gain or loss on the foreign currency for the difference between exchange rate and
the transaction date and the balance sheet date
 Settlement date - The assets and liabilities accounts are you settled and the NDP shall recognize gain or loss
on foreign exchange for the difference between the exchange rate and the balance sheet date and settlement date

Transaction Date
FOREX gain or loss
Balance Sheet Date
FOREX gain or loss
Settlement Date
 Receivable Effect Payable Effect
FOREX FOREX
difference difference
Increase Gain Increase Loss
Decrease Loss Decrease Gain

RULES ON RECOGNIZING FOREX GAIN OR LOSS

ILLUSTRATION 1: IMPORTING TRANSACTIONS –DIRECT
QUOTATION
 ABC company, a Philippine company ordered inventory from XYZ Corp. A U.S. company for $10,000 on
November 1, 2021 to be settled on January 31, 2022. The goods were delivered on December 15, 2021. The
invoice was dated December 5, 2021, the shipping date (FoB shipping point).
This spot rates for U.S. dollar on the respective dates were:

November 1, 2021 $1 = ₱51.00

December 5, 2021 $1 = ₱52.00
December 15, 2021 $1 = ₱51.20
December 31, 2021 $1 = ₱52.50
January 31, 2022 $1 = ₱51.50

Prepare journal entries and compute foreign gain or loss.

ILLUSTRATION 1: IMPORTING TRANSACTIONS –DIRECT
QUOTATION
 ABC company, a Philippine company ordered inventory from XYZ Corp. A U.S. company for $10,000 on
November 1, 2021 to be settled on January 31, 2022. The goods were delivered on December 15, 2021. The
invoice was dated December 5, 2021, the shipping date (FoB shipping point).
This spot rates for U.S. dollar on the respective dates were:

November 1, 2021 $1 = ₱51.00

December 5, 2021 $1 = ₱52.00
December 15, 2021 $1 = ₱51.20
December 31, 2021 $1 = ₱52.50
January 31, 2022 $1 = ₱51.50

December 5, 2021 Inventory 520,000.00

Prepare journal entries and compute foreign gain or loss.
Accounts payable 520,000.00
ILLUSTRATION 1: IMPORTING TRANSACTIONS –DIRECT
QUOTATION
 ABC company, a Philippine company ordered inventory from XYZ Corp. A U.S. company for $10,000 on
November 1, 2021 to be settled on January 31, 2022. The goods were delivered on December 15, 2021. The
invoice was dated December 5, 2021, the shipping date (FoB shipping point).
This spot rates for U.S. dollar on the respective dates were:

November 1, 2021 $1 = ₱51.00

December 5, 2021 $1 = ₱52.00
December 15, 2021 $1 = ₱51.20
December 31, 2021 $1 = ₱52.50
January 31, 2022 $1 = ₱51.50

December 31, 2021 Forex Loss 5,000.00

Prepare journal entries and compute foreign gain or loss.
Accounts payable 5,000.00
ILLUSTRATION 1: IMPORTING TRANSACTIONS –DIRECT
QUOTATION
 ABC company, a Philippine company ordered inventory from XYZ Corp. A U.S. company for $10,000 on
November 1, 2021 to be settled on January 31, 2022. The goods were delivered on December 15, 2021. The
invoice was dated December 5, 2021, the shipping date (FoB shipping point).
This spot rates for U.S. dollar on the respective dates were:

November 1, 2021 $1 = ₱51.00

December 5, 2021 $1 = ₱52.00
December 15, 2021 $1 = ₱51.20
December 31, 2021 $1 = ₱52.50
January 31, 2022 $1 = ₱51.50

January 31, 2022 Accounts Payable 525,000.00

Prepare journal entries and compute foreign gain or loss.
Cash 515,000.00
Forex Gain 10,000.00
ILLUSTRATION 2: EXPORTING TRANSACTIONS –DIRECT
QUOTATION
On October 15, 2021, Hide corporation, a Philippine company, sold goods to apple corporation, a
Thailand company for 600,000 Baht. The terms of the sale require payment in Thailand Baht on January
10, 2022. The exchange rate at this time is Baht 1 was one ₱1.62. On December 31, 2021, the exchange
rate of Baht to peso was ₱1.70. until January 10, 2022, high corporation received the payment of tax for
corporation when the exchange rate was ₱1.65.
Prepare journal entries and compute foreign gain or loss.

October 15, 2021 ฿1 = ₱1.62

December 31, 2021 ฿1 = ₱1.70
January 10, 2022 ฿1 = ₱1.65

October 15, 2021 Accounts receivable 972,000.00

Sales (1.62 x 600,000 ) 972,000.00
ILLUSTRATION 2: EXPORTING TRANSACTIONS –DIRECT
QUOTATION
On October 15, 2021, Hide corporation, a Philippine company, sold goods to apple corporation, a
Thailand company for 600,000 Baht. The terms of the sale require payment in Thailand Baht on January
10, 2022. The exchange rate at this time is Baht 1 was one ₱1.62. On December 31, 2021, the exchange
rate of Baht to peso was ₱1.70. until January 10, 2022, high corporation received the payment of tax for
corporation when the exchange rate was ₱1.65.
Prepare journal entries and compute foreign gain or loss.

October 15, 2021 ฿1 = ₱1.62

December 31, 2021 ฿1 = ₱1.70
January 10, 2022 ฿1 = ₱1.65

December 31, 2021 Accounts receivable 48,000.00

Forex gain (0.08 x 600,000 ) 48,000.00
ILLUSTRATION 2: EXPORTING TRANSACTIONS –DIRECT
QUOTATION
On October 15, 2021, Hide corporation, a Philippine company, sold goods to apple corporation, a
Thailand company for 600,000 Baht. The terms of the sale require payment in Thailand Baht on January
10, 2022. The exchange rate at this time is Baht 1 was one ₱1.62. On December 31, 2021, the exchange
rate of Baht to peso was ₱1.70. until January 10, 2022, high corporation received the payment of tax for
corporation when the exchange rate was ₱1.65.
Prepare journal entries and compute foreign gain or loss.

October 15, 2021 ฿1 = ₱1.62

December 31, 2021 ฿1 = ₱1.70
January 10, 2022 ฿1 = ₱1.65

January 10, 2022 Cash 990,000.00

Forex loss (0.05 x 600,000) 30,000.00
Accounts receivable 1,020,000.00
 ILLUSTRATION 3: IMPORT AND EXPORT TRANSACTION – INDIRECT
QUOTATION
 On October 1, 2021, Pale Company, a Philippines company, ordered equipment from Hin Corp., a Singapore
company for SGD $25,000. The terms of the purchase is FOB shipping point which require payment on January
30, 2022. The equipment was shipped and invoiced on October 10, 2021 and was received by Pale Company on
October 15, 2021. On October 25, 2021, Sigh Company purchased goods from Pale Company for 100,000 rupees.
The terms of the sale require payment in Indian rupee on January 15, 2022.
 The spot rates for Singapore dollars and Indian rupee on the respective dates were:

October 1, 2021 ₱1 = SGD 0.027027 ₱1 = ₹INR 1.4706

October 10, 2021 ₱1 = SGD 0.026316 ₱1 = ₹INR 1.4286
October 15, 2021 ₱1 = SGD 0.026178 ₱1 = ₹INR 1.4925
October 25, 2021 ₱1 = SGD 0.026110 ₱1 = ₹INR 1.5385
Oct. 10, 2021December 31, 2021 ₱1 = SGD 0.027100 ₱1
Equipment = ₹INR 1.3333
950,000.00
January 15, 2022Accounts
₱1 =payable
SGD 0.026110 ₱1 = ₹INR 1.4815 950,000.00
January 30, 2022 ₱1 = xSGD
(1/0.026316 0.026385 ₱1 = ₹INR 1.5000
SGD25,000)
 ILLUSTRATION 3: IMPORT AND EXPORT TRANSACTION – INDIRECT
QUOTATION
 On October 1, 2021, Pale Company, a Philippines company, ordered equipment from Hin Corp., a Singapore
company for SGD $25,000. The terms of the purchase is FOB shipping point which require payment on January
30, 2022. The equipment was shipped and invoiced on October 10, 2021 and was received by Pale Company on
October 15, 2021. On October 25, 2021, Sigh Company purchased goods from Pale Company for 100,000 rupees.
The terms of the sale require payment in Indian rupee on January 15, 2022.
 The spot rates for Singapore dollars and Indian rupee on the respective dates were:

October 1, 2021 ₱1 = SGD 0.027027 ₱1 = ₹INR 1.4706

October 10, 2021 ₱1 = SGD 0.026316 ₱1 = ₹INR 1.4286
October 15, 2021 ₱1 = SGD 0.026178 ₱1 = ₹INR 1.4925
October 25, 2021 ₱1 = SGD 0.026110 ₱1 = ₹INR 1.5385
December 31, 2021 ₱1 = SGD 0.027100 ₱1 = ₹INR 1.3333
Oct. 25, 2021 Accounts
January 15, 2022
Receivable
₱1 = SGD 0.026110
65,000.00
₱1 = ₹INR 1.4815
January 30, 2022 Sales ₱1 = SGD 0.026385 ₱1 = ₹INR 1.5000 65,000.00
(1/1.5385 x INR100,000)
 ILLUSTRATION 3: IMPORT AND EXPORT TRANSACTION – INDIRECT
QUOTATION
 On October 1, 2021, Pale Company, a Philippines company, ordered equipment from Hin Corp., a Singapore
company for SGD $25,000. The terms of the purchase is FOB shipping point which require payment on January
30, 2022. The equipment was shipped and invoiced on October 10, 2021 and was received by Pale Company on
October 15, 2021. On October 25, 2021, Sigh Company purchased goods from Pale Company for 100,000 rupees.
The terms of the sale require payment in Indian rupee on January 15, 2022.
 The spot rates for Singapore dollars and Indian rupee on the respective dates were:

December 31, 2021 ₱1 = SGD 0.027100 ₱1 = ₹INR 1.3333

January 15, 2022 ₱1 = SGD 0.026110 ₱1 = ₹INR 1.4815
January 30, 2022 ₱1 = SGD 0.026385 ₱1 = ₹INR 1.5000

Dec. 31, 2021 Accounts payable 27,500.00 Accounts receivable 10,000.00

Forex gain 27,500.00 Forex gain 10,000.00
(1/0.027100 X 25K)-950K (1/1.333 x 100K)-65K
 ILLUSTRATION 3: IMPORT AND EXPORT TRANSACTION – INDIRECT
QUOTATION
 On October 1, 2021, Pale Company, a Philippines company, ordered equipment from Hin Corp., a Singapore
company for SGD $25,000. The terms of the purchase is FOB shipping point which require payment on January
30, 2022. The equipment was shipped and invoiced on October 10, 2021 and was received by Pale Company on
October 15, 2021. On October 25, 2021, Sigh Company purchased goods from Pale Company for 100,000 rupees.
The terms of the sale require payment in Indian rupee on January 15, 2022.
 The spot rates for Singapore dollars and Indian rupee on the respective dates were:
December 31, 2021 ₱1 = SGD 0.027100 ₱1 = ₹INR 1.3333
January 15, 2022 ₱1 = SGD 0.026110 ₱1 = ₹INR 1.4815
January
Jan. 30, 2022Cash ₱1 = SGD 0.02638567,500.00
15, 2022 ₱1 = ₹INR 1.5000
Forex loss 7,500.00
Accounts receivable 75,000.00

Dec. 31: (1/1.3333 x 100K) 75,000.00

Jan. 15: (1/1.4815 x 100K) 67,500.00
Decrease in AR 7,500.00
 ILLUSTRATION 3: IMPORT AND EXPORT TRANSACTION – INDIRECT
QUOTATION
 On October 1, 2021, Pale Company, a Philippines company, ordered equipment from Hin Corp., a Singapore company
for SGD $25,000. The terms of the purchase is FOB shipping point which require payment on January 30, 2022. The
equipment was shipped and invoiced on October 10, 2021 and was received by Pale Company on October 15, 2021.
On October 25, 2021, Sigh Company purchased goods from Pale Company for 100,000 rupees. The terms of the sale
require payment in Indian rupee on January 15, 2022.
 The spot rates for Singapore dollars and Indian rupee on the respective dates were:
December 31, 2021 ₱1 = SGD 0.027100 ₱1 = ₹INR 1.3333
January 15, 2022 ₱1 = SGD 0.026110 ₱1 = ₹INR 1.4815
January 30, 2022 ₱1 = SGD 0.026385 ₱1 = ₹INR 1.5000
Jan.30, 2022 Accounts payable 922,500.00
Forex loss 25,000.00
Cash 947,500.00

Dec. 31: (1/.027100 x 125K) 922,000.00

Jan. 30: (1/1.026385 x 25K) 947,500.00
Increase in AP 25,500.00
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