PAS 21: ACCOUNTING FOR

FOREIGN CURRENCY
TRANSACTIONS
Rei Marian D. Leynes, CPA, MPA
OVERVIEW
✓ Foreign Currency Transaction
✓Translation of Financial Statements
WHY IS THERE A NEED?
ACCOUNTING STANDARD
PAS 21
The Effects of Changes in Foreign
Exchange Rates
 Transaction in Foreign
Currency

- Importation
- Exportation P&L
- Borrowing or
lending
- Forward exchange Exchange difference: the
contracts difference resulting from translating
a given number of units of one
currency into another currency at
different exchange rates.
Foreign Operations

- Subsidiary
-
-
Associate
Join Venture
OCI
- Branches
TYPE OF ACCOUNTING
CURRENCY
Functional Currency of the primary
economic environment
Currency on which entity operates

Foreign Currency other

Currency than functional
Currency currency

Presentation FSs are presented

Currency
Note:
Translation Adjustment from FUNTIONAL currency to PRESENTATION currency -> OCI
EXCHANGE RATE
It is the price of one currency in terms of another currency

DEC 1: $1= P50

DIRECT DEC 31: $1= P55

From FC to LC
FC constant
Type of LC varies
1/.02= 50
1/.01818 = 55
Quotations
DEC 1: P1=$.02
INDIRECT DEC 31: P1=$.01818

From LC to FC
FC varies
LC constant
TYPES OF EXCHANGE RATES
Spot Rate
- The exchange rate for immediate delivery
- Exchange rate today

Forward or Future Rate

- The exchange rate at which the currency can be changed at
a future date
FOREIGN EXCHANGE RISK
• Foreign Currency transactions are exposed to foreign
exchange risk.
• Types of exposure risk
- Exposed liability position
✓ Arising from importing transactions

- Exposed asset position

✓ Arising from exporting transactions

• As a result of exposure risk, exchange differences arise when

foreign exchange rates changes between 2 dates
• Buying Spot Rate
- the rate at which money dealers will buy
foreign currency

• Selling Spot Rate

- rate at which they will sell that currency
FOREIGN CURRENCY
TRANSACTIONS
FOREIGN CURRENCY TRANSACTIONS
• Transactions denominated (and to be settled) in foreign
currency (other than functional currency)
Spot Rate at transaction date
(market rate “TODAY”)

Initial recognition: Transaction rates/ HC

Subsequent Measurement:
- Monetary Items Closing rate
Fx gain/ loss to P&L
- Non- Monetary Items
❖ Subsequently measure @ FV
Rate when the FV is determined
❖ Not subsequently measured @ FV Transaction rate/ HC
CR HR Rate when FV
is determined

P/L
FCT: IMPORTING AND EXPORTING GOODS
1. At the date the transaction is recognized
2. At each transaction date that occurs between the
transaction date and the settlement date
3. At settlement date

Spot Rate Closing rate Settlement Rate

Forex Gain/ Loss Forex Gain/ Loss

 ILLUSTRATION 1: FCT- IMPORTATION
On Nov 2, 2021, CK Corp, a Philippine Nov 2, 2021 No Entry.
company, ordered a goods from US
supplier for $40,000. The inventory was Dec 1, 2021 Purchase 3,244,000.00
shipped and invoiced on Dec 1, 2021, to ($40,000xP81.10)
be paid in US Dollars on February 28, Accounts Payable 3,244,000.00
2022.
Selling SR, 12/31/2021 81.60
Spot rates for US Dollars: Selling SR, 12/01/2021 81.10
Incr. in Selling SR 0.50
X FC units 40,000
Forex Loss 20,000
Dec 31, 2021 Foreign Exchange Loss 20,000
Accounts Payable 20,000
Selling SR, 02/28/2022 81.30
Selling SR, 12/31/2021 81.60
Decr. In Selling SR 0.30
X FC units 40,000
Forex Gain 12,000
Feb 28, 2022 Accounts Payable 12,000
Prepare the Journal Entries
Foreign Exchange Gain 12,000
 ILLUSTRATION 1: FCT- IMPORTATION
On Nov 2, 2021, CK Corp, a Philippine
company, ordered a goods from US
supplier for $40,000. The inventory was
shipped and invoiced on Dec 1, 2021, to
be paid in US Dollars on February 28,
2022.

Spot rates for US Dollars:

Feb 28, 2022 Accounts Payable 3,252,000.00

Prepare the Journal Entries Cash 3,252,000.00
 ILLUSTRATION 1: FCT- IMPORTATION
Possible Questions
1. At what amount should the merchandise purchased be reported in 2021?

2. What amount should be reported as liability to the supplier (accounts payable) on

December 31, 2021?

3. What amount of foreign exchange gain or loss should be recorded on December

31, 2021?

4. What amount of foreign exchange gain or loss should be recorded on February

28, 2022?

5. How much peso will it cost to finally pay the account on February 2022?
 ILLUSTRATION 2: FCT- IMPORTATION
• On Nov 1, 2020, Cebu Company
purchase raw materials from American
supplier for $2,500,000 and opens the
corresponding letter of credit with City
Bank to cover its importation. Cebu
Company’s year end is December 31.
The spot rate issued by the bank for US
dollars at various dates is as follows:
11/01/2020 P 0.50

12/31/2020 P 0.54

(date of arrival of goods)

01/31/2021 P 0.52

Prepare Journal Entries

 ILLUSTRATION 3: FCT- EXPORTATION
On Nov 2, 2021, CK Corp, a Philippine Nov 2, 2021 No Entry.
company, received an order from a
foreign firm for $40,000. CK Corp. Dec 1, 2021 Accounts Receivable 3,200,000.00
shipped and billed the foreign firm on ($40,000xP80.00)
December 1, 2021. The foreign firm Sales 3,200,000.00
settled its account on February 28, 2022
by remitting its payment in US Dollars. Buying SR, 12/31/2021 81.40
Buying SR, 12/01/2021 80.00
Incr. in Buying SR 1.40
Spot rates for US Dollars:
X FC units 40,000
Forex Gain 56,000
Dec 31, 2021 Accounts Receivable 56,000
Foreign Exchange Gain 56,000
Buying SR, 02/28/2022 81.20
Buying SR, 12/31/2021 81.40
Decr. In Buying SR 0.20
X FC units 40,000
Forex Loss 8,000
Feb 28, 2022 Foreign Exchange Loss 8,000
Accounts Receivable 8,000
Prepare the Journal Entries
 ILLUSTRATION 3: FCT- EXPORTATION
On Nov 2, 2021, CK Corp, a Philippine
company, received an order from a
foreign firm for $40,000. CK Corp.
shipped and billed the foreign firm on
December 1, 2021. The foreign firm
settled its account on February 28, 2022
by remitting its payment in US Dollars.

Spot rates for US Dollars:

Feb 28, 2022 Cash ($40,000 x 81.20) 3,248,000.00

Accounts Receivable 3,248,000.00
Prepare the Journal Entries
 ILLUSTRATION 3: FCT- EXPORTATION
Possible Questions
1. At what amount of sales should be reported in 2021?

2. What amount should be reported as receivable from foreign customer on

December 31, 2021?

3. What amount of foreign exchange gain or loss should be recorded on December

31, 2021?

4. What amount of foreign exchange gain or loss should be recorded on February

28, 2022?

5. How much peso amount did CK Corp received on February 2022?

 ILLUSTRATION 4: EXPORTATION
• Pinex Co. sold merchandise to a
foreign customer for FCU 10,000.
pertinent exchange rates are as
follows:

PHP to FCU
11/10/2020 Receipt of order P 56.10
11/22/2020 Date of shipment P 56.20
12/31/2020 BS date P 56.50
01/05/2021 Settlement date P 56.45

Prepare the Journal Entries

OTHER CONSIDERATIONS
▪ FOB Shipping Point
- Transaction date: date of shipment
• FOB Destination
- Transaction date: date of receiving the goods
ILLUSTRATIVE PROBLEM
On November 29, 2021, Heinz Co. place a non-cancellable
purchase order with a company based in USA to import a
machinery. The machine was shipped on December 1, 2021
and was received by Heinz on December 15, 2021. The
purchase price was settled in US$ on January 3, 2022.

1. What is the transaction date if the shipping term in FOB

shipping point?

2. What is the transaction date if the shipping term is FOB

destination?
SUMMARY
Transaction Type of Exchange rate Exchange Rate Exchange Rate
to use

Importing Selling Spot Rate FX Loss FX Gain

Exporting Buying Spot Rate FX Gain FX Loss

TRANSLATION OF FOREIGN
FINANCIAL STATEMENTS
TRANSLATION OF FOREIGN
OPERATIONS
Foreign Operations
- A subsidiary, associate, joint venture or branch whose activities
are based or conducted in a country or currency other than
that of the reporting entity
DETERMINING THE FUNCTIONAL CURRENCY

• Functional Currency
- Currency of the primary economic environment in which an
entity operates

Determinants of Functional Currency

1. Sales and COS
2. Cashflows
3. Cashflows from financing and operating activities are
generated
 EX: STAND ALONE ENTITY
Perlas Company is a company registered in Singapore whose shares
are traded in Singaporean Stock Exchange. Perlas Co. operating
activities take place in the Philippines.
1. What is Perlas Co.’s functional currency? Philippine Peso
2. What is Perlas Co.’s presentation currency? Singaporean Dollars
EX: PARENT AND SUBSIDIARY
Silangan Company is a parent company based in the
Philippines and it has a subsidiary based in Canada.
Determine the functional and presentation currency of Silangan
Company and its subsidiary.

Functional Presentation
Currency Currency
Silangan Company Philippine Peso Philippine Peso

Subsidiary Canadian Dollars Philippine Peso

TRANSLATION METHOD
• Hyperinflationary Economy
- Restate and translate method
• Non Hyperinflationary Economy
- Closing Rate Method
Hyperinflation is indicated by factors
such as prices, interest and wages
linked to a price index, and
cumulative inflation over three years
of around 100 per cent or more.
CLOSING RATE METHOD

Account Exchange Rate to use

Assets Closing Rate
Liabilities Closing Rate
Income and Expenses Exchange rate as of transaction dates
*for practical reasons, average rate is used
Contributed Capital Accounts Historical Rates
Retained Earnings
- Beg Bal (1) Year of Acq. – Historical Rates
(2) Subsequent Year- Translated balance last
period
- P/L Exchange rates as of transaction dates
*for practical reasons, average rate is used
- Dividends Exchange rate as of transaction date
TREATMENT OF TRANSLATION
DIFFERENCES
• Also known as:
- Translation adjustments
- Translation reserves
- Translation gains and losses
• Taken to other comprehensive income
• When the foreign operation is disposed, taken to P&L
NON- HYPER INFLATIONARY
ECONOMY
ILLUSTRATION 1: 1ST YEAR OF TRANSLATION

December 1, 2020
1. Total Assets translated in Philippine Peso

Cash 22,500.00
Accounts Receivables 14,000.00
Inventory 33,500.00
Property, plant and equipment, net (12,000-1,200) 10,800.00
Total Asset in AU$ 80,800.00
Dec 31, 2020 rate 53
Total Asset in Peso 4,282,400.00
2. Total Liabilities translated in Philippine Peso

Accounts Payable 3,800.00

Total Liabilities in AU$ 3,800.00
Dec 31, 2020 rate 53
Total Liabilities in Peso 201,400.00
3.. Net income translated in Philippine Peso

Sales 45,000.00
Less: COGS (22,500.00)
Gross Profit 22,500.00
Less Operating Expenses (12,500.00)
Net Income in $ 10,000.00
Average in 2020 51
Net Income in Peso 510,000.00
4. Total SHE translated in Philippine Peso

Total Assets in P 4,282,400.00

Less Total Liabilities in P (201,400.00)
Total SHE in P 4,081,000.00
4. Ordinary Share translated in Philippine Peso

Ordinary Shares in $ 50,000.00

Rate as of date of Acquisition 50
Ordinary Shares in Peso 2,500,000.00
6. Retained Earnings translated in Philippine Peso

Retained Earnings, 1/1/2019 ($20,000 x P50) 1,000,000.00

Add: Net Income 510,000.00
Total 1,510,000.00
Less: Dividends in P ($ 3,000 x P52) (156,000.00)

Retained Earnings, 12/31/2020 1,354,000.00

 7. Translation Adjustment in the consolidated
financial statements
Total SHE on Peso 4,081,000.00
Less: Ordinary Shares in P (2,500,000.00)
Retained Earnings in P (1,354,000.00)
Translation Adjustment -Credit (Gain) 227,000.00
ILLUSTRATION 2: COMPREHENSIVE
 AS OF DECEMBER 31, 2020

1. Total asset translated in 2. Total liabilities translated in

Philippine peso Philippine peso

Total Assets (in Yen) 66,000.00 Total Liabilities (in Yen) 44,000.00
Closing Rate, 2020 1.20 Closing Rate, 2020 1.20
Total Assets (in Peso) 79,200.00 Total Liabilities (in Peso) 52,800.00
AS OF DECEMBER 31, 2020
3. Net Income translated in 4. Total SHE translated in
Philippine peso Philippine peso

Revenues- 2020 (in Yen) 20,000.00 Total Assets (in Peso) 79,200.00
Less: Expenses- 2020 (17,000.00) Less: Total Liabilities (in Peso) (52,800.00)
Net Income- 2020 (in Yen) 3,000.00 Total SHE (in Peso) 26,400.00
Average Rate- 2020 1.05
Net Income- 2020 (In Peso) 3,150.00
AS OF DECEMBER 31, 2020
5. Contributed Capital translated 6. Retained Earnings translated in
in Philippine Peso Philippine peso

Ordinary Shares 4,000.00 RE, 1/1/2020 0.00

Share Premium 16,000.00 Add: Net Income 3,150.00
Contributed Capital (in Yen) 20,000.00 Less: Dividend Declared and (1,100.00)
Acquisition date xrate 0.90 Paid (1,000x P1.10)
Contributed Capital (in Peso) 18,000.00 RE, 12/31/2020 2,050.00
AS OF DECEMBER 31, 2020
7. Translation adjustment to be presented in the Consolidated
Financial Statements

Total SHE (in Peso) 26,400.00

Less: Contributed Capital (in Peso) (18,000.00)
Retained Earnings (in Peso (2,050.00)
Translation Adjustment- Credit 6,350.00
 AS OF DECEMBER 31, 2021

1. Total asset translated in 2. Total liabilities translated in

Philippine peso Philippine peso

Total Assets (in Yen) 73,000.00 Total Liabilities (in Yen) 50,000.00
Closing Rate, 2021 1.08 Closing Rate, 2021 1.08
Total Assets (in Peso) 78,840.00 Total Liabilities (in Peso) 54,000.00
AS OF DECEMBER 31, 2021
3. Net Income translated in 4. Retained Earnings translated in
Philippine peso Philippine Peso

Revenues- 2021 (in Yen) 22,000.00 RE, 1/1/2021 2,050.00

Less: Expenses- 2021 (17,000.00) Add: Net Income (in Peso) 5,800.00
Net Income- 2021 (in Yen) 5,000.00 Less: Dividends declared and (4,400.00)
Average Rate- 2021 1.16 paid (4,000 x P1.10)
Net Income- 2021 (In Peso) 5,800.00 Retained Earnings, 12/31/2021 3,450.00
 AS OF DECEMBER 31, 2021

4. Total SHE translated in Philippine peso

Total Assets (in Peso) 78,840.00

Less: Total Liabilities (in Peso) (54,000.00)

Total SHE (in Peso) 24,840.00

 AS OF DECEMBER 31, 2021
6. Translation Adjustment in the 7. Translation Adjustment in the
Consolidated Statement of Statement of Comprehensive
Financial Position Income
Cumulative Translation 3,390.00
Total SHE (in Peso) 24,800.00 Adjustment- Credit 12/31/2021
Less: Contributed Capital (Peso) (18,000.00)
Translation Adjustment 6,350.00
Retained Earnings (in Peso) (3,450.00) Credit- 12/31/2020
Cumulative Translation 3,390.00
Adjustment- Credit Changes in Translation (2,960,00)
Adjustment, 2021- Debit
HYPERINFLATIONARY ECONOMY
• GPI- Measure of change in the general level of prices of goods and
services

• Monetary Items-
- Not restated
- Gain or loss on net monetary position to P&L

• Non Monetary Items

- Restated based on the change in GPI between the date those items
were acquired or incurred and the balance sheet date
 ILLUSTRATION 3: HYPERINFLATIONARY ECONOMY

• Restate the financial

statement of a
hyperinflationary
economy as of
December 31, 2020.
 SUMMARY

Non-Hyperinflationary Closing Rate Method

economy

Translation
Method Restate and Translate
Hyperinflationary
Method
economy
Thank you
IAS 39:

Derivatives
and Hedging
REI MARIAN D. LEYNES
IAS 39: Derivative
I. Its value changes in response to changes in the so called ‘underlying’ or
other variables
II. It requires no initial net investment
III. It settled at a future ate - Stock price
- interest rate
- exchange rate
- Commodity price
Types of Derivatives
1. Forward (future ) Contract- a contract that gives the holder the obligation to buy or sell an
asset at a set price at a future date

2. Option Contract- a contract that gives the holder the right but not the obligation to buy or sell
an asset at a set price at a future date

- Call Option - to buy

- Put Option - to sell

3. Swap Agreement- a contract between two parties to exchange payments in the future
Measurement of Derivatives
All derivatives are measured at FAIR VALUE
Uses of Derivatives
➢ For speculation
➢ For Hedging
Hedging
▪ Risk management strategy employed
to offset losses in investments by
taking an opposite position in a
related asset. Hedge item
▪ Its objective is to reduce potential Hedging
loss arising from transaction Relationship
exposure Hedging
Instrument
Hedge Item
Defined as:

✓ Recognized asset

✓ Firm Commitment

✓ Highly probable forecasted transaction

✓ Net Investment in foreign operation

That exposes the entity to risk of changes in fair value or future cash flows and is designated as
being hedge.
Hedging Instrument
❑ As designated derivatives or non derivatives financial asset or liability whose fair value or
cash flows are expected to offset changes in the fair value or cash flows of a designated
hedge item

• Forward (future) Contracts

• Option Contracts

• Swap Agreements
 Hedging Relationship
Hedge Item Hedging Instrument
Sells goods for $5,000, payment Enters into a forward contract to sell
expected in 9 months $5,000 for P50 Peso/Dollar in 9 months

US Customer Filipino Producer

Types of Hedging Relationship

Fair Value Hedge Cash Flow Hedge

•hedge of the •hedge of the

exposure to exposure to
changes in fair variability in cash
value flows
• Profit or Loss • Deferred- OCI
Qualifications of Hedged Items
Hedge Items Fair Value Hedge Cash Flow Hedge

Recognized asset or liability

Firm Commitment

Highly Probable forecasted

transaction
Net Investment in foreign operation
Hedging

Fair Value Cash Flow

Hedge Hedge
Hedging
P&L OCI
Instrument
Normal
Hedged Items P&L Accounting
 Illustration 1: Hedging Exposed Net
Liability Position

On December 1, 2020, ABC Co.

purchase from Thailand frim an Hedged Item Hedging Instrument
inventory costing 10,000 baht.
Payment is due on January 15,
2021. also on December 1, ABC
Co. entered into a foreign
exchange forward to buy 10,000
baht on January 15, 2021.
 Possible Questions
1. What is the fair value of the forward contract on December 1, 2020? Zero.

2. How much is the gain or loss to be recognized with respect to the hedge P 1,200.00 Loss
item on December 31, 2020?

3. How much is the gain or loss to be recognized with respect to the hedging P 700.00 Gain
instrument on December 31, 2020?

4. How much is the gain or loss to be recognized with respect to the hedge P 200.00 Gain
item on January 15, 2021

5. How much is the gain or loss to be recognized with respect to the hedging P 300.00 Loss
instrument on January 15, 2021?

6. What is the fair value of the forward contract on January 15, 2021? P 400.00 Asset
7. What is the impact on the company’s income in 2021 as a result of this
hedge?
P 100.00 Loss

8. How much peso will it cost the company to finally pay the account on P 13,600.00
January 15, 2021?
 Illustration 2: Hedging Exposed Net
Asset Position

On December 1, 2020, ABC Co.

sold from Thailand frim an Hedged Item Hedging Instrument
inventory costing 10,000 baht.
Payment is due on January 15,
2021. also on December 1, ABC
Co. entered into a foreign
exchange forward to sell 10,000
baht on January 15, 2021.
 Possible Questions
1. What is the fair value of the forward contract on December 1, 2020? Zero.

2. How much is the gain or loss to be recognized with respect to the hedge P 1,200.00 Gain
item on December 31, 2020?

3. How much is the gain or loss to be recognized with respect to the hedging P 700.00 Loss
instrument on December 31, 2020?

4. How much is the gain or loss to be recognized with respect to the hedge P 200.00 Loss
item on January 15, 2021

5. How much is the gain or loss to be recognized with respect to the hedging P 300.00 Gain
instrument on January 15, 2021?

6. What is the fair value of the forward contract on January 15, 2021? P 400.00 Liability
7. What is the impact on the company’s income in 2021 as a result of this
hedge?
P 100.00 Gain

8. How much peso did the company ultimately realized from exporting P 13,600.00
transaction?
Firm Commitment
❑ A binding agreement to purchase or sell an asset at a set price on a future
date
❑ When an unrecognized firm commitment is designated as a hedge item,
the subsequent cumulative change in the fair value of the firm commitment
is recognized as an asset or liability with a corresponding gain or loss
recognized inn profit or loss
❑ The initial carrying amount of the asset or liability that arises from a firm
commitment is adjusted to include the cumulative change in the fair value
of the firm commitment
Illustration 3:Firm Commitment
 Possible Questions
1. How much is the gain or loss to be recognized with respect to the P 1,200.00 Gain
hedging instrument on December 31, 2020?

2. How much is the gain or loss to be recognized with respect to the P 1,200.00 Loss
hedging item on December 31, 2020?

3. What is the firm commitment balance on December 31, 2020? P 1,200.00 Liability

4. How much is the gain or loss to be recognized with respect to the P 1,200.00 Gain
hedging instrument on January 14, 2021?

5. How much is the gain or loss to be recognized with respect to the P 1,200.00 Loss
hedging item on January 14, 2021?
Zero
6. What is the impact on the company’s income in 2021 as a result of
this hedge?

7. What amount shall be recognized as purchases n January 14, 2021? P 49,600.00 ($20,000 xP2.48)
 Illustration 4 : Forward Contract
The following data apply to Alpha Company’s purchase of Questions:
45,400 yen under a forward contract dated November 2, a. In its income statement for the year end
2019, for delivery on January 31, 2020 2019, what amount of gain or loss should Alpha
Nov 2, 2019 Dec 31, 2019 Jan 31, 2020 report from this forward contract?
Spot Rates P 55.75 P 53.90 P 54.50
30 day Forward rate P 51.30 P 56.15 P 53.20
60 day Forward rate P 57.65 P 52.30 P 55.75
90 day Forward rate P 54.25 P 55.45 P 52.10 (54.25-56.15) x 45,400= 86,260 GAIN
 Illustration 4: Forward Contract
The following data apply to Alpha Company’s purchase of Questions:
45,400 yen under a forward contract dated November 2, b. In its income statement for the year end 2020,
2019, for delivery on January 31, 2020 what amount of gain or loss should Alpha report
Nov 2, 2019 Dec 31, 2019 Jan 31, 2020 from this forward contract?
Spot Rates P 55.75 P 53.90 P 54.50
30 day Forward rate P 51.30 P 56.15 P 53.20
60 day Forward rate P 57.65 P 52.30 P 55.75 (56.15-54.5) x 45,400= 74,910 LOSS
90 day Forward rate P 54.25 P 55.45 P 52.10
 Illustration 5: Future Contract
Beta Company sold Merchandise for 111,200 US dollars
to a customer in France on November 2, 2019. Collection a. What amount will affect profit or loss
in US dollars was due on January 31, 2020. On the same regarding the hedge item on the financial
date, to hedge this foreign currency exposure, Beta statement in the date 2019?
Company entered into a future contract to sell 111,200
US dollars to BPI for delivery on January 31, 2020. (81.9-80.7) x 111,200= 133,440 LOSS
Exchange rates for the US dollars on different dates are
as follows b. What amount will affect profit or loss regarding
Nov 2, 2019 Dec 31, Jan 31, 2020
the hedging instrument on the financial statement
2019 in the date 2020?
Spot Rates 81.9 80.7 80.1
30 day futures 82.3 80.4 83.9
60 day futures 81.8 80.3 82.6 (80.4-80.1) x 111,200= 33,360 GAIN
90 day futures 80.6 81.6 83.4
120 day futures 80.1 81.4 82.8
 Illustration 5: Future Contract
Beta Company sold Merchandise for 111,200 US dollars
to a customer in France on November 2, 2019. Collection c. As a result of foregoing transactions, what
in US dollars was due on January 31, 2020. On the same
amount will affect current earnings on the
date, to hedge this foreign currency exposure, Beta
Company entered into a future contract to sell 111,200 settlement date in 2020?
US dollars to BPI for delivery on January 31, 2020.
Exchange rates for the US dollars on different dates are Hedging Instrument 33,360 gain
as follows
Hedge Item (AR) 66,720 loss
Nov 2, 2019 Dec 31, 2019 Jan 31, 2020 (80.7-80.1) x 111,200
Spot Rates 81.9 80.7 80.1
30 day Forward Contract 82.3 80.4 83.9
33,360 loss
60 day Forward Contract 81.8 80.3 82.6
90 day Forward Contract 80.6 81.6 83.4
120 day Forward Contract 80.1 81.4 82.8
Your best quote that reflects your
approach… “It’s one small step for
man, one giant leap for mankind.”

- NEIL ARMSTRONG
 Accounting for
Government Transactions
Rei Marian D. Leynes

Reference: Zeus Millan

GAM for NGAs
Objectives
• Describe the nature of government accounting.
• Present the New Government Accounting System of chart of accounts.
• Perform the accounting procedures for the books of a government agency.
 Introduction

• Government
- Defined under PD 1177 (Budget Reform Decree of 1977) as the National
Government, including the Executive, the Legislative and the Judicial
Branches, and the Constitutional Commissions.
 Government Vs. Commercial Enterprise
GOVERNMENT COMMERCIAL

Ownership Entire People Owner/Proprietor

Purpose Render Service Profits

Organization Co-equal Branches Owners/ BOD

Financing Involuntary Voluntary

Income Not for Income Generate Returns

 Overview of Government Accounting

Accounting
• “the art of recording, classifying, and summarizing in a significant manner and in terms
of money, transactions and events which are, in part at least, of financial character, and
interpreting the results thereof”
- American Institute of Certified Public Accountants (AICPA))

• “the process of identifying, measuring and communicating economic information to

permit informed judgments and decisions by users of information”
- American Accounting Association (AAA)
Combined Accounting Definition from AAA and AICPA

Identifying Recording Classifying Summarizing Interpreting

Prepare Prepare Reverse

Analyze Journalize Post Adjust Close
TB FS (Optional)
 Government Accounting

• Encompasses the process of analyzing, recording, classifying, summarizing

and communicating all transactions involving the receipt and disposition of
government funds and property, and interpreting the results thereof.
 Objectives of Government Accounting

1. To produce information concerning past operations and resent decision

2. To provide a basis for guidance for future operations
3. To provide for control of the acts of public bodies and officers in the
receipt, disposition and utilization of funds and property
Sources and utilization of Government Funds

Sources Utilization
- Receipt from
taxes and other - Expenditures
on
fees
Programs
- Borrowings
Projects
- Grants from
other govt and - Unanticipated
international losses from
bodies calamities
 Responsibility, Accountability and Liability
over Government Funds and Properties

• Government resources must be utilized efficiently and effectively in

accordance with the law;
• Government Officials are responsible in implementing this policy , are
accountable for the government resources in their custody and are liable for
any loss
 Objectives of Government Accounting

4. To report on the financial position and the results of operations of

government agencies for the information of all persons concerned
 Government Offices with Accounting
Responsibility
Promulgates accounting and COA Keeping of general accounts;
auditing rules and regulations submits financial reports

Govt Responsible Formulation and

Required by law to have
DBM implementation of the
accounting units of divisions Agencies Offices National Budget

BTr Cash Custodian

 Financial Reporting System of the National
Government
Consolidates financial reports
Accounting books are subject to
audit by COA
COA
Submits financial reports to COA Office of the President
for consolidation
Congress
Maintains accounting books and Govt Reconciles budget
registries with DBM
budget registries Agencies
budget records of
DBM

BTr
Reconciles accounting books
with cash records of BTr
 The GAM for NGAs

Government
New Government Accounting Manual
“Old” Government
Accounting System for National
Accounting System
(NGAS) Government Agencies
(GAM for NGAs)
2002 2016
Promulgate to harmonize the
government accounting standards
with the international accounting
standard, the International Public
Sector Accounting Standards (IPSAS),
which is based on IFRS
 The GAM for NGAs
Legal Basis Coverage Objective

• Article IX-D, • preparation of the a. standards, policies,

Section 2 par. (2) general purpose guidelines and
financial statements procedures in
of the 1987 in accordance with the accounting for
Constitution of PPSAS and other government funds
the Republic of financial reports as and property;
the Philippines may be required by
laws, rules and b. coding structure and
regulations; and accounts; and

• reporting of budget, c. accounting books,

revenue and registries, records,
expenditure in forms, reports and
accordance with laws, financial statements.
rules and regulations.
 Basic Accounting and Budget Reporting System

✓ Should Comply with PPSAS and other relevant laws, rules and regulations;
✓ Accrual basis of accounting;
✓ Budget basis of presentation of budget information in the financial statements;
✓ Revised chart of accounts prescribed by COA;
✓ Double Entry Bookkeeping;
✓ FS based on accounting and budgetary records;
✓ Fund Cluster accounting (books of accounts are maintained according to the
type of funds being accounted for
Qualitative Characteristics of Financial Reporting
Under Conceptual Framework

Fundamental Qualities
Verifiability
✓ Relevance
⁻ Confirmation Value
⁻ Predictive Value Comparability Enhancing
Characteristics
✓ Faithful Representation
⁻ Completeness Understandability
⁻ Neutrality
⁻ Free from Errors
Timeliness
 Qualitative Characteristics of Financial Reporting
Under GAM for NGAs (PPSAS 1)

✓Understandability ✓Substance over form

✓Relevance ✓Neutrality
✓Materiality ✓Prudence
✓Timeliness ✓Completeness
✓Reliability ✓Comparability
✓Faithful Representation

GAM for NGAs Volume I, Chapter 19

Elements and Components of General Purpose
Financial Statement

6. Statement of Comparison of
Budget and Actual Amounts
(SCBAA)
Revenue Funds
- Comprises all funds from the income of any agency of the government
and available for appropriation or expenditure in accordance with law
 Budget Process in
the Philippines
Budget
Preparation

Budget Budget
Accountability Legislation

Budget
Execution
Definition of Terms
Appropriations • Authorization made by the legislative body to allocate funds for purposes specified by
the legislative or similar authority

• Authorization issued by the DBM to NGAs to incur obligations for specified amounts
Allotments contained to a legislative appropriation in the form of BUDGET release documents. Also
referred to as Obligation Authority

• is an act of a duly authorized official which binds the government to the immediate or
Obligation eventual payment of a sum of money. Obligation maybe referred to as a commitment
that encompasses possible future liabilities based on current contractual agreement.

Disbursements • are the actual amounts spent or paid out of the budgeted amounts
 Government Accounting Process
Accounting Records Budget Records

Journal Ledger Registries

❑General Ledger ❑ Reg of Revenue and Other
❑General Journal Receipts

❑Subsidiary Ledger ❑ Reg of Appropriations and

❑Cash Receipts Journal Allotments

❑Cash Disbursement
Accounting Budget
❑ Reg of Allotments Obligations
Journal and Disbursements
Unit/ Division Unit/ Division
❑Check Disbursement ❑ Reg of Budget, Utilization and
Journal Disbursements
 RROR Registries of Revenue and Other Receipts

RAPAL Registry of Appropriations and Allotments

Monitoring of
the Budget RAOD
Registries of Allotments, Obligations and
Disbursements

ORS Obligation Request and Status

RBUD Registries of Budget, Utilization and Disbursements.

RROR
RAPAL
RAOD
ORS
RBUD
 Government Accounting Process

Objects of Expenditures
Registries
1. Personnel Services (PS)
❑ Reg of Revenue and Other
2. Maintenance and Other Operating Expenses (MOOE) Receipts (ROR)

3. Financial Expenses (FE) ❑ Reg of Appropriations and

Allotments (RAPAL)
4. Capital Outlays (CO) ❑ Reg of Allotments
Obligations and
Disbursements (RAOD)
Note: Separate RAOD and RBUD shall be maintained ❑ Reg of Budget, Utilization
for each object of expenditure and Disbursements
(RBUD)
Government Accounting Process

APPROPRIATION

Entity A (a government agency) receives its GAA consisting of the

following

Personnel Services 100,000.00 The receipt of the

MOOE 60,000.00 appropriation is
posted (recorded) in
Financial Expenses 0.00 the Registry of
Capital Outlay 200,000.00 Appropriations and
Allotments (RAPAL)
Total Appropriations for the current year 20xx 360,000.00

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
Government Accounting Process

ALLOTMENT
The receipt of the appropriation
Entity A (a government agency) receives its allotment from DBM is posted (recorded) in the
consisting of the following Registry of Appropriations and
Allotments (RAPAL) and
Registries of Allotments,
Personnel Services 90,000 Obligations and
MOOE 40,000.00 Disbursements (RAOD)
Financial Expenses 0.00
Capital Outlay 170,000.00

Total Appropriations for the current year 20xx 300,000.00

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
Government Accounting Process

IINCURRENCE OF OBLIGATION
Obligations shall be incurred
Entity A (a government agency) enters into the following through the issuance of
contracts: Obligation Request and Status
1. Personnel services- employment contracts (job order) (ORS)
amounting to P70,000;
2. Maintenance and other operating expenses- purchase contract
for office supplier worth P25,000;
3. Capital Outlays – purchase contract for office equipment The “obligations” are recorded
worth P160,000. in the Registries of Allotments,
Obligations and
Disbursements (RAOD)

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
Government Accounting Process

Disbursement Authority

All of the recordings previously are

made on the budget registries.

Nothing is recorded yet in the

accounting books up to this point

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
Government Accounting Process

Disbursement Authority- NCA

Entity A receives a Notice of Cash Allocation (NCA) from DBM
amounting to P200,000, net of Tax

Cash- MDS, Regular 200,000.00

Subsidy from National Government 200,000.00

The Journal entry for the NCA is recorded in the general

journal and posted to the general ledger

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
Government Accounting Process

Employees have rendered services and are now entitled to

compensation. Details are as follow:

Salaries and Wages 35,000.00 Salaries and Wages 35,000

Personnel Economic Relief
Allowance (PERA) 5,000.00 Personnel Economic Relief Allowance 5,000
Gross Compensation 40,000.00 Due to BIR 10,000
Withholding Tax ( 10,000.00)
GSIS (2,000.00) Due to GSIS 2,000
PAGIBIG (2,000.00 ) Due to PAGIBIG 2,000
Philhealth (1,000.00 )
Due to Philhealth 1,000
Total Deductions (15,000.00)
Net 25,000.00 Due to Officers and Employees 25,000
Payable is posted in Section C of ORS and in appropriate ledgers

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
 Government Accounting Process

Grant of Cash Advance for Payroll The journal entry is posted on the
appropriate general ledgers and Section
C of the ORS is updated for the posting
Advance for Payroll 25,000 of disbursement.

Cash- MDS, Regular 25,000

Disbursement is also updated on the
Registry of Allotments, obligations and
Disbursements (RAOD)

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
 Government Accounting Process

Payroll Fund is liquidated

Due to Officers and Employees 25,000

Advances for Payroll 25,000

Taxes and mandatories withheld are remitted separately to the respective

government agencies

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
Government Accounting Process

There is no actual physical

Tax Remittance to BIR
Due to BIR
Cash- Tax Remittance Advice
transfer of payment to BIR.
The use of Tax Remittance
10,000 Advice represents a
constructive remittance of
10,000 taxes withheld.

Cash- Tax Remittance Advice 10,000 The credit to Subsidy from

Subsidy from National Government
National Government means
10,000
that the entity has the
authority to use the amount
withheld for its operations.

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
 Government Accounting Process

Remittance of Mandatory Contributions

Due to GSIS 2,000

Due to PAGIBIG 2,000
Due to PhilHealth 1,000
Cash-MDS, Regular 5,000

The ORS and RAODs-PS are updated for the payments

Incurrence of Disbursement
Appropriation Allotment
Obligations Authority
Government Accounting Process

Reversion of Unused Notice of Cash Allocation

Government entities are required to revert any unused NCA at
the end of the accounting period

Cash- MDS, Regular

NCA receipt 200,000 25,000 Advances for Payroll
5,000 Mandatory remittances
200,000 30,000
Remaining NCA 170.000

Subsidy from National Government 170,000

Cash- MDS, Regular 170,000
Government Accounting Process
Summary of Basic Recordings

TRANSACTION RECORDING IN
Registries & Other Records Journal & Ledger
Appropriation RAPAL None
Allotment RAPAL & Appropriate RAODs None
Incurrence of Obligations ORS & Appropriate RAODs None
Notice of Cash Allocation RANCA
Disbursements Updating of ORS and Appropriate RAODs
Tax Remittance Advice Updating of ORS and Appropriate RAODs
Reversion of Unused NCA RANCA
Thank you!
 Name of Entity
Statement of Financial Position
Regular Agency Fund
As at December 31, 20x1

ASSETS Notes
Current Assets
Cash and Cash Equivalents 45,000.00
Receivables, net 78,000.00
Inventories 12,000.00
Total Current Assets 135,000.00

Noncurrent Assets
Property Plan and Equipment 1 660,000.00
Total Noncurrent Assets 660,000.00

TOTAL ASSETS 795,000.00

LIABILITIES
Current Liabilities
Financial Liabilities 10,000.00
10,000.00

TOTAL LIABILITIES 10,000.00

TOTAL ASSETS less TOTAL LIABILITIES 785,000.00

NET ASSETS/EQUITY
Accumulated Surplus/ (Deficit) 785,000.00
TOTAL NET ASSETS/EQUITY 785,000.00

Name of Entity
Notes to Financial Statements
December 31, 20X1

Note1: Property Plant and Equipment

This account consist of the following

Buidlings 500,000.00
Office Equipment 450,000.00
Total Cost 950,000.00
Accumulated Depreciations- Buildings 200,000.00
Accumulated Depreciations- Equipment 90,000.00
Total Accumulated Depreciation 290,000.00

Propert, Plant and Equipment, net 660,000.00

Note 2: Tax Revenue

This account consist of the following

Immigration Tax 100,000.00

Tax Revenue 100,000.00

Note 3: Service and Business Income

This account consist of the following

Permit Fees 200,000.00

Registration Fees 160,000.00
Other Service Income 10,000.00
Power Supply System Fees 100,000.00
Landing and Parking Fees 80,000.00
Service and Business Income 550,000.00

Note 4: Personnel Services

This account consist of the following

Salaries and Wages, Regular 200,000.00

PERA 50,000.00
Personnel Services 250,000.00

Note 5: Maintenance and Other Operating Expenses

This account consist of the following

Travelling Expenses- Foreign 1,800.00

Office Supplies Expenses 63,000.00
Water Expenses 1,000.00
Electricity Expenses 5,000.00
Telephone Expenses 2,000.00
Janitorial Expenses 10,000.00
Security Expenses 12,000.00
Maintenancce and Other Operating Expenses 94,800.00

Note 6: Non-cash Expenses

This account consist of the following

Depreciation- Buildings & Other Structures 50,000.00

Depreciation- Machinery & Equipment 30,000.00
Impairment Loss- Loans and Receivables 2,000.00
Non-cash Expenses 82,000.00
 Name of Entity
Statement of Financial Perfomance
Regular Agency Fund
For the year Ended December 31, 20x1

REVENUE Notes
Tax Revenue 2 100,000.00
Service and Business Income 3 550,000.00
TOTAL REVENUE 650,000.00

Less: CURRENT OPERATING EXPENSES

Personnel Services 4 250,000.00
Maintenancce and Other Operating Expenses 5 94,800.00
Non-cash Expenses 6 82,000.00

TOTAL CURRENT OPERATING EXPENSES 426,800.00

SURPLUS/ (DEFICIT) FROM CURRENT OPERATIONS 223,200.00

Net Financial Assitance/ Subsidy 667,000.00

SURPLUS/ (DEFICIT) FOR THE PERIOD 890,200.00

s
INTRODUCTION

• APPLICABILITY OF PFRS TO NPO

Although the IFRS/PFRS are designed to apply to business entities, they can also be
applied to non-profit organizations.
NOT FOR PROFIT ORGANIZATION (NPO)

•Is one that carries out some socially

desirable needs of
the community or its members and whose activities are
not directed towards making profit
CHARACTERISTICS OF NONPROFIT ORGANIZATIONS

Public No profit
service motives Similar to business Enterprises
- Governance of Board of
Directors
- Use of Accrual Basis of
Finance by Stewardship Accounting

the citizenry of resources

ACCOUNTING STANDARDS FOR NONPROFIT
ORGANIZATIONS

• Accounting standards are adopted from the guidelines issued by American Institute of
Certified Public Accountant (AICPA applicable to all Nonprofit Organizations)
 ACCOUNTING FOR FUND
Fund Accounting Fund Theory

NPOs uses this method to account for contributions,

grants, appropriations, and so on. This accounting The fund theory stresses great importance on the
method segregates the accounting records of custody and administration of funds
resources restricted for specific purpose
FINANCIAL STATEMENT OF NPO
Statement of Financial Position
Statement of Activities (IS)
Statement of Cash Flows
Notes to Financial Statements
Net Assets:
- Permanently Restricted
- Temporarily Restricted
- Unrestricted
- Revenue
- Expense: Program or Support
- Operating, Investing, Financing
- Disclosures
 With Donor restriction
Permanent In perpetuity

Restricted
Time Restriction

Classification Temporary
Purpose Restriction
of Net Assets
No- Donor
Unrestricted
Imposed
Without Donor imposed restriction
RECLASSIFICATION OF NET ASSETS

NPOs reclassify resources from the temporarily restricted net assets category to the
unrestricted net assets category because of one or more of the ff:
• Money was appropriately expended for an expense designated by the donor
• A donor restriction based on time was satisfied
 CONTRIBUTIONS
Contributions Promise to Give/ Pledge
An unconditional transfer of cash or other assets to Written or oral agreement to contribute cash or other
an entity or a settlement or cancellation of its assets to another entity. Known as pledges. Can be
liabilities in a voluntary, non-reciprocal transfer by conditional or unconditional.
another entity acting other than its owner.
Conditional Unconditional
- Not recognized - Recognized (Revenue
& Receivable)
FV Revenue - Not measured
- FV: NRV (net of ADA)
EXAMPLE: CONTRIBUTION

UC received the following pledges

Donor Imposed
- P 100,000 pledge to be paid in eight months that is restricted for the purchase of library
books Unconditional
Condition
- P 900,000 pledge to be made if a famous biology professor is hired.
What amount of pledge receivable is recognized?

P 100,000
EXAMPLE: CONTRIBUTION

UC reported gross contributions receivable of P175.8 million. The balance being reported was
reduced by (1) P6.3 million to arrive at the present value of the expected cash flows and (2) an
allowance for doubtful accounts of P38.4 million.
How much is the reported net contribution receivable?
Receivable 175.8M
Discount - 6.3M
AFDA - 38.4M
Contribution Receivable 131.1M
CATEGORIES OF NPO
Voluntary Health and Welfare Organizations

Health Care Organizations

Colleges and Universities
Other NPOs
 Voluntary Health and Welfare Organizations VHWOs
• NPOs that are supported and
provided voluntary services to the
public normally uses their
Functional
Statement of
resources to solve basic social
Functional
problems in the areas of health and
Expenses
welfare either globally, nationally at Natural
the community level or on an
individual basis
 Health Care Organizations

• This includes clinics, ambulatory Premium

Premium Fees
Fees
care organizations, continuing care
retirement communities, health
maintenance organizations, home Other
Other Operating
Operating Revenue
Revenue
health agencies, hospitals, health
cares entities and nursing homes
that provide health care
Non-operating Revenue
 Health Care Organizations

Patient Service Revenue

Includes room and board, nursing
services and other professional
services
 Colleges and Universities
The primary objective of private
Tuition and Fees
not-for-profit Colleges and
universities is to provide
educational services to its
Subsidy
constituents

3rd Party student aid