FOREIGN CURRENCY

TRANSACTION
MODULE 01
 FOREIGN CURRENCY TRANSACTION V FOREIGN CURRENCY TRANSLATION

Foreign Currency Transactions are transactions to be settled in a foreign

currency and financial statements of an affiliate maintained in a foreign currency
are translated (converted) into pesos by multiplying the numbers of units of the
foreign currency by a direct exchange rate

Foreign Currency Translation is the process of expressing monetary amount

that are stated in terms in a foreign currency into the currency of the reporting
entity by using an appropriate exchange rate.
 Foreign Exchange Rate
It is the price of a currency expressed in terms of another currency.

Two types of Quotation:

A. Direct Quotation
One which the exchange rate is quoted in terms of how many units of the domestic
currency can be converted into one unit of foreign currency
B. Indirect Quotation
An exchange rate often stated in terms of converting one unit of domestic currency
into units of a foreign currency.
 Spot Rate v Forward Rate
Spot rate is the rate for the immediate delivery of currencies exchanged.

Forward rate is the rate at which currencies can be exchanged at some future
date. It is an exchange rate established at the time a forward exchange contract
is negotiated. A forward exchange contract is a contract to exchange at
specified rate currencies of different countries on a specified future date.
 FORWARD RATE IN FORWARD EXCHANGE CONTRACT

Before currencies are exchanged in a forward exchange contract, the spot rate
may move above or below the contracted forward exchange rate, but this has
no effect on the forward exchange rate established when the forward exchange
contract was negotiated.
 BID RATE V OFFER RATE

BID RATE – also referred to as buying rate is the maximum rate in the market
which buyers of stock are willing to pay in order to purchase any stock or the
other security demanded by them

OFFER RATE – also referred to as selling rate is the offer rate is the minimum rate in
the market at which sellers are willing to sell any stock or the other security which they
are currently holding.
 FLOATING RATES

Relationship between major currencies is determined by supply and demand

factors called floating rates.

Floating rates increase the risk to companies doing business with a foreign company
because after a rate change occurs, all transactions are conducted at the new rate until
the next change occurs.
 MEASURED V DENOMINATED

Transactions are normally measured and recorded in terms of the currency in

which the reporting entity prepares its financial statements. This currency is
usually the domestic currency of the country in which the company is domiciled
and is also referred to as the reporting currency.

Assets and liabilities are denominated in a currency if their amounts are fixed in terms of
that currency.
 TRANSACTIONS
A transaction between two Philippine firm companies requiring payment of a
fixed number of pesos is both measured and denominated in pesos

A transaction between a Philippine company and a foreign company, the two parties
usually negotiate whether the settlement be made
A. In Pesos (not a foreign currency)
B. In the domestic currency of the foreign company (a foreign currency)

Transaction is to be settled by the payment of a fixed amount of foreign currency, the

Philippine company measures the receivable or payable in pesos, but the transaction is
denominated in specified foreign currency.
 TYPES OF FOREIGN EXCHANGE RATE EXPOSURE
Foreign Exchange rate exposure can be broadly categorized into two main types:
A. Accounting Exposure
Is the exposure to changes in exchange rates as a result of the entity:
Entering into foreign currency transactions that result to contractual rights and
obligations, such as receivables or payable denominated in foreign currencies

Having to translate the foreign currency financial statements of foreign

operations from local currency to the group’s reporting currency for the purpose
of preparing consolidated financial statements
B. Economic Exposure (Operating Exposure)
TYPES OF ACCOUNTING EXPOSURE
ACCOUNTING EXPOSURE
Translation exposure
Transaction exposure
[Arises from translation of foreign currency financial statements of
[Arises from foreign currency transaction]
foreign operations]

RESULT
Translation exposure
Transaction exposure[Transaction gain or loss]
[Transaction gain or loss]

RECORDING
Transaction exposure Translation exposure
[Recorded in the books of the individual entity] [Presented in the consolidated financial statements]
 FUNCTIONAL CURRENCY
FUNCTIONAL CURRENCY is the currency of the “primary economic
environment in which the entity operates”.

PAS 21 – The Effects of Changes in Foreign Exchange Rate – emphasizes that

the functional currency of a firm should be the currency that influences the sales
prices of goods and services.

Functional Currency should also be the currency in which a firm receives most
of its cash receipts and expends cash outlays.
 FACTORS: FUNCTIONAL CURRENCY
PRIMARY INDICATORS
1. The currency that mainly influences the sales prices of goods and services
2. The currency of the country where competitive forces and regulations determine the
sales prices of goods and services
3. The currency that mainly influences labor, material, and other costs of goods and
services
SUPPORTING EVIDENCE
1. The currency in which financing is obtained
2. The currency in which receipts from operating activities are usually retained
 FOREIGN CURRENCY TRANSACTIONS
A transaction that requires payment or receipt in a foreign currency.
In particular:
A. A transaction with a foreign company that is to be settled in pesos is not a foreign
currency transaction
B. A transaction with a foreign company which is settled in foreign currency is a foreign
currency transaction. This leads to the Philippine company being exposed to the risk
of unfavorable changes in the exchange rate that may occur between dates the
transaction entered into and the date the account is settled.
FOREIGN CURRENCY TRANSACTIONS

Foreign Currency
Transactions
Financial year-end,
recorded at actual Settlement of
outstanding
(historical) exchange monetary
monetary
rate giving rise to asset/liability
asset/liability
monetary asset or
monetary liability
 FOREIGN CURRENCY TRANSACTIONS
PAS 21 requires that a foreign currency transaction be recorded (and measured) by
applying the foreign currency using the spot exchange rate, referred to as the actual rate
existing of the transaction date.
 Monetary v Non-Monetary

Non Monetary
Monetary Items
Items
Units of currency held and assets
and liabilities to be received or
Referred to as accounts
paid in fixed or determinable
number of units of currency

the peso amounts of which they

Items whose balances are fixed
are presented in the financial
in terms of pesos regardless of
statements differ from what
changes in the general price
they are actually realized or
level.
represents

The key feature that distinguishes a monetary item from a non-monetary item is the right to receive
(or an obligation to deliver) a fixed or determinable number of units of currency.
EXAMPLES OF MONETARY AND NON-MONETARY ITEMS
MONETARY ITEMS NON-MONETARY ITEMS
CASH INVENTORIES

ACCOUNTS AND NOTES RECEIVABLES PREPAID EXPENSES (XPN: INTEREST)

PREPAID INTERESTS LAND

ACCOUNTS AND NOTES PAYABLES BUILDINGS

LOAN PAYABLE EQUIPMENT

LOAN RECEIVABLE CAPITAL STOCK

 REPORTING AT SUBSEQUENT BALANCE SHEET DATE
At each balance sheet dates:
1. Foreign currency monetary items have to be adjusted (or remeasured) for exchange
rate changes using the current/closing rate on balance sheet date.
2. Non monetary items that are measured in terms of historical cost in a foreign
currency are translated using the exchange rate on the date of the transaction
3. Non monetary items that are measured at fair value in a foreign currency are
translated using the exchange rates on the date when the fair value was determined.
Usually this date is the balance sheet date, hence, the current/closing rate is used.
 TRANSACTION EXPOSURE
Foreign currency monetary and non-monetary items carried at fair value have to be
remeasured for changes in foreign exchange rates. They are said to be exposed to
foreign exchange risk.

Transaction exposure is used to refer to items in the financial statements that are
exposed to foreign exchange rates as a result of foreign currency transactions. As a
result of the exposure, an exchange gain or loss takes place when the foreign exchange
rates change between two dates.

The resulting gains or losses depends on the direction of the foreign exchange rate
movement and whether item is an asset or a liability.
 TREATMENT OF TRANSACTION GAIN/LOSS
Exchange gains and losses on monetary items are recognized in the profit and loss of the entity as they
arise. Commonly recognized in:
1. On balance sheet date. Foreign currency monetary items are translated at the current/closing rate
that is different from the spot rate at which they were initially received during the period or reported
in financial statements of the previous period. In this case the exchange gain or loss is recognized as
unrealized gain or loss.
2. On the date of settlement of foreign currency monetary items. The exchange rate on the date of
settlement of a foreign currency monetary item differs from the spot rate at which it is recorded, thus
resulting to a realized exchange gain or loss.

• Foreign currency exchange differences on non-monetary items are recognized in the same way as the
gain or loss on the item is recognized. Gain or loss on anon-monetary item recognized in profit or loss,
any exchange in the gain or loss is also recognized in profit or loss statement.

• Gain or Loss on a non-monetary item that is measured at fair value is recognized in OCI
STAGES AND APPROPRIATE EXCHANGE RATE

Balance Sheet
•Current Direct date •Realization of
Exchange Rate transaction gain or loss
•Spot rate in effect at by comparing carrying
the balance sheet date amount of item against
settlement amount

Transaction Settlement
date date
 SUMMARY OF FOREX GAINS AND LOSSES
Balance sheet
Exposed Account Effect on Balance Sheet Reported Income Statement Effect

Increase in direct spot rate

Importation Payable Increase Transaction Loss

Exportation Receivable Decrease Transaction Gain

Decrease in direct spot rate

Importation Payable Decrease Transaction Gain

Exportation Receivable Increase Transaction Loss

END OF MODULE