FOREX and HYPERINFLATION AFAR 08

● Foreign Currency - currency other than functional currency

● Closing/Current/Ending rate - exchange rate at FS date
● Historical/Spot rate - rate at acquisition or transaction date
● Average rate - approximate

Ways of Conducting Foreign Activities

A. Foreign Currency Transactions
Accounting Issue
1. Transaction date - use Spot Rate

Note:
➔ Date to use is when ownership is transferred
➔ Buyer/Import/Purchase - Selling Rate Seller/Export/Sold - Buying Rate
➔ Direct quotation - multiply Indirect quotation - divide

2. End of Reporting Period - Year End

Ex JE:
Forex Loss XX Accounts Payable XX
Account Payable XX Forex Gain XX

3. Settlement Date
- Differences shall be recognized in the period in which they arise
Ex JE:
AP XX
Forex Loss XX
Cash XX

B. Foreign Operations
Procedure:
1. Receive foreign entity’s FS
2. Translate it to Php
3. Consolidate the translated foreign entity’s account with Ph company account
ASR - CHA
Accounts Not a hyperinflationary economy Hyperinflationary economy

Assets and Liabilities Closing rate

Closing rate
 SHE except RE Historical rate
- Rate @ acquisition date

Revenue and Expenses Average rate

Theoretical: use exchange rate
as of transaction date

Retained Earnings

Beginning Balance Year of Acquisition - Historical Rate

Subsequent Year - Translated Balance last period

Profit or Loss Average Rate

Dividends (deduct sa RE) Exchange Rate @ date of declaration

Notes:
★ Hyperinflationary economy - cumulative inflation over 3 years that exceeds 100%
★ If FS of Foreign Operation differs with the entity, the Assets and Liabilities are translated at
Exchange rate at end of reporting of Foreign Operations
★ Translation adjustments - to OCI
★ But if disposal of foreign operations, the gain or loss is sa P/L
★ If may advance payments, use the rate on that date
★ Nonmonetary @ FV - use Closing Rate

Assets DR XX
Liabilities CR XX
Equity CR XX
FCTA or Cumulative Translation Adjustments XX