AFAR-12 (Foreign Currrency)

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 45  May 2023 CPA Licensure Examination

AFAR-12
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  A. CRUZ
FOREIGN CURRENCY TRANSACTIONS & TRANSLATION

Foreign Currency Transactions without Hedging
I – Importing Transaction (Exposed Liability)
On December 1, 20x9, Petra Corporation, ordered equipment FOB shipping point from an American
Company for US $10,000. The equipment was shipped and invoiced to Petra on December 16, 20x9. Petra
paid the invoice on January 15, 20y0. Relevant spot rates for US dollars on the respective dates are as
follows:
Buying Selling Spot
Spot Rate Rate
December 1, 20x9 P 48.50 P 49.00
December 16, 20x9 48.90 50.00
December 31, 20x9 49.50 51.00
January 15, 20y0 50.00 50.50
Required:
1. Prepare all entries on Petra Corporation’s books to record the above transactions.
2. Determine the following:
a. Foreign exchange gain or loss on:
a.1. December 16, 20x9
a.3. January 15, 20y0
b. On December 31, 20x9:
b.1. Accounts payable
b.2. Equipment
II – Exporting Transaction (Exposed Asset)
Conrada Exports Corporation, sold merchandise - metal crafts to a Canadian Corporation for a 10,000
Canadian dollars. Pertinent information on exchange conversion rates related to this transaction were as
follows:
Buying Selling Spot
Spot Rate Rate
November 16, 20x9 – receipt of order P 51.50 P 52.00
December 16, 20x9 – date of shipment 52.50 53.00
December 31, 20x9 – balance sheet date 53.50 53.75
January 15, 20y0– date of collection 53.00 54.00
Required:
1. Prepare all entries on Petra Corporation’s books to record the above transactions.
2. Determine the following:
a. Foreign exchange gain or loss on:
a.3. January 15, 20y0
b. On December 31, 20x9:
b.1. Accounts receivable
b.2. Sales
III – Import
DD Inc., a Philippine company, bought machine parts from a foreign country on March 1, 20x4, for 30,000
foreign currency units (FCU), when the spot rate for FCU was P.4895. DD’s year-end was March 31, when
the spot rate was P.4845. On April 20, 20x5, DD paid the liability with 30,000 FCUs at a rate of P.4945. DD’s
income statements should report a foreign exchange gain or the years ended March 31, 20X4 and 20x5 of:
20x4 20x5 20x4 20x5
a. P -0- -0- c. P150 loss P -0-
b. P -0- P150 loss d. P150 gain P300 loss
IV – Importing and Borrowing
Kennetha Corporation had the following foreign currency transactions during 20x4:
▪ Merchandise was purchased from a foreign supplier on January 20, 20x4 for the Philippine peso
equivalent of P90,000. The invoice was paid on March 20, 20x4, at the Philippine peso equivalent
of P96,000.
▪ On July 1, 20x4, Kennetha borrowed from foreign corporation with a Philippine peso equivalent
of P500,000 evidenced by a note that was payable in the lender’s local currency on July 1, 20x5.
On December 31, 20x4, the Philippines peso equivalents of the principal amount and accrued
interest were P520,000 and P26,000, respectively. Interest on the note is 10% per annum.
In Kennetha’s 20x4 income statement, what amount should be included as foreign exchange loss?
a. P -0- c. P21,000
b. P6,000 d. P27,000
Page 1 of 22 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FOREIGN CURRENCY TRANSACTIONS & TRANSLATION AFAR-12
V - Export
On September 1, 20x9, Rosan Corporation received an order for equipment from a foreign customer for
300,000 local currency units (LCU) when the Philippine peso equivalent was P96,000. Rosan shipped the
equipment on October 15, 20x9, and billed the customer for 300,000 LCU when the Philippine peso
equivalent was P100,000. Rosan received the customer’s remittance in full on November 16, 20x9, and sold
the 300,000 LCU for P105,000. In its income statement for the year ended December 31, 20x9, Rosan should
report a foreign exchange transaction gain of:
a. P -0- c. P5,000
b. P4,000 d. P9,000
VI - Lending
On July 1, 20x9, Vir Company lent P120,000 to a foreign supplier, evidenced by an interest-bearing note
due on July 1, 20y0. The note is denominated in the currency of the borrower and was equivalent to 840,000
local currency units (LCU) on the loan date. The note principal was appropriately included at P140,000 in
the receivable section of Vir’s December 31, 20x9 balance sheet. The note principal was repaid to Vir on
the July 1, 20y0 due date when the exchange rate was 8 LCU to P1. In its income statement for the year
ended, December 31, 20y0, what amount should Vir include as a foreign currency transaction gain or loss?
a. P -0- c. P15,000 gain
b. P15,000 loss d. P35,000 loss
VII – Import and Export
During July 20x9, Petron Corporation had the following transactions with foreign businesses:
Billing Exchange Rate
Date Nature of Transaction Currency (Direct)
Vendor A:
7/ 1/x9 Imported merchandise costing, 100,000 Rupees
from Pakistan wholesaler........................................................ Rupee P.82
7/10/x9 Paid 40% of amount owed.......................................................... .83
7/31/x9 Paid remaining amount owed..................................................... .78
Customer A
7/15/x9 Sold merchandise for 50,000 Pounds to
Syrian wholesaler.................................................................... Pound* P.95
7/20/x9 Received 20% payment............................................................... .90
7/30/x9 Received remaining amount owed........................................... .91
*Syrian pound.
1. What is the capitalized cost of inventory purchase from the Pakistan wholesaler?
a. P 0 c. P82,000
b. 78,000 d. 83,000
2. What is the foreign exchange gain or loss on July 10, 20x9 transactions arising from the Pakistan
wholesaler?
a. P1,000 loss c. P400 gain
b. P1,000 gain d. P400 loss
3. What is the foreign exchange gain or loss on July 31, 20x9 transactions arising from the Pakistan
wholesaler?
a. P4,000 gain c. P2,400 loss
b. P4,000 loss d. P2,400 gain
4. What is the reportable sales amount in the income statement in 20x9?
a. P38,000 c. P45,500
b. P45,000 d. P47,500
5. What is the foreign exchange gain or loss on July 20, 20x9 transactions arising from the Syrian wholesaler?
a. P500 gain c. P2,500 gain
b. P500 loss d. P2,500 loss
6. What is the foreign exchange gain or loss on July 30, 20x9 transactions arising from the Syrian wholesaler?
a. P1,600 loss c. P2,000 gain
b. P1,600 gain d. P2,000 loss
Foreign Currency Transactions with Hedging (Forward Contracts)

Derivatives (Hedging Activities)
The Four Cornerstone Decisions of PFRS 9
PFRS 9 is based on the following cornerstone decisions made by the IASB:
Cornerstone Decision No. 1: Derivatives are contracts that create rights and obligations that meet the
definitions of assets and liabilities (thus these rights and obligations are reported in the balance sheet – not
in an “off-balance-sheet’ manner).

Cornerstone Decision No. 2: Fair value is the only relevant measure for reporting of derivatives, thus
derivatives are reported in the balance sheet at their fair values – whether or not they hedge an item.
Cornerstone Decision No. 3: Only items that are assets and liabilities are reportable on the balance sheet
(thus losses on derivatives cannot be deferred and reported as assets, likewise, gains on derivatives cannot
be deferred and reported as liabilities).
Cornerstone Decision No. 4: Gains and losses on derivatives must be reported in earnings currently – except
in certain specified situations in which the gains and losses must be initially reported in the equity section.
Furthermore, in certain specified situations in which the gain or loss on the hedging transaction must be
reported in earnings currently, the normal accounting for the hedged item must be altered so that the
offsetting loss or gain on the hedged item is also reported currently in earnings. The accounting treatment
for both types of these certain specified situations comprises what is collectively referred to as “hedge
accounting”.
Types of Derivatives
Derivatives can be generally categorized into one of the following categories:
1. Option-based derivatives (examples are option contracts, interest rate caps, and interest rate
floors). Under these contracts, it has a “one-sided exposure” wherein the party can potentially have
a favorable outcome for which it pays a premium at inception; the other party can potentially have
only an unfavorable outcome for which it is paid the premium at inception. Consequently, only the
downside risk on the hedged item is counterbalanced.
2. Forward-based derivatives (examples are forwards, futures, and swaps). Under these contracts, it
has a “two-sided exposure” wherein each party has a favorable or unfavorable outcome.
Consequently, the downside risk and the upside potential on the hedged item are
counterbalanced.
Therefore, there are four types of derivative contract:

(1) Forwards;
(2) Options;
(3) Futures and
(4) Swap.
The most common underlying instruments include foreign currencies, commodities, interest rates, stocks
and bonds.
Distinguishing between “Hedging” and “Hedge Accounting”

The word “hedging” is a broad and general term; it is a means of minimizing risk. The simplest hedge is when
an enterprise takes out a foreign currency loan to finance a foreign currency investment. If the foreign
currency strengthens, then the value of the asset and the burden of the liability will increase by the same
amount. Any gains or losses will be cancelled out.
Hedge accounting recognizes symmetrically the offsetting effects on net profit or loss of changes in the fair
values of the hedging instrument and the related item being hedged. The hedging instrument will normally
be a derivative.
PFRS 9 identifies three types of HEDGING INSTRUMENTS:

1. Fair value hedge – this hedges against the risk of changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment (or portion of such asset, liability, or firm commitment)
attributable to a particular risk. Such as the fair value of fixed rate debt will change as a result of
changes in interest rates.
2. Cash flow hedge – this hedge against the risk of changes in expected cash flows. It is a hedge of
the exposure to variability in cash flows that is attributable to a particular risk associated with:
a. A recognized asset or liability such as future interest payments or variable-interest debt or
b. A highly probable forecasted transaction such as a forecasted sale or purchase that will affect
future reported profit or loss.
3. Hedge of a net investment in foreign operations.
PFRS 9 sets out the items that could qualify as HEDGED ITEMS:
1. Recognized assets or liabilities (refer to No. 1 above)
2. Unrecognized firm commitments
3. Highly probable forecasts transactions
4. A net investment in a foreign entity

Forward Contracts
A forward contract is an agreement between a buyer and a seller that requires the delivery of some
commodity at a specified future date at a price agreed to today (the exercise price). A typical example
of forward contracts is FOREIGN CURRENCY FORWARD CONTRACTS.
A foreign currency forward contract is an agreement to buy or sell a foreign currency at:
1. a specified future date (usually within 12 months), and
2. a specified exchange rate. This rate is called the forward rate.
At the inception of the contract, the forward rate normally varies from the spot rate. The difference
between the two rates is referred to as a discount (premium) if the forward rate is less than (greater than)
the spot rate.
The use of forward contracts includes the following:
1. Hedges
a. Forward contracts used as a hedge of a foreign currency transaction. These include importing
and exporting transactions denominated in foreign currency. These hedges do not qualify for
hedge accounting under PAS 39 because the foreign exchange gains and losses are already
reported at market value on the balance sheet.
b. Forward contracts used as a hedge of an unrecognized firm commitment (This type of hedge is
now treated as a fair value hedges rather than cash flow hedges. However, PFRs 9 clarifies that
a hedge of the foreign currency risk of a firm commitment can be treated as either a cash flow
hedge or fair value hedge). Hedge accounting rules apply. Both the change in the value of the
hedge and the value of the hedged item are reported in earnings (before the contract is
reported in the books).
An example of an unrecognized firm commitment would be when the firm enters into a
contract to purchase an asset in two months for a fixed amount of foreign currency.
c. Forward contract used as a hedge of a foreign-currency-denominated “forecasted” transaction
(a cash flow hedge). Initially foreign exchange gains and losses on the hedging instrument are
recognized in equity, while no offsetting amount is reported on the hedged item. Eventually,
the exchange gains and losses will be reported in earnings in the period the hedged items affect
earnings (i.e., if the item hedged is a forecasted purchase of inventory, the gains and losses on
the hedge will be reclassified into earnings when inventory is sold, or when a forecasted
purchase of equipment, the gains and losses on the hedge will be reclassified into earnings as
the equipment is depreciated.)
An example of a forecasted transaction is a situation where the firm has planned sales receipts
(expected to occur in the near future) and uses the forward contract as a means to hedge the
cash flow risk.
d. Forward contracts as a hedge of a net investment in foreign operations. A foreign currency
transaction is considered a hedge of a net investment in a foreign entity if the forward contract
is designated as, and is effective as, a hedge of the net investment. The gain or loss on the
hedging instrument is reported in the equity the same manner as the translation adjustment.
2. Speculation. Forward contracts used to speculate changes in foreign currency. Forward rate should
be used because a firm speculating in foreign currency changes is exposed to the risk of movements
in the forward rate. Foreign exchange gains and losses are reported currently in the income
statement.
Hedge Accounting: Summary
Fair Value Hedge Cash Flow Hedge
Hedging Instrument On balance sheet On balance sheet carried at FAIR
(derivative is a Forward Contract) carried at FAIR VALUE
VALUE
Gain or loss on HEDGING INSTRUMENT Recognized To the extent, the hedges are
immediately in P & L effective, recognized as other
comprehensive income and are
subsequently recognized as a
component of income when the
hedged item affects earnings.
The ineffective portion of the gain
or loss will be reported immediately
in P & L

Gain or loss on the HEDGED ITEM due to Recognized Not applicable – forecasted
hedged risk immediately in P & L transactions are not recognized
Gain or loss in the other comprehensive Not applicable if the item hedged is a forecasted
income is transferred to P & L purchase of inventory, the gains
and losses on the hedge will be
reclassified into earnings when
inventory is sold, or when a
forecasted purchase of
equipment, the gains and losses on
the hedge will be reclassified into
earnings as the equipment is
depreciated
Split Accounting in Assessing/Measuring Hedge Effectiveness

PFRS 9 requires all derivatives to be valued at their fair values. Thus, both the time value element and the
intrinsic value element are valued fair value. Accordingly, the need to determine the breakdown of the
total fair value occurs only if split accounting is used.
Intrinsic value may be viewed as being conceptually different from the time value; it theoretically can be
accounted for separately from the time value. Carving out the time value element and reporting its gain
or loss separately from the manner of reporting the intrinsic value element’s gain or loss is referred to as split
accounting.
Intrinsic value is the incremental premium paid (difference between the spot price and the exercise price
- to be placed in this favorable position). The entire premium is called the time value (time value is
analogous to a prepaid insurance that could be amortized over the life of the option period).
PFRS 9 permits (but does not require) an entity to exclude all or part of a derivative’s time value element in
assessing hedge effectiveness. Thus, split accounting (accounting for the time value element in a separate
manner from the intrinsic value element) is permitted.
For forward contracts purposes, time value element applies to premium and discounts on forward rates.
If hedge effectiveness were assessed by excluding time value element, the presumed change in fair value
of the foreign currency commitment would be based on the change in the spot rate – not the change in
the forward rate. Thus, one compares:
Only the foreign currency forward’s intrinsic value change (attributable to the change in the spot rate)
with,
1. The change in the foreign currency commitment’s fair value using the change in the spot rate.
VIII - Forward Contracts – Exposed Liability/Asset (“Undesignated Hedges” or Hedges does not require
Hedge Accounting)
1. Given the following information for a 90-day contract:

Pesos FC
Value Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,750 5,000
Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4% 7%
3 months interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.50 87.50
Value in 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?? ??
The spot rate today is 1 FC = .75 . . . . . . . . . . . . . . . . .
What will be the forward rate?

a. 1FC = .75 pesos c. 1FC = .745 pesos
b. 1FC = .57 pesos d. 1FC = .70 pesos
Use the following information for questions 2 to 11:
Valley Enterprises purchases inventory of 1,000,000 foreign currency units (FCUs) from a foreign supplier on
August 13 with payment due on November 1. Management of Valley Enterprises immediately enters into
a forward contract to hedge this transaction. Valley prepares quarterly financial statements with a
December 31 year-end. The relevant exchange rates and forward contract fair values are as follows:
Nov. 1 Forward Contract
Date Spot Rate Forward Rate Fair Value____
Aug. 13 P1.116 P1.120 P 0
Sept. 30 P1.129 P1.126 P 6,000
Nov. 1 P1.138 P1.138 P18,000

2. What is the balance in the accounts payable account on August 13?
a. P1,116,000 c. P1,129,000
b. P1,138,000 d. P1,130,000
3. What is the balance in the accounts payable account on September 30?
a. P1,116,000 c. P1,129,000
b. P1,138,000 d. P1,130,000
4. What is the amount of the exchange loss recognized with respect to the accounts payable account
on September 30?
a. P13,000 c. P9,000
b. P22,000 d. P4,000
5. What is the balance in the accounts payable account on November 1, immediately before collection?
a. P1,138,000 c. P13,000
b. P1,116,000 d. P1,129,000
6. What is the amount of the exchange loss recognized with respect to the accounts payable account
on November 1?
a. P13,000 c. P9,000
b. P22,000 d. P4,000
7. What is the balance in the forward contract account on August 13?
a. None c. P12,000 asset
b. P6,000 asset d. P18,000 asset
8. What is the balance in the forward contract account on September 30?
a. None c. P 6,000 asset
b. P6,000 liability d. P12,000 asset
9. What is the amount of the exchange loss or gain recognized with respect to the forward contract on
September 30?
a. P6,000 loss c. P12,000 loss
b. P6,000 gain d. P12,000 gain
10. What is the balance in the forward contract account on November 1?
a. None c. P18,000 asset
b. P6,000 asset d. P18,000 liability
11. What is the amount of the exchange loss or gain recognized with respect to the forward contract on
November 1?
a. P18,000 loss c. P12,000 loss
b. P18,000 gain d. P12,000 gain
12. What is the net increase or decrease in cash flow from having entered into this forward contract hedge?
a. Zero c. P18,000 decrease
b. P18,000 increase d. P 4,000 decrease
13. What is the amount of premium or discount on forward contract?
a. Zero c. P 4,000 premium revenue
b. P4,000 premium expense d. P 4,000 discount expense
Taste Bits Inc. purchased chocolates from Thailand for 200,000 bahts on December 1, 20x9. Payment is due
on January 30, 20y0. On December 1, 20x9, the company also entered into a 60-day forward contract to
purchase 200,000 bahts. The forward contract is not designated as a hedge. The rates were as follows:
Spot Rate Forward Rate
December 1, 20x9 P0.89 P0.90 (60 days)
December 31, 20x9 P0.91 P0.93 (30 days)
January 30, 20y0 P0.92
14. The entries on December 31, 20x9, include a:
a. Credit to Foreign Currency Payable to Exchange Broker, P4,000.
b. Debit to Foreign Currency Receivable from Exchange Broker,P6,000.
c. Debit to Foreign Currency Receivable from Exchange Broker, P186,000.
d. Debit to Foreign Currency Transaction Gain, P4,000.
15. The entries on January 30, 20y0, include a:
a. Debit to Pesos Payable to Exchange Broker, P180,000.
b. Credit to Cash, P184,000.
c. Credit to Premium on Forward Contract, P4,000
d. Credit to Foreign Currency Receivable from Exchange Broker, P180,000.

a. Credit to Foreign Currency Units (Bahts), P184,000.
b. Credit to Cash, P180,000.
c. Debit to Foreign Currency Transaction Loss, P4,000
d. Debit to Pesos Payable to Exchange Broker, P184,000.
a. Debit to Pesos Payable to Exchange Broker, P184,000.
b. Credit to Foreign Currency Transaction Gain, P4,000.
c. Credit to Foreign Currency Receivable from Exchange Broker, P180,000.
d. Debit to Foreign Currency Units (Bahts), P184,000.
Stark, Inc. placed an order for inventory costing 500,000 foreign currency (FC) with a foreign vendor on April
15 when the spot rate was 1 FC = P0.683. Stark received the goods on May 1 when the spot rate was 1 FC
= P0.687.
Also on May 1, Stark entered into a 90-day forward contract to purchase 500,000 FC at a forward rate of 1
FC = P0.693. Payment was made to the foreign vendor on August 1 when the spot rate was 1 FC = P0.696.
Stark has a June 30 year-end. On that date, the spot rate was 1 FC = P0.691, and the forward rate on the
contract was 1 FC = P0.695. Changes in the current value of the forward contract are measured as the
present value of the changes in the forward rates over time. The relevant discount rate is 6%.
18. The foreign exchange gain on hedging instrument (forward contract) on June 30 amounted to:
a. P2,000 c. P 995
b. P1,000 d. Zero
19. The nominal value of the forward contract on June 30 amounted to:
a. P2,000 c. P 995
b. P1,000 d. Zero.
20. The fair value of the forward contract on June 30 amounted to:
a. P2,000 c. P 995
b. P1,000 d. Zero.
21. The net decrease on Stark Corp.’s net income on June 30 income statement amounted to:
a. P2,000 c. P1,005
b. P1,000 d. P 995
22. The foreign exchange gain due to hedging instrument (forward contract) on August 1 amounted to:
a. P2,500 c. P1,500
b. P2,000 d. P 505
23. MNC Corp. (a Philippine-based company) sold parts to a foreign customer on December 1, 20x9, with
payment of 10 million foreign currencies to be received on March 31, 20y0. The following exchange
rates apply:
Forward rate
Dates Spot Rate (for 3/31/20y0)
December 1, 20x9 P.0035 P.0034 (4 months)
December 31, 20x9 .0033 .0032 (3 month)
March 31, 20y0 .0038 N/A
MNC’s incremental borrowing rate is 12 percent. The present value factor for three months at an annual
rate of interest of 12 percent (1 percent per month) is 0.9706.
Assuming that MNC entered into no forward contract, how much foreign exchange gain or loss should
it report on its 20x9 income statement with regard to this transaction?
a. P5,000 gain c. P2,000 loss
b. P3,000 gain d. P1,000 loss
24. Using the same information in No. 23 and assuming that MNC entered into a forward contract to sell 10
million foreign currencies on December 1, 20x9, as a fair value hedge of a foreign currency receivable,
what is the net impact on its net income in 20x9 resulting from a fluctuation in the value of the foreign
currencies?
a. No impact on net income.
b. P58.80 decrease in net income.
c. P2,000 decrease in net income.
d. P1,941.20 increase in net income.

IX - Forward Contracts –Unrecognized Foreign Currency Firm Commitment
(Hedge Accounting applies)
Items 1 through 10 are based on the following information:
On October 2, 20x9, AST, Inc. ordered a custom-built passenger van from a Japanese firm. The purchase
order is non-cancelable. The purchase price is 1,000,000 yens with delivery and payment to be on March
31, 20y0. On October 2, 20x9, AST, Inc. entered into a forward contract to buy 1,000,000 yens on March 31,
20y0 for P.53. On March 31, 20y0, the custom-built passenger van was delivered.
10/2/20x9 12/31/20x9 3/31/20y0
Spot rate (rupee)………………… P.50 P.56 P.57
Forward rate (rupee)……………. .53 .58 .57
Accounted for as Fair Value Hedge
1. The December 31, 20x9 profit and loss statement, net foreign exchange gain or loss (forward contract
and commitment):
a. P10,000 net gain c. Zero
b. P10,000 net loss d. Not applicable since hedge accounting does apply
2. The Firm Commitment account balance as shown in the December 31, 20x9 balance sheet amounted
to:
a. P 50,000 asset c. P 50,000 liability
b. P 60,000 liability d. None, since it is a fair value hedge
3. What is the fair value of the forward contract on December 31, 20x9?
a. P 50,000 receivable c. P60,000 receivable
b. P 50,000 payable d. P60,000 payable
4. What is the fair value of the forward contract on March 31, 20y0?
a. P 50,000 receivable c. P40,000 receivable
b. P 50,000 payable d. P40,000 payable
5. The Firm Commitment account balance on March 31, 20y0 amounted to:
a. P 10,000 asset c. P40,000 asset
b. P 50,000 liability d. P40,000 liability
6. The value of the equipment on March 31, 20y0 if the firm commitment account will be adjusted to asset
acquired:
a. P 500,000 c. P560,000
b. P 530,000 d. P570,000
7. The value of the equipment on March 31, 20y0 if the firm commitment account will be will be a separate
adjustment to net income::
a. P 500,000 c. P560,000
b. P 530,000 d. P570,000
Accounted for as Cash Flow Hedge
8. The December 31, 20x9 profit and loss statement, foreign exchange gain or loss on hedged
item/commitment amounted to:
a. P50,000 loss c. P 60,000 loss
b. P 50,000 gain d. Not applicable, since it is a cash flow hedge
9. The December 31, 20x9 foreign exchange gain or loss on the hedging instrument (forward contract)
amounted to:
a. P50,000 gain, other comprehensive income
b. P50,000 gain, current earnings
c. P60,000 loss, other comprehensive income
d. P60,000 gain, current earnings
10. The Firm Commitment account balance on March 31, 20y0 amounted to:
a P 10,000 asset c. P 40,000 liability
b. 50,000 liability d. None, since it is a cash flow hedge
11. The value of the equipment on March 31, 20y0 assuming that AST, Inc. has elected to adjust the cost of
non-financial items acquired:
a. P 500,000 c. P 560,000
b. P 530,000 d. P 570,000
Note: If incremental borrowing rate is given the nominal value of the forward contract is not the same with
the fair value (which is the present value of the nominal value) of the forward contract.

12. Happ, Inc. agreed to purchase merchandise from a foreign vendor on November 30, 20x9. The goods
will arrive on January 31, 20y0 and payment of 100,000 foreign currency units (FCU) due February 28,
20y0. On November 30, 2019, Happ signed an agreement with a foreign exchange broker to buy
100,000 FCUs on February 28, 2020. Exchange rates to purchase 1 FCU pound are as follows:
Nov. 30, 20x9 Dec. 31, 20x9 Jan. 31, 20y0 Feb. 28, 20y0
Spot P1.65 P1.62 P1.59 P1.57
30 day P1.64 P1.59 P1.60 P1.59
60 day P1.63 P1.56 P1.58 P1.58
90 day P1.65 P1.63 P1.64 P1.62
Because of this commitment hedge, Happ, Inc. will record the merchandise at what value when it
arrives in January?
a. P165,000 c. P160,000
b. P164,000 d. P159,000
X - Forward Contracts - Cash Flow Hedge: Forecasted Sale Transaction
Ward Enterprises sells aircraft seat cushions to most major airplane manufacturers. The company has made
sales to a foreign customer for several years and management believes that sales to this customer will
continue. On November 30, management initiates a forward contract for 300,000 foreign currency units
(FCUs) to hedge the forecasted sales to foreign customer. Historically the sale has occurred around
February 1 and payment is received by March 15. The spot and March 15 forward exchange rates on
November 30 are P1.139 and P1.138, respectively. Ward prepares quarterly financial statements with a
December 31 year-end. The relevant exchange rates and forward contract fair values are as follows:
March 15 Forward Contract
Date Spot Rate Forward Rate Fair Value___
Dec. 31 P1.141 P1.140 (P 600)
Feb. 1 1.136 1.137 P 300
Mar. 15 1.133 1.133 P1,500
1. What is the value recognized in the financial accounting records on November 30 for the forward
contract?
a. (P600) c. P0
b. P300 d. P1,500
2. What is the value of the forward contract at December 31?
a. (P600) c. P 900
b. P300 d. P1,500
3. What is the gain (loss) on the forward contract included in other comprehensive income at December
31?
a. P300 gain c. P600 gain
b. P300 loss d. P600 loss
4. What is the value of the forward contract at February 1?
a. (P600) c. P0
b. P300 d. P1,500
5. What is the gain (loss) on the forward contract included in other comprehensive income at February
1?
a. P300 gain c. P900 gain
b. P300 loss d. P900 loss
XI - Forward Contracts – Speculation
(“Undesignated Hedges” or Hedges does not require Hedge Accounting)
On November 1, 20x9, ReSA Dairy Corp. concluded that the Thailand baht would weaken during the next
six months because of the coup that transpires recently. In hopes of reporting a gain, ReSA entered into a
foreign exchange forward for speculation on November 1, 20x9, to sell 1,000,000 baht on April 30, 20y0 at
the forward rate.
11/1/20x9 12/31/x9 4/30/y0
Spot rate (baht)………………… P1.190 P1.180 P1.210
Forward rate (baht)……………. 1.199 1.187 1.210
1. The December 31, 20x9 profit and loss statement, foreign exchange gain or loss on forward contract
amounted to:
a. P10,000 gain c. P12,000 gain
b. P10,000 loss d. P12,000 loss
2. On April 30, 20y0, foreign exchange gains or loss on forward contract amounted to (ignoring any
discount reversal):
a. P23,000 gain c. P30,000 gain
b. P23,000 loss d. P30,000 loss

XII - Forward Contracts – Hedging of a Net Investment in Foreign Operations

On December 31, 20x9, Indoy Company, the parent of the 100% owned Japanese subsidiary expected
the yen to weaken by the end of 20y0. Accordingly, Indoy Company, the parent contracted with a foreign
exchange trader on December 31, 20x9, to sell 2,300,000 yens (the subsidiary’s net asset position at that
date) in 365 days at the forward rate of P.435. The following direct exchange rates are as follows:
12/31/20x9 12/31/y0
(the inception (the expiration date and financial reporting
date date
Spot rate P.440 P.400
Forward rate (selling forward) .435 .400
The January 1, 20y0 balance of the translation reserve (cumulative) – debit amounted to P129,000 and
translation reserve loss for 20y0 of P100,000.
1. The December 31, 20y0 foreign exchange gain or loss on forward contract to be charged to
amounted to:
a. P80,500 gain – equity c. P80,500 loss - equity
b. P80,500 gain - earnings d. P92,000 gain - equity
2. The December 31, 20y0, translation reserve balance (cumulative translation adjustment) amounted to:
a. P148,500 debit c. P309,500 debit
b. P229,500 debit d. P148,500 credit
Future Contract
A future contract is the same thing with forward contracts except that instead of being negotiated
between two parties, the contract is a standard one that is sponsored by an organized exchange. With a
futures contract, the exchange handles the cash settlements between the two parties to the contract.
Accordingly, with a futures contract, the two parties to the agreement almost never directly contact one
another. This is not true with forward contracts because they are directly negotiated between the two
parties.
Option Contract
An option contract between two parties – the buyer and the seller – gives the buyer (option holder) the
right, but not the obligation, to purchase or sell something to the option seller (option writer) at a date in
the future at a price agreed to at the time the option contract is exchanged.
A foreign currency option contract is a contractual agreement giving the holder the right to buy or sell a
given amount of currency at a specified price (the exercise or strike price) for a period of time or a point in
time.
Option Terminologies
1. Call is an option to buy
2. Put is an option to sell
3. Holder is the party having the right to buy or sell
4. From the perspective of the holder, the option contract is referred to as a Purchased Option.
5. Writer is the party that grants the holder this contractual right.
6. From the perspective of the writer, the option contract is referred to as a Written Option.
Foreign Currency Option Situations
Spot Market Price Spot Market Price is Spot Market Price
Equals the Exercise More Than the is Less Than the
Strike Price Exercise Strike Price Exercise Strike Price
Option (P5 = P5) (P6 > P5) (P5 < P6)
Call (buy) At the money In the money Out of the money
Put (sell) At the money Out of the money In the money
In the money – the holder would exercise the option since it is favorable to the holder.
Out of the money – the holder would not exercise the option since it is unfavorable to holder.
Accounting for Foreign Currency Option Premiums
• Time Value Element. If at the inception of the foreign currency option, the option is either out of the
money or at the money, the entire premium is called the time value. The time value is analogous to a
prepaid insurance premium that could be amortize to income over the life of the option period.

• Intrinsic Value. On the other hand, if at the inception of the foreign currency option, the option is in the
money, the option holder will have paid a higher premium – the incremental amount equaling the
difference between spot market price and the exercise strike price – to be placed in this favorable
position. This incremental premium paid is called the foreign currency’s intrinsic value.
How Options are reported in the Balance Sheet
The presentations of an option contract from the perspectives of the option holder and option writer are
as shown below:
Presentation of an unexpired Presentation of an unexpired
portion contract in the option portion contract in the option
Option is : holder’s balance sheet writer’s balance sheet
Out-of-the-money Asset (time value only) Liability
At-the-money Asset (time value only) Liability
In-the-money Asset (intrinsic + time value) Liability
From the option buyer’s perspective, a purchased option, regardless of whether it is a call option or a put
option, is always an asset as long as it has not reached the expiration date. This is the case even if the
option is at-the-money or out-of-the-money, the intrinsic value is zero.
The option buyer will not suffer any loss (other than the option premium paid) because the option buyer
has no obligation to exercise the option when it is out-of-the money (or at-the-money). Thus the option’s
value for out-of-the money or an at-the-money option is purely its time value.
As long as an option has not expired, there is a possibility that the option may move into an in-the-money
position. From an option buyer’s perspective, an option contract can never be a liability, that is, it can
never have a negative intrinsic value or a negative time value.
The position of an option writer is the opposite. From his perspective, a written option is always a liability
until it expires as out-of-the money. If the option stays as out-of-the-money during the entire period, the
option writer recognizes a reduction in the time value component as a gain during the option period or
as the expiration of the option period.
XIII – Call Option Contract: Forecasted Purchase
On November 1, 2021, Dos Santos Company forecasts the purchase of raw materials from a foreign supplier
on February 1, 2022, at a price of 200,000 foreign currencies. On November 1, 2021, Dos Santos pays P1,500
for a three-month call option on 200,000 foreign currency with a strike price of P0.40 per foreign currency
transaction. On December 31, 2021, the option has a fair value of P1,100. The following spot rates apply:
Philippine Peso per
Dates Foreign Currency
November 1, 2021 P0.40
December 31, 2021 0.38
February 1, 2022 0.41
1. What is the net impact on Dos Santos Company’s 2021 net income as a result of this hedge of a
forecasted foreign currency purchase?
a. P -0-
b. P400 decrease in net income
c. P1,000 decrease in net income
d. P1,400 decrease in net income
2. What is the net impact on Dos Santos’s 2022 as this hedge of a forecasted foreign currency purchase?
Assume that the raw materials are consumed and become a part of the cost of goods sold in 2022.
a. P80,000 decrease in net income.
b. P80,600 decrease in net income.
c. P81,100 decrease in net income.
d. P83,100 decrease in net income.
3. What is the intrinsic value (IV) and time value (TV) of option on November 1, 2021?
Intrinsic Value Time Value Intrinsic Value Time Value
a. P 0 P 0 c. P1,500 P 0
b. P 0 P 1,500 d. P1,500 P1,500
4. What is the intrinsic value (IV) and time value (TV) of put option on December 31, 2021?
a. P 0 P 0 c. P1,100 P 0
b. P 0 P 1,100 d. P1,100 P 1,100
5. What is the intrinsic value (IV) and time value (TV) of put option on February 1, 2022?
a. P 0 P 0 c. P2,000 P 0
b. P 0 P 2,000 d. P2,000 P2,000

XIV: Call Option Contract: Forecasted Transaction
Woolsey Corporation, a Philippine Company, expects to order goods from a foreign supplier at a price of
250,000 foreign currencies, with delivery and payment to be made on October 24. On July 24, Woolsey
purchased a three-month call option for 250,000 foreign currencies and designated this option as a cash
flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:
Option strike price……………………………………………………. P 2.17
Option cost……………………………………………………………. P4,000
July 24 spot rate……………………………………………………… P2.17
October 24 spot rate………………………………………………... P2.13
What amount will Woolsey include as an option expense in net income during the period July 24 to October
24?
a. P4,000 c.P10,000
b. P5,000 d.P12,000
Assessing Hedge Effectiveness under PFRS 9
In order to qualify for hedge accounting, the hedge relationship must meet the following effectiveness
criteria at the beginning of each hedged period:
• there is an economic relationship between the hedged item and the hedging instrument;
• the effect of credit risk does not dominate the value changes that result from that economic
relationship; and
• the hedge ratio of the hedging relationship is the same as that actually used in the economic
hedge, i.e., hedge ration is designated based on actual quantities of hedged item and the hedging
instrument.
Swap Contract
A swap is a contract in which two parties agreed to exchange payments in the future based on the
movement of some agreed-upon price or rate.
The most common type of swap is an interest rate swap. In an interest rate swap, two parties agree to
exchange future interest payments on a given loan amount; usually, one set of interest payments is based
on fixed interest rate and the other is based on a variable interest rate.
Swaps, forwards, and futures provide two-sided protection. If these derivative instruments are used in a
hedging relationship, they hedge against both increases and decreases in prices or rates. An option
provides one-sided hedging: protection against unfavorable movements in prices or rates without taking
away the ability of the firm to profit from a favorable movement in prices or rates. Because of the one-
sided nature of an option, an option has value at the agreement date and the buyer of the option must
pay this amount at the beginning of the contract period.
Foreign Currency Financial Statements Translation
Key Definitions
• Exchange difference: The difference resulting from translating a given number of units of one currency
into another currency at different exchange rates.
• Foreign operation: A subsidiary, associate, joint venture, or branch whose activities are based in a
country other than that of the reporting enterprise.
Basic Steps for Translating Foreign Currency Amounts into the Functional Currency
The primary economic environment in which an entity operates is normally the one in which it primarily
generates and expends cash. An entity considers the following factors in determining its functional
currency:
a. the currency:
• that mainly influences sales prices for goods and services (this will often be the currency in which
sales price for its goods and services are denominated and settled); and
• of the country whose competitive forces and regulations mainly determine the sales prices of
the goods and services.
b. the currency that mainly influences labor, materials, and other costs of providing goods or services
this will often be the currency in which sales price for its goods and services are denominated and
settled)
Steps apply to a stand-alone entity, an entity with foreign operations such as a parent with foreign
subsidiaries), or a foreign operation such as a foreign subsidiary or branch).
• The reporting entity determines its functional currency
• The entity translates all foreign currency items into its functional currency
• The entity reports the effects of such translation in accordance with paragraphs 20-37 and 50 of
PAS 21.

Functional Currency versus Presentation Currency
Functional currency is the currency of the primary economic environment in which an entity operates. On
the other hand, presentation currency is the currency in which the financial statements are presented. In
most cases, a stand-alone entity’s presentation currency is also its functional currency.
PAS 21 specifies two approaches to translation and the approach to be used depends on whether the
functional currency (is not the currency of a hyperinflationary economy) of the foreign subsidiary is the
same as the presentation currency and whether the books are kept in the functional currency:
Method 1: Translation from the Functional Currency into the Presentation Currency (FCPC/Closing/Current
Rate Method / Net Investment Method / Translated Method).
This method is used on the following basis:
• Foreign operations operates independently in economic and financial matters (or not integral to the
operations of the parent)
• Functional currency (is not the presentation currency) should be the LCU (local currency unit – the
currency of the country in which the subsidiary operates) or a third country currency.
• The functional currency is not the currency of a hyperinflationary economy, otherwise apply PAS 29.
• The main features of the closing / current rate method are summarized as follows:
➢ Assets and liabilities both monetary and non-monetary are translated at current rate on the
date of the balance sheet
➢ Stockholder’s equity accounts are translated using historical rates in effect at the time equities
were first recognized (date of investment) in the foreign entity’s accounting records, except:
❖ Beginning retained earnings is set equal to the ending balance of last year
❖ Dividends – historical rate on date of declaration, otherwise date of payment
➢ Revenue and expense of the foreign operation are translated at the dates of transactions, i.e.
actual or spot rates (historical rates). For practical reasons, the average rate is usually used for
items whose transactions are numerous and occur evenly throughout the year, for example,
sales, purchases and operating expenses, but, if exchange rates fluctuate significantly, the use
of the average for a period is inappropriate.
➢ All resulting difference (translation gains or losses) shall be recognized in other comprehensive
income until the disposal of the foreign operation, when they are included in profit or loss.
Method 2: Translation into the Functional Currency / Remeasurement of Foreign Currency Financial
Statements to the Functional Currency (Temporal Method / Remeasurement Method).
This method is used on the following basis:
• Foreign operation is integrated with parent’s operation.
• Functional currency should be the parent’s currency / presentation or reporting currency.
• The main features of the temporal or remeasurement method are summarized as follows:
➢ Monetary assets and liabilities (e.g. cash and fixed deposits, receivables, payables and most
liabilities) shall be translated (remeasured) using the closing rate
➢ Non-monetary items at historical cost or carried at past exchange price (e.g. fixed assets,
investments at cost, prepaid items except prepaid interest, inventories and intangible assets)
shall be translated (remeasured) using the exchange rate at the date of the transaction
(historical rate)
➢ Non-monetary items at fair value or at current of future exchange prices (e.g., trading securities,
inventories carried at replacement cost and revalued fixed assets) shall be translated
(remeasured) using the exchange rate at the date of the revaluation or fair value determination
➢ Stockholders’ equity accounts – are translated (or remeasured) using the historical rates in effect
at the time equities were first recognized (date of investment) in the foreign entity’s accounting
records, except:
❖ Beginning retained earnings is set equal to the ending balance of last year
❖ Dividends – historical rate on date of declaration, otherwise date of payment
--------------------------------------------------
-Your future depends on many things, but mostly on who you are-

➢ Income statement items:
❖ Related to non-monetary items such as cost of sales, depreciation of plant assets,
amortization of intangible assets, amortization of deferred charges or credits and
other allocation of non-monetary items shall be translated (or remeasured) using
historical rate (either at the date of purchase for historical cost items or the date of
valuation for items carried at fair value)
❖ Not related to non-monetary items (or related to monetary items) such as sales,
purchases, expenses and income items that result in inflow/outflow of monetary
items shall be translated (remeasured) using actual rate (historical rate); however
for practical reasons, an average rate may be used.
➢ Resulting difference (remeasurement gain or loss) should be reported as profit or loss for
the period; remeasurement gain or loss arising from the revaluation of a non-monetary item
is taken to other comprehensive income if the revaluation gains or losses are taken to other
comprehensive income.
Choice of Functional Currency – the Applicable Translation Method
Assume:
Philippines - Parent Company;
U.S. - Subsidiary
Functional Currency is not the Currency of a Functional Currency is the Currency

Hyperinflationary Economy of a Hyperinflationary Economy
(PAS 21: 20-42) (PAS 21: 42-43/PAS 29)
Restatement of F/S, then

Current Rate Consolidate
Method Temporal
(Translation from /*Remeasurement
Functional Method
Currency into the (Translation Into the
XG/XL on net
Presentation Functional Currency
monetary position
Currency) – – Foreign operation
–
Foreign operation is integral with
Net Income
operates parent’s operations
Where: 1 - remeasure first
independently (PAS 21: 20-26) 2- then translate
(PAS 21:38-41)
XG – exchange gain; XL – exchange loss
Functional
LCU - $ Peso
Currency
XG/XL - OCI XG/XL- Net Income
Currency
2 of a third 1
country
(for
example
Yen)
XV - Translation of Foreign Subsidiary’s Financial Statements
Assume that on January 2, 20x4, P Company, a Philippine based company, acquired for
US$2,400,000 an 80% interest in S Company maintains its books in U.S. dollars and they are in
conformity with GAAP in the Philippines (parent’s functional and presentation currency is the
peso). S Company’s financial statements are prepared in the local currency unit (the foreign
currency unit – dollars.
The translation process will be illustrated under two different assumptions:
(1) the U.S. dollars is the functional currency, and
(2) the Philippine peso is the functional currency. Exchange rates for the US dollars for the 20x4
fiscal year are as follows:
-------------------------------------------------------
-No one finds life worth living – he has to make it worth living.-

Date Spot Rate

January 2, 20x4 (date of acquisition) . . . . . . P40.00
September 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . 40.10
December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . 40.25
Average for the fourth quarter . . . . . . . . . . . . . . 40.22
Average for the year . . . . . . . . . . . . . . . . . . . . 40.20
In translating the income statement accounts, it is assumed that revenues were generated and expenses were
incurred evenly during the year. It is also assumed that the company uses the FIFO cost flow assumption, and
that the ending inventory was acquired during the last quarter. The following accounts based on the adjusted
trial balance are given as follows:
US Dollars
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,624,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,220,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786,000
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . 98,400
Retained earnings, 1/1/20x4 . . . . . . . . . . . . . . . . . . . . 576,000
Dividends declared, 9/1/20x4 . . . . . . . . . . . . . . . . . . . . 360,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,116,000
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . 729,600
Inventory (FIFO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 996,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768,000
Short-term notes payable . . . . . . . . . . . . . . . . . . . . . . 762,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . 1,152,000
Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . 360,000
Solution
1. Functional Currency Is the Local Currency Unit US Dollars: Translation Into the Presentation
Currency (Current/Closing Rate Method)
Translation Adjusted Trial
Combined Statement of Income and
Adjusted Trial Exchange Balance
Retained Earnings
Balance ($) Rate (Pesos)
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 (A) 40.20 89,244,000
Depreciation expense 120,000 (A) 40.20 4,824,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Net Income to Retained Earnings 399,600 16,063,920
Retained earnings, 1/1 576,000 (1) 23,040,000
Total 975,600 39,103,920
Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000
Retained earnings, 12/31 to Balance Sheet 615,600 24,667,920
Balance Sheet
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 (C) 40.25 40,089,000
Land……………………………. 600,000 (C) 40.25 24,150,000
Buildings (net) 780,000 (C) 40.25 31,395,000
Equipment (net) 516,000 (C) 40.25 20,769,000
Total 4,737,600 190,688,400
Accounts payable…………… 768,000 (C) 40.25 30,912,000
Short-term notes payable 762,000 (C) 40.25 30,670,500
Bonds payable………………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par……… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000
Retained earnings, from above _ 615,600 24,667,920
Total 4,737,600 190,200,420
Foreign Currency Translation Reserve Gain OCI) –
credit……………………………………………………… _________ B/A 487,980
Total…… 4,737,600 190,688,400
*Include as a component of other comprehensive income
(1) Retained earnings in pesos on January 2 (date of acquisition)
(A) Average exchange rate used to approximate the rate on the date these elements were recognized.
(H) Historical exchange rate
(C) Current exchange rate
(5) B/A – balancing amount

Verification of the Translation Adjustment – Current/Closing Rate Method (Functional Currency – US Dollars)
Translation Reporting
Exchange Currency
US $ Rate (Pesos)
1/2 Exposed net asset position……………… *2,088,000 40.00 83,520,000
Adjustments for changes in net asset position
during year:
Net income for year………………. 399,600 40.20 16,063,920
Dividends declared……………………. (360,000) 40.10 ( 14,436,000)
Net asset position translated using rate in
effect at date of each transaction……………….. 85,147,920
12/31 Exposed net asset position……………. 2,127,600 40.25 85,635,900
Change in cumulative translation adjustment
during year—net increase…………. 487,980
1/2 Cumulative translation adjustment**……………. -0-
12/31 Cumulative translation adjustment………….. 487,980
*A condensed balance sheet for S Company on January 2, 20x4 was as follows:
US $ US $
Monetary assets 1,320,000 Monetary Liabilities 2,160,000
Nonmonetary assets Common stock 1,152,000
Inventory 912,000 Paid-in capital in excess of par 360,000
Fixed assets 2,016,000 Retained earnings 576,000
Total 4,248,000 Total 4,248,000
1/1 Net assets = $4,248,000 - $2,160,000 = 2,088,000
**the beginning balance is zero since this was the first year the investment was held.
Required:
1. Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary's functional
currency is the US dollars. [(Functional Currency Is the Local Currency Unit – Translation Into the
Presentation Currency (Current/Closing Rate Method)]
2. Prepare a schedule to compute the translation gain or loss, assuming the subsidiary's functional currency is the
peso. (Functional Currency Is Philippine Peso - Translation into the Functional Currency (Remeasurement or
Temporal Method)
3. Translate the financial statements using the trial balance approach, under:
a. Current Rate Method
b. Temporal Method
2. Translation into the Functional Currency (Remeasurement or Temporal Method)
Functional Currency - Philippine Peso
Remeasurement Adjusted Trial
Adjusted Trial Exchange Balance
Balance Sheet Balance ($) Rate (Pesos)
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Inventory (FIFO) 996,000 Schedule 40,059,120
Land……………………………. 600,000 (H) 40.00 24,000,000
Buildings (net) 780,000 (H) 40.00 31,200,000
Equipment (net) 516,000 (H) 40.00 20,640,000
Total 4,737,600 190,184,520
Accounts payable…………… 768,000 (C) 40.25 30,912,000
Bonds payable………………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par……… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000
Retained earnings _ 615,600 (B/A) 24,652,020
Total 4,737,600 190,184,520
Combined Statement of Income and
Retained Earnings
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 Schedule 89,041,680
Depreciation expense 120,000 (H) 40.00 4,800,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 __3,955,680
Net income before remeasurement loss 16,290,240
Remeasurement loss - debit 0 ___242,220
Net Income to Retained Earnings 399,600 16,048,020
Total 975,600 39,088,020
Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000
Retained earnings, 12/31 from balance sheet 615,600 24,652,020
B/A – balancing amount

Schedule - Translation of Cost of Goods Sold
Remeasurement
Exchange
Accounts ($) Rate Pesos
Beginning inventory (assumed)…………. 912,000 (H) 40.00 36,480,000
Purchases (assumed)…………….. 2,304,000 (A) 40.20 92,620,800
Total…………………….. 3,216,000 129,100,800
Less: Ending inventory……………. 996,000 (A) 40.22 40,059,120
Cost of goods sold…………… 2,220,000 89,041,680
Verification of the Translation Adjustment – Remeasurement or Temporal Method (Functional Currency – Philippine Peso)
Translation Reporting
Exchange Currency
US $ Rate (Pesos)
1/2 Exposed net monetary liability position….. *840,000 40.00 33,600,000
Adjustments for changes in net monetary position
during year:
Less: Increase in cash and receivables from sales (3,624,000) 40.20 145,684,800
Add: Decrease in monetary assets or increase in
monetary liabilities:
Purchases 2,304,000 40.20 92,620,800
Other expenses 786,000 40.20 31,597,200
Income taxes 98,400 40.20 3,955,680
Dividends declared…………….. 360,000 40.10 14,436,000
Net monetary liability position translated using rate
in effect at date of each transaction.. 30,524,880
Less: 12/31 Exposed net monetary liability position **764,400 40.25 30,767,100
Remeasurement gain (loss) ( 242,220)
*The January 2, 20x4 condensed balance sheet is given in Figure 19-3:
US $
Monetary liabilities 2,160,000
Less: Monetary assets 1,320,000
Net monetary liability position….. 840,000
**See above:
US $
Monetary liabilities (768,000 + 762,000 + 1,080,000) 2,610,000
Less: Monetary assets (1,116,000 + 729,600) 1,845,600
Net monetary liability position….. 764,400
3. Translation Using a Trial Balance Approach
Translation into the Presentation Currency (Current/Closing Rate Method)
Functional Currency - Is Local Currency Unit – US Dollars
Adjusted Trial Balance Adjusted Trial Balance
Accounts ($) Exchange (Pesos)
Debit Credit Rate Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 (A) 40.20 89,244,000
Depreciation expense 120,000 (A) 40,20 4,824,000
Other expenses 786,000 (A) 40.20 31,597,200
Dividends declared, 9/1 360,000 (H) 40.10 14,436,000
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Inventory (FIFO), 12/31 996,000 (C) 40.25 40,089,000
Land………………………… 600,000 (C) 40.25 24,150,000
Buildings (net) 780,000 (C) 40.25 31,395,000
Equipment (net) 516,000 (C) 40.25 20,769,000
Accounts payable………… 768,000 (C) 40.25 30,912,000
Bonds payable…………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par _________ __360,000 (H) 40.00 ___________ _14,400,000
Sub-totals 8,322,000 8,322,000 334,745,280 334,257,300
Foreign Currency Translation
Reserve Gain OCI) – credit _________ _________ ___________ 487,980
Totals 8,322,000 8,322,000 334,745,280 334,745,280
Note: In the pre-closing trial balance approach, the following should be observed:
1. The retained earnings should be of beginning balance
2. In the event that there are details as to the component of cost of goods sold purchases should be translated using
average and inventory should be of a beginning balance translated at the appropriate rate existing at the date
of inventory acquired.

Translation into the Functional Currency (Remeasurement or Temporal Method)
Functional Currency
Is Philippine Peso -
Translation into the Functional Currency (Remeasurement or Temporal Method)
Accounts ($) Exchange (Pesos)
Debit Credit Rate Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800
Purchases 2,304,000 (A) 40.20 92,620,800
Depreciation expense 120,000 (H) 40.00 4,800,000
Other expenses 786,000 (A) 40.20 31,597,200
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Inventory (FIFO), 1/1 (assumed) 912,000 (H) 40.00 36,480,000
Land………………………… 600,000 (C) 40.00 24,000,000
Buildings (net) 780,000 (C) 40.00 31,200,000
Equipment (net) 516,000 (C) 40.00 20,640,000
Bonds payable…………… 1,080,000 (C) 40.25 43,470,000
Paid-in capital in excess of par _________ __360,000 (H) 40.00 ___________ 14,400,000
Sub-totals 8,322,000 8,322,000 334,015,080 334,257,300
Remeasurement loss - debit _________ _________ ____242,220 ___________
Totals 8,322,000 8,322,000 334,257,300 334,257,300
Schedule: Translation of Cost of Goods Sold
Remeasurement
Exchange
Accounts ($) Rate Pesos
Total…………………….. 3,216,000 129,100,800
Less: Ending inventory……………. 996,000 (A) 40.22 40,059,120
Alternatively, the cost of goods sold will be lump into one amount (refer to schedule below), and the inventory ending balance will
be the amount presented in the trial balance the way it was presented under the current/closing rate method
($) Exchange (Pesos)
Accounts Debit Credit Rate Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 Schedule 89,041,680
Depreciation expense 120,000 (A) 40.00 4,800,000
Other expenses 786,000 (A) 40.20 31,597,200
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Inventory (FIFO), 1/1 (assumed) 996,000 (H) 40.00 40,059,120
Land………………………… 600,000 (C) 40.00 24,000,000
Buildings (net) 780,000 (C) 40.00 31,200,000
Equipment (net) 516,000 (C) 40.00 20,640,000
Bonds payable…………… 1,080,000 (C) 40.25 43,470,000
Paid-in capital in excess of par _________ __360,000 (H) 40.00 ___________ 14,400,000
Sub-totals 8,322,000 8,322,000 334,015,080 334,257,300
Remeasurement loss - debit _________ _________ ____242,220 ___________
Totals 8,322,000 8,322,000 278,547,750 278,547,750
Schedule - Translation of Cost of Goods Sold
Remeasurement
Accounts ($) Exchange Rate Pesos
Total…………………….. 2,680,000 129,100,800
Less: Ending inventory……………. 830,000 (A) 40.22 _40,059,120
XVI
A foreign subsidiary of Decker Corporation has certain balance sheet accounts on December 31, 20x9.
Information relating to these accounts in Philippine pesos as follows:

Translated at
Current Rates Historical Rates
Marketable securities at cost P 65,000 P 75,000
Inventories, at average cost 500,000 550,000
Patents 80,000 85,000
Totals P 645,000 P 710,000
What total amount should be included in Decker’s December 31, 20x9 consolidated balance sheet for the
above accounts if subsidiary’s foreign operations operates independently in economic and financial
matters (or not integral to the operations of the parent):
A. P710,000 C. P660,000
B. P700,000 D. P645,000
XVII
Certain balance sheet accounts of a foreign (US) subsidiary of Kanchengjunga Company at December
31, 20x9, have been remeasured into Philippine pesos as follows:
Remeasured at
Accounts receivable, current P 200,000 P 220,000
Accounts receivable, long-term 100,000 110,000
Prepaid Insurance 50,000 55,000
Goodwill 80,000 85,000
Totals P 430,000 P 470,000
What total amount should be included in Kanchengjunga’s December 31, 20x9 consolidated balance
sheet for the above accounts if subsidiary’s foreign operation is integral to parent’s operations?
A. P430,000 C. P440,000
B. P435,000 D. P450,000
XVIII
Certain balance sheet accounts of a foreign subsidiary of Fuji Company at December 31, 20x9, have been
converted into Philippine pesos as follows:
Notes receivable, long term P 240,000 P 200,000
Prepaid interest 10,000 8,000
Prepaid rent 85,000 80,000
Patent 150,000 170,000
Marketable securities, at cost 120,000 130,000
Trademarks 50,000 55,000
Goodwill 200,000 210,000
Marketable securities, at market value 110,000 90,000
Inventories 90,000 95,000
Deferred charges 88,000 85,000
Accounts receivable 15,000 20,000
Cash 100,000 110,000
Customer list 60,000 70,000
Buildings (net) 400,000 420,000
Totals P1,718,000 P1,743,000
1. Assume that the LCU (local currency unit) is the subsidiary’s functional currency. What balances does a
consolidated balance sheet report as of December 31, 20x9?
A. P1,790,000 C. P1,743,000
B. P1,770,000 D. P1,718,000
2. Assume that the Philippine peso is the subsidiary’s functional currency. What balances does a
consolidated balance sheet report as of December 31, 2019?
A. P1,790,000 C. P1,743,000
B. P1,770,000 D. P1,718,000
XIX
A wholly owned subsidiary of Mary, Inc. has certain expense accounts for the year ended December 31,
20x9, stated in local currency units (LCU) as follows:
LCU
Depreciation of equipment (related assets were purchased 1/1/20x7) 120,000
Provision for doubtful accounts 80,000
Rent 200,000
The exchange rates at various dates are as follows:
Peso Equivalent
of 1 LCU
December 31, 20x9 P .40
Average for the year ended 12/31/20x9 .44
January 1, 20x7 .50

Assume that the LCU is the subsidiary’s functional currency. The charges of the expense accounts occurred
approximately evenly during the year. What total peso amount should be included in Mary’s 20x9
consolidated income statement to reflect these expenses?
A. P160,000 C. P176,000
B. P168,000 D. P183,200
XX
A wholly owned subsidiary of a Philippine Company had selected expense accounts stated in local
currency units (LCUs) for the fiscal year ended November 30, 20x9 as follows:
Bad debts expense 60,000 LCU
Amortization of patent (patent was acquired on December 1, 20x6) 40,000
Rent expense 100,000
The exchange rates for LCUs at various dates are as follows:
December 1, 20x6 P .25
November 30, 20x9 .20
Average for fiscal year ended 11/30/20x9 .22
If the subsidiary’s functional currency is the Philippine peso, what is the peso amount to be included in the
translated income statement of the Philippine Company’s foreign subsidiary for the fiscal year ended
November 30, 20x9 for the foregoing expense accounts?
A. P44,000 C. P42,000
B. P40,000 D. P45,200
XXI
The subsidiary in Japan of Manila Company, a Philippine enterprise has plant assets with a cost of 3,600,000
yen on December 31, 20x9. Of this amount, plant assets with a cost of 2,400,000 yen were acquired in 20x7
when the exchange rate was 1 yen = P0.625; and plant assets with a cost of 1,200,000 yen were acquired
in 20x8 when the exchange rate was 1 yen = P0.556. The exchange rate on December 31, 20x9 was 1 yen
= P0.500, and the weighted average rate for 20x9 was 1 yen = P0.521. The Japanese subsidiary depreciates
plant assets by the straight-line method over a 10 years economic life with no residual value.
If the subsidiary’s foreign operation is integrated with parent’s operation, what is the 20x9 depreciation
expense for the Japanese subsidiary in Philippine peso for the translated income statement?
A. P207,820 C. P150,000
B. P216,720 D. P 66,720
Goodwill Arising from the Acquisition of Foreign Subsidiaries
When the acquirer's interest in the fair value of identifiable net assets of the acquired company
acquires a controlling equity interest in another company, the excess of the purchase price company
is recognized as goodwill on consolidation. In the context of the acquisition of a foreign company, the
issue arises as to whether goodwill is an asset of the acquired company or an asset in the acquirer’s books.
If it is an asset of the acquired subsidiary, the goodwill is a foreign asset which should be translated in the
same manner as any other asset of the acquired subsidiary, which may give rise to a translation difference.
However, if it is treated as an asset in the acquirer's books, there is no need for translation.
But, for purposes of consolidation, PAS 21 paragraph 47 states: “Any goodwill arising on the acquisition
of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities
arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign
operation.”
Thus, they shall be expressed in the functional currency of the foreign operation (meaning their functional
currency is the LCU), and shall be translated at the “current/closing rate.”
Illustration: Translation of Goodwill and Fair Value Differential under PAS 21

Espenilla Corporation, whose functional currency is the Philippine peso, acquired the entire common
stock of Elirie Company, a Japanese company, on December 31, 20x4 at a cost of P2,000,000. At the date
of acquisition, Elirie Company's paid-up capital and retained earnings were 3,000,000 yen and 500,000 yen,
respectively. The assets and liabilities of Elirie Company at the date of acquisition by Espenilla Corporation
approximated their fair values except for a building that was undervalued by 100,000 yen. Deferred tax
liability on the undervalued building was 20,000 yen. The exchange rate on December 31, 20x4 was P.50 = 1
yen.
The resulting ownership situation can be viewed in the schedule of determination and allocation of excess.
Goodwill in pesos on the date of acquisition is computed as follows:

Date of Acquisition – December 31, 20x4
Fair value of Subsidiary (100%)
Consideration transferred:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,000,000
Less: Book value of stockholders’ equity of Elirie:
Common stock (3,000,000 yen x P.50 x 100%) . . . . P1,500,000
Retained earnings (500,000 yen x P.50 x 100%) . . . 250,000 _ 1,750,000
Allocated excess (excess of cost over book value) . . . P 250,000
Less: Over/under valuation of assets and liabilities:
Increase in building (100,000 yen x P.50 x 100%) . . P 50,000
Increase in deferred tax liability on building
(20,000 yen x P.50 x 100%) . . . . . . . . . . . . . . . . . (10,000) ___40,000
Positive excess: Goodwill (excess of cost over fair value P 210,000
Goodwill in yen (P210,000 x 1 yen / P.50) . . . . . . . . . . . . Yen 420,000
It should be noted that on the date of acquisition (i.e., December 31, 20x4) “goodwill arising on the
acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the
foreign operation.” Thus, they shall be expressed in the “functional currency of the foreign operation
(meaning their functional currency is the LCU), and shall be translated at the current/closing rate.”
XXII
An entity acquired all the share capital of a foreign entity at a consideration of 9 million baht on June 30,
20x9. The fair value of the net assets of the foreign entity at that date was 6 million baht. The functional
currency of the entity is the peso. The financial year-end of the entity is December 31, 20x9. The exchange
rates at June 30, 20x9, and December 31, 20x9, were 1.5 baht = P1 and 2 baht = P1 respectively. What
figure for goodwill should be included in the financial statements for the year ended December 31, 20x9?
a. P2 million c. P1.5 million
b. 3 million baht d. P3 million
Financial Reporting in Hyperinflationary Economies (PAS 29)
Restatement of Financial Statements
The basic principle in PAS 29 is that the financial statements of an entity that reports in the currency of a
hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet
date. Comparative figures for prior period(s) should be restated into the same current measuring unit.
Historical Cost Financial Statements
Restatements are made by applying a general price index.
1. Monetary items are not restated that are already stated at the measuring unit at the balance sheet
date are not restated.
2. Assets and liabilities linked by agreement to changes in prices should be adjusted in accordance with
the agreement.
3. All other assets and liabilities are non-monetary. Some non-monetary items are carried at amounts
current at the balance sheet date, such as net realizable value and market value, so they are not
restated. All other non-monetary assets and liabilities are restated.
4. All items in the income statement are expressed in terms of the measuring unit current at the balance
sheet date. Therefore, all amounts need to be restated by applying the change in the general price
index from the dates when the items of income and expenses were initially recorded in the financial
statements.
5. A gain or loss on the net monetary position is included in net income. It should be disclosed separately.
The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - but allows judgment
as to when restatement of financial statements becomes necessary. Characteristics of the economic
environment of a country which indicate the existence of hyperinflation include:
1. the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign
currency. Amounts of local currency held are immediately invested to maintain purchasing power;
2. the general population regards monetary amounts not in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency;
3. sales and purchases on credit take place at prices that compensate for the expected loss of purchasing
power during the credit period, even if the period is short;
4. interest rates, wages and prices are linked to a price index; and
5. the cumulative inflation rate over three years approaches, or exceeds, 100%.
PAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it concludes
that it is a matter of judgment when restatement of financial statements becomes necessary.
When an economy ceases to be hyperinflationary and an enterprise discontinues the preparation and
presentation of financial statements in accordance with PAS 29, it should treat the amounts expressed in the
measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its
subsequent financial statements.

Functional Currency is the Currency of a Hyperinflationary Economy
For an entity whose functional currency is the currency of a hyperinflationary economy, and for which the
comparatives amounts are translated into the currency of a different hyperinflationary shall be translated
into a different presentation currency using the following procedures:
a. All amounts (i.e., assets, liabilities, equity items, income and expenses, including comparatives) shall
be translated at the closing rate at the date of the most recent balance sheet (i.e., last year’s
comparatives, as adjusted for subsequent changes in the price level, are translated at this year’s
closing rate), except that
b. when amounts are translated into the currency of a non-hyperinflationary economy, comparative
amounts shall be those that were presented in the prior year financial statements (i.e., not adjusted
for subsequent changes in the price level or subsequent changes in exchange rates).
XXIII - Hyperinflationary Economy
Pinoy Company operates in a hyperinflationary economy. Its balance sheet at December 31, 20x9, follows:
Baht (‘000)
Property, plant and equipment……………………………………………….. 900
Inventory…………………………………………………………………………… 2,700
Cash………………………………………………………………………………… 350
Share capital (issued 20x5)…………………………………………………….. 400
Retained earnings………………………………………………………………… 2,350
Noncurrent liabilities……………………………………………………………… 500
Current liabilities…………………………………………………………………… 700
The general price index had moved in this way: December 31
20x5………………………………………………………………………… 100
20x6………………………………………………………………………… 130
20x7………………………………………………………………………… 150
20x8………………………………………………………………………… 240
20x9………………………………………………………………………… 300
The property, plant and equipment were purchased on December 31, 20x7, and there is a six months’
inventory held. The noncurrent liabilities were a loan raised on March 31, 20x9
Determine the following:
1. The total assets after adjusting for hyperinflation should be: (‘000)
A. 1,550 C. 5,850C. D
B. 5,150 D. 11,850
2. The Retained Earnings on December 31, 20x9: (‘000)
A. 2,350 C. 2,937
B. 2,750 D. 7,050
3. The Retained Earnings on December 31, 20x9 (in ‘000’s) assuming the following exchange rates:
December 31
20x5…………………………………………………………………………… P 1.20
20x6…………………………………………………………………………… 1.24
20x7…………………………………………………………………………… 1.27
20x8…………………………………………………………………………… 1.50
20x9…………………………………………………………………………… 1.75
A. P4,812.50 C. P3,525.00
B. P4,125.00 D. P2,750.00
XXIV - Hyperinflationary Economy
Lorikeet Corporation has a foreign subsidiary located in a country experiencing high rates of inflation.
Information concerning this country’s inflation rate experience is given below.
Change Annual rate
Date Index in index of Inflation
January 1,20x6 90
January 1,20x7 120 30 30/100 = 30.00%
January 1,20x8 150 30 30/130 = 23.08%
January 1,20x9 210 60 60/160 = 37.50%
The inflation rate that is used in determining if the subsidiary is operating in a highly inflationary economy is
A. None C. 90.58%
B. 37.50% D. 133.33%
,
*All of the significant battles are waged within ourselves*
*You never find yourself until you face the truth.*
GOD bless as always!

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

FOREIGN CURRENCY TRANSACTIONS & TRANSLATION

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Foreign Currency Transactions with Hedging (Forward Contracts)

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Therefore, there are four types of derivative contract:

Distinguishing between “Hedging” and “Hedge Accounting”

PFRS 9 identifies three types of HEDGING INSTRUMENTS:

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Split Accounting in Assessing/Measuring Hedge Effectiveness

1. Given the following information for a 90-day contract:

What will be the forward rate?

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XII - Forward Contracts – Hedging of a Net Investment in Foreign Operations

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Choice of Functional Currency – the Applicable Translation Method

Functional Currency is not the Currency of a Functional Currency is the Currency

Restatement of F/S, then

XG/XL - OCI XG/XL- Net Income

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Date Spot Rate

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Goodwill Arising from the Acquisition of Foreign Subsidiaries

Illustration: Translation of Goodwill and Fair Value Differential under PAS 21

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