Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977
AFAR
3610-Effects of Changes in FC Exchange Rates
LECTURE NOTES
Foreign Currency Exchanges Rates
IFRS provides guidance for the translation of foreign
currency items, balances, and financial statements into
the entity’s functional currency and/or the entity’s
selected presentation currency.
A. Definition of foreign currency items and balances:
1. Foreign currency transactions – specific
transactions not denominated in the functional
currency of the entity;
2. Foreign currency financial statements – financial
statements measured and recorded in currency
(local currency) that is not the entity’s functional
currency; and
3. Functional currency financial statements – financial
statements that are measured in the entity’s
functional currency, either as a direct result of its
accounting recognition process or a re-
measurement process as required by PAS 21.
B. Additional definition of terms:
1. Local currency – This is the currency in which the
foreign operation measures and records its
transactions.
2. Functional currency – Paragraph 8 defines this as
the currency of the primary economic environment
in which the entity operates. It is this currency that
affects the economic wealth of the entity.
3. Presentation currency – Paragraph 8 defines this as
the currency in which the financial statements of
the entity are presented.
IFRS requires that all financial statements should be
measured in its functional currency, and allows under the
current revision, the presentation of these financial
statements in any currency for justifiable reasons. Note
that there are two (2) translation processes here aside
from those prescribed for foreign currency transactions.
One is to translate foreign currency items and balances
into the entity’s functional currency, and the other is to
translate functional currency balances into a different
presentation currency if so desired. The latter translation
process is more pronounced in PAS 21 because it is
deemed that all issued financial statements are in the
functional currency measurements, unless specified
otherwise.
C. Rules for translating FOREIGN CURRENCY
TRANSACTIONS (FCT) into the entity’s FUNCTIONAL
CURRENCY:
a. A FCT shall be recorded, on initial recognition in
the functional currency, by applying to the
foreign currency amount the spot exchange rate
between the functional currency and the foreign
currency at the date of the transaction.
b. At each balance sheet date the foreign currency
monetary item shall be adjusted to conform with
the closing rate (the spot rate at the balance
sheet date), which same adjustment is
recognized as foreign exchange gain or foreign
exchange loss, as the case maybe, and carried to
current income determination even though such
gain or loss is unrealized at that point.
c. At the date of settlement, any difference between
the book carrying value of the foreign currency
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DE LEON/ DE LEON/ ALENTON
MAY 2024
monetary item (established at the most recent
balance sheet date) and the functional currency
amount is recognized either as a foreign
exchange gain or loss, as the case maybe, and
carried to current income determination. The
functional currency amount is calculated by
applying to the foreign currency amount the spot
exchange rate between the functional currency
and the foreign currency at the date of the
settlement.
D. Rules for translating LOCAL CURRENCY FS into
FUNCTIONAL CURRENCY FS:
a. Monetary assets and monetary liabilities are
translated at the current rate existing at the
balance sheet date.
b. Non-monetary assets and non-monetary
liabilities are translated using the exchange
rate at the date of the transaction if carried
at historical cost or the exchange rate at the
date of revaluation if carried at fair value.
c. Stockholders Equity items are translated
using historical rates (i.e. the exchange rates
at the original transaction dates), except
retained earnings which is translated by
components. The only time retained earnings
maybe translated by the use of a single
exchange rate is at the date of acquisition,
using the exchange rate at that date.
d. Revenues and expenses are translated using
the spot exchange rates at the transaction
dates, for practical purposes, a weighted
average current rate is used instead, except
for the following:
1. Depreciation expense and amortization
expense will be translated using the
historical rate of the related fixed asset,
and
2. Cost of sales will be translated by
components.
e. This translation process is referred to as
Monetary-Non-Monetary Method. Any
exchange difference that results from its
application is carried to the income statement
either as foreign exchange gain or loss.
E. Rules for translating FUNCTIONAL CURRENCY FS
into the selected PRESENTATION CURRENCY FS
a. Assets and liabilities are translated at the
exchange rate existing at the balance sheet
date.
b. Stockholders’ equity items are translated
using historical rates (i.e. the exchange rates
at the original transaction dates), except
retained earnings which is translated by
components. Retained Earnings maybe
translated by applying a single rate at the
date of acquisition only, using the spot
exchange rate at that date.
c. Revenues and expenses are translated using
the spot exchange rates at the date of the
transaction. For practical purposes, a
weighted average for the current period is
used instead.
AFAR.3610
TEAM PRTC

d. This translation process is referred to as 5/01/19 P1.185 P1.200

Current Rate Method and any exchange 5/31/19 1.190 1.210
difference resulting from its application is 6/30 /19 1.200 1.205
called translation adjustment cumulatively 7/30/19 1.215 1.215
(CTA) shown as a component of stockholders’
equity. The month-end fair value of the forward contract is
calculated using a 5% (per annum) discount rate, as
Hedging Foreign Currency transactions. follows:
Companies with assets or liabilities denominated in a Contracted Current Notional Discoun 0…………
foreign currency are exposed to the risk that the Forward Forwar amount t Factor ..F.V of
Date Rate d Rate Frwrd
exchange rate might fluctuate, thus causing transaction Cntrct
gains and losses. A company wishing to eliminate this (a) (b) (c) (d) [(b-a) x
risk could enter a transaction called a hedge. c] *d
05/01/19 P1.20 P1.20 1,000,000 P 0 P 0
Except for speculative hedges, which is a stand-alone 05/31/19 1.20 1.21 1,000,000 0.9917 9,917
contract, hedge agreements have underlying transactions 06/30/19 1.20 1.205 1,000,000 0.9958 4,979
that justify the creation of the hedge instrument. The 07/30/19 1.20 1.215 1,000,000 1.0 15,000
underlying transaction is the hedged item, and the hedge
instrument is the mechanism established to minimize Important notes on the above computations:
adverse effects of changes in exchange rates on the 1. At inception, the fair value of the forward contract is
hedged item. nil, there being no change between the contracted
forward rate and the forward rate at that point. The
In foreign currency hedges, there are two types of subsequent fair value of the forward contract is
hedging instruments; determined by the change in forward rate from the
1. Non-derivative hedge instruments - Its main inception date to the end of the current period,
characteristic is that the fair value of the hedge multiplied by the notional amount, then multiplied by
instrument is established at the inception of the the discount factor.
contract by agreement, followed by a full cash 2. For example, at June 30, 2019, there is one month
settlement upon expiry remaining in the contract. The fair value is P4,979,
2. Derivative hedge instruments - Its main computed as follows:
characteristic is that it will have a value of zero at [P1,000,000 x (P1.205 – P1.20)] x discount factor =
inception of the contract, cash settlement is P5,000 x 0.995850 = P4,979
restricted to differences over or under the notional 3. The fair value of the forward contract is positive
amount brought about by changes in the foreign (receivable) because the amount payable by Sahara
exchange rate. Company (P1,200,000) is less than the amount
receivable (P1,215,000) based on the spot rate at
The latter type qualifies for use in hedge accounting
maturity. If the spot rate at maturity were P1.19
as described in PAS 39.
instead, the fair value will be negative (payable)
because the amount payable by Sahara (P1,200,000)
FAIR VALUE OF FORWARD CONTRACTS is more than the amount receivable (P1,190,000), -
(Illustrated) P10,000, i.e.
On May 1, 2019, Sahara Company entered into a forward [P1,000,000 x (P1.19 – P1.20)] = P10,000 x 1.0 =
contract with a foreign exchange dealer to purchase FC P(10,000)
1,000,000 for delivery on July 30, 2019. The relevant 4. The forward rate and the spot rate at maturity date
directly-quoted exchange rates at various dates follow: are the same because the time value component of
the forward rate is zero upon expiry of the forward
Spot Rates Forward Rates to contract.
July 30 2019

STRAIGHT PROBLEMS

A. FOREIGN CURRENCY TRANSACTIONS

Exercise 1 (Importing transaction)
On November 1, 2024, MARIKIT ENTERPRISE S, whose
functional currency is Philippine pesos, purchases a
special equipment from a Australian exporter. MARIKIT
will pay Australian $120,000 at this date when the spot
rate is P35.856 per dollar. As is customary in the
industry, the foreign seller does not require immediate
payment and allows MARIKIT ENTERPRISES 90 days to
pay for its purchases.
The following are relevant spot rates at pertinent dates:
November 30, 2024, P35.841; December 31, 2024,
P35.746; January 30, 2025, P35.968, and February 28,
2025, P35.858. Assume the payment in dollars was paid
by MARIKIT at due date.
Required: Prepare journal entries in the books of
MARIKIT for the above foreign currency transaction.
Exercise 2 (Exporting transaction)
On 10 December 2024, BEVONNAIRE CORPORATION, A
Philippine company, and the Philippine peso its functional
currency, sold merchandise to a Bahraini importer
invoiced at 95,000 Bahraini dinars to be settled on 29
February 2025. The following exchange rates are
relevant:
10 December 2024 BD .007207
31 December 2024 .007217
29 February 2025 .007200
Assume the foreign currency transaction was settled by
the foreign buyer at due date.
Required: Prepare journal entries in the books of
BEVONNAIRE CORPORATION for the above transaction
in foreign currency

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TEAM PRTC

B. FOREIGN CURRENCY HEDGES 2. The sales forward contract assuming a fair-value-

Exercise 3 – Hedge of a FCT ( sale) by a non- hedge designation, and
derivative Forward Contract. (Gross Method) 3. The sales forward contract assuming a cash-flow-
LUZONIAN CORPORATION, a Filipino company, enters
hedge designation.
into a forward exchange contract on October 1, 2024 to
hedge a foreign currency risk in US dollars. The contract
Exercise 7 (Hedge of foreign currency risk on asset
is for the sale of $64,000 to the international bank for
exposure by a derivative Option Contract.
delivery on March 31, 2025. The company anticipates the
On December 1, 2024, LUZON CORPORATION delivers
dollar will weaken against the peso.
merchandise to a foreign buyer which agreed to pay FC
Relevant exchange rates for the US dollars are as 800,000 on March 1, 2025. To hedge the foreign
follows: currency risk against unfavorable exchange rate changes
10/01/24 12/31/24 03/31/25 during the 90-day period, LUZON enters into a derivative
Spot rate P46.35 P46.00 P45.60 option contract to sell FC 800,000 for delivery on March
30-day forward 46.25 45.50 46.00 1, 2025.
90-day forward 46.28 45.80 45.60
180-day forward 46.30 43.60 45.00 LUZON CORPORATION pays a premium of P0.009 per FC
unit. Hence, the purchase price for the option is P7,200,
Required: Reconstruct all journal entries for the foreign
i.e. FC 800,000 x P0.009.
currency transaction and the forward contract in the
books of LUZONIAN. Relevant market price (spot rate) and strike price at
relevant dates follow:
Exercise 4 – Hedge of a FCT (Purchase) by a 12/01/24 12/31/24 03/01/25
derivative Forward Contract. (Net Method)
Market price (spot
VISAYAN COMPANY purchased merchandise from a
rate) P1.32 P1.33 P1.30
foreign vendor for FC 80,000 . The merchandise is Strike price (exercise
received on November 1, 2024, payment is due on price) 1.32 1.32 1.32
January 31, 2024. Also, on November 1, 2024, VISAYAN
enters into a 90-day forward contract for the purchase of Required: Prepare journal entries in the books of LUZON
FC 100,000 for delivery on January 31, 2025, as a hedge CORPORATION
of the foreign currency transaction. Relevant exchange
rates for the foreign currency follow:
Exercise 8 (Hedge of unrecognized foreign currency
11/01/24 12/31/24 1/31/25 firm commitment by a derivative forward contract).
Spot rate P.54 P55 P.56 VISAYAS CORPORATION, on December 1, 2024, receives
30-day forward .56 .56 .57 and approves an order from a foreign buyer to deliver
60-day forward .56 .57 .58 merchandise on March 1, 2025 at an agreed price of
90-day forward .57 .58 .59
FC1,000,000. Although this time the firm commitment is
just an executory contract it can be recognized if hedged
by a derivative financial instrument to achieve the
C. SPECULATIVE FORWARD EXCHANGE CONTRACT. objectives of hedge accounting.
Exercise 5. (Derivative and Non-Derivative
Instruments) The other relevant data follows:
On December 1, 2024, Pit Master Enterprise, a Philippine DATE SPOT RATE FORWARD RATE
entity, enters into contract to sell US$20,000 to its bank
12/01/24 P1.32 P1.305 to 3/1/25
on March 1, 2025 at the market rate for a 90-day
12/31/24 1.33 1.316 to 3/1/25
forward contract US$1 : P54.00. On December 31, 2024, 03/01/25 1.30 1.300 spot rate
Pit Master’s year-end, the 60-day forward rate to sell US
dollars on March 1 has changed to P53.80. On March 1, Visaya’s incremental borrowing rate is 12% per year.
2025, the currencies are exchanged when the spot rate is
P53.70. Required: Prepare journal entries in the books of
Required: Prepare journal entries to account for the
VISAYAS CORPORATION assuming:
above information, using the gross and the net methods.
(a) a FAIR VALUE hedge designation
(b) a CASH FOW hedge designation
Exercise 6
PHILCO ENTERPRISES, a Philippine company, sells and
delivers goods to a foreign buyer for FC 1,000,000 on D. FOREIGN CURRENCY FS TRANSLATIONS
December 1, 2024. Payment is due on March 1, 2025. As
Exercise 9
PHILCO predicts the peso would strengthen against the
KAPATID CORPORATION, a Philippine company, forms a
foreign currency, to mitigate any huge losses, it enters
wholly-owned subsidiary in a foreign country (FOREIGN
into a forward contract to sell FC 1,000,000. The sales COMPANY) on December 31, 2023. On that date,
forward contract has exactly the same covering period as KAPATID invested P240,000 in exchange for all of the
the hedged foreign currency receivable to assure that it subsidiary’s common stock. The exchange rate on this
will be fully effective. date is P0.60 per the foreign currency (FC) unit; the
PHILCO’s incremental borrowing rate is 12% per year.
initial capital investment was FC400,000, of which
Other relevant data regarding spot and forward rates
FC120,000 was immediately invested in inventory and
follow: the remainder held in cash. The balance sheet of
Date Spot rate Forward rate FOREIGN (whose functional currency is the FC) when it
12/01/24 P 0.320 P0.305 to 3/01/25 began operations on January 1, 2024 follows:
12/31/24 0.330 0.316 to 3/01/25
03/01/25 0.300 0.300 to 3/01/25 Cash FC 280,000 Common stock FC 80,000
Inventory 120,000 APIC 320,000
Required: Prepare all the journal entries in the books of Total FC 400,000 Total FC400,000
PHILCO ENTERPRISES for
1. The foreign currency sales transaction,

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 TEAM PRTC

During 2024, FOREIGN generated income after taxes of Cash FC 104,000 Accounts
FC 376,000 and declared dividends of FC 120,000 on payable FC 480,000
October 1, 2024. Accounts Long-term-
receivable 160,000 debt 200,000
The financial statements of FOREIGN for 2024 are as Inventory 320,000 Common
follows: stock 80,000
Income Statement for year ended December 31, 2024 Property and APIC 320,000
equipment net
Sales FC 3,200,000 720,000
Cost of goods sold (2,400,000)* Patents, net 32,000 Retained 256,000
Gross profit 800,000 earnings
Depreciation expense (80,000) Total FC1,336,000 Total FC1,336,000
Amortization expense ( 8,000)
Other expenses ( 176,000) The relevant exchange rates in Philippine pesos are as
Income before tax 536,000 follows:
Income taxes ( 160,000) January 1, 2024 P0.60
Net income FC 376,000 Average for 2024 0.65
March 15,2024 (Date when property and
*Cost of Goods Sold Statement for year ended 2024. equipment was acquired and long-term-
debt was incurred 0.61
Inventory, Jan 1, 2024 FC 120,000 April 10, 2024 (Date when patent was
Purchases in 2024, evenly acquired) 0.62
throughout the year 2,600,000 October 1, 2024 (Date when dividends were
Inventory, Dec 31 (evenly declared) 0.67
throughout the 4th Qtr ( 320,000) 4th Qtr of 2024 average 0.68
Total FC 2,400,000 December 31, 2024 0.70

Statement of Retained Earnings for year ended Required:

December 31, 2024
Retained earnings, 1/1/24
Net income for 2024
Dividends, 10/1/24
Retained earnings, 12/31/24
1. Assuming the functional currency of Foreign
FC - Subsidiary is the local currency, translate its financial
376,000 statements into the peso functional and presentation
( 120,000) currency of the parent company.
256,000 2. Assuming the functional currency of Foreign
Subsidiary is the Philippine peso, re-measure its
financial statements into its functional currency.

Balance Sheet, as of December 31, 2024

MULTIPLE CHOICE

1. BULACAN COMPANY, a Philippine Corporation, bought statement for the year ended December 31, 2024 what
inventory from a supplier in Japan on November 2, amount should ILOCoS include as a foreign currency
2023 for 40,000 yen, when the spot rate was P.4245. transaction gain or loss?
On December 31, 2023, the spot rate was P.4295. On a. P0 c. P12,800 gain
January 15, 2024, bought 40,000 yen at a spot rate of b. P12,800 loss d. P20,800 gain
P.4250 and paid the invoice. How much should
BULACAN report in its income statements for (1) 2023 Certain balance sheet accounts of a foreign subsidiary in
and (2) 2024 as foreign exchange gain or (loss) Japan of MISAMIS, INC. at December 31, 2024 have been
a. (1) P200; (2) (P180) c. (1) P 0; (2) (P180) translated into Philippine pesos as follows:
b. (1) (P 0); (2) P176 d. (1) P(200); (2) P180 Current rate Historical
Rate
2. On October 1, 2023, CAMARINES COMPANY. acquired Accounts receivable P 96,000 P 80,000
goods from USA Company for $8,000 payable in US Prepaid insurance 44,000 40,000
dollars on April 1, 2024. Spot rates on various dates Copyright 60,000 68,000
follow:
Transaction date P1 = $0.018 4. What was the total amount included in MISAMIS’
Balance sheet date, 12/31/23 P1 = $0.017 December 31, 2024 consolidated balance sheet for the
Settlement date P1 = $0.020 above accounts?
a. P204,000 c. P192,000
As a result of this transaction, CAMARINES COMPANY b. P200,000 d. P188,000
has a foreign exchange gain or loss in 2023 and 2024,
respectively of (rounded)
a. P( 80) and P 240 c. (26,144) and 70,588 A wholly-owned subsidiary in Hongkong of PAMPANGA
b. P26,144 and P(70,588) d. ( 8 )and 24 CORPORATION. has certain expense accounts for the year
ended December 31, 2024 stated in Hongkong dollars, as
3. On July 1, 2023, ILOCOS COMPANY lent P246,400 to a follows:
US supplier, evidenced by an interest-bearing-note due Depreciation (related assets were
on July 1, 2024. The note is equivalent to $6,400 on purchased on January 1, 2019) 96,000HK$
the loan date. The note principal was appropriately Provision for doubtful accounts 64,000
included at P262,400 in Rent 160,000
ILOC0S’ December 31, 2023 balance sheet. The note
was repaid to ILOCos on July 1, 2024 due date when The functional currency of PAMPANGA CORPORATION and
the exchange rate was P39 to $1. In its income its Hongkong subsidiary is the Phil. Peso

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TEAM PRTC

The exchange rates for HK$ at various dates were as BILIRAN COMPANY, a money changer, speculates in
follows: foreign currency as its business. On October 1, 2013,
December 31, 2024 P5.40 BILIRAN bought a 180-day forward contract to purchase 4,
Average for the year ended 000 FC at a forward rate of FC1= P56.50 when the spot
December 31, 2024 5.44 rate was P56.00. Other exchange rates were as follows:
January 1, 2019 5.50 Spot Rate Forward Rate for
March 31, 2024
5. What total peso amount should be included in Dec. 31, 2023 P56.30 P56.60
PAMPANGA CORPORATION’s 2024 consolidated Mar. 31, 2024 56.32
income statement to reflect these expenses?
a. P1,740,800 c. P1,744,000 9. The foreign exchange gain (loss) recognized by
b. P1,705,600 d. P1,746,560 BILIRAN from this forward contract is:
a. P 1,200 c. P 400
b. P(8,000) d. P ( 720)
On December 31, 2024 a foreign subsidiary of a NEGROS
CORPORATION submitted the following balance sheet in
foreign currency. The following information applies to BOHOL
FC CORPORATION’s sales of 8,000 foreign currency units
Total assets 80,000 under a forward contract dated November 1, 2023, for
Total liabilities 16,000 delivery on January 31, 2024:
Common Stocks 40,000 November 1, December 31,
Retained Earnings, 12/31/24 24,000 2023 2023
Spot rate P0.80 P0.83
The exchange rates for 1FC are as follows: 30-day futures 0.79 0.82
Current rate P3.40 90-day futures 0.78 0.81
Historical rate 3.10
Weighted average rate 3.00 10. BOHOL entered into a contract to speculate in the
foreign currency. In BOHOL’s income statement for
6. Assuming the retained earnings of the subsidiary on the the year ended December 31, 2023, what amount
December 31, 2024 translated to Philippine pesos is of foreign exchange gain (loss) should be reported
P73,600 what amount of cumulative translation from this forward contract?
adjustment is to be reported in the consolidated a. P 80 c. P 160
balance sheet on December 31, 2024? b. P (320) d. P 240
a. P20,000 loss c. P20,000 gain
b. P16,000 gain d. P17,600 loss
On December 1, 2023, MARINDUQUE, INC. paid P3,000 to
purchase a 90-day call option for 500,000 Thailand baht.
BATANGAS ENTERPRISES, A Philippine importer, The option’s purpose is to protect an exposed liability of
purchased merchandise from the Star Company of 500,000 baht relating to a purchase of merchandise
Thailand for 80,000 Baht on March 1, 2024, when the spot received on December 1, 2023 and to be paid on March 1,
rate for a Baht was P1.630. The accounts payable 2024. Relevant rates and market values at different dates
denominated in bath was not due until May 30, 2024 so are as follows:
BATANGAS immediately entered into a 90-day forward 12/01/23 12/31/23 03/01/24
contract to hedge the transaction against exchange rate Spot rate (market
changes. The contract was made at forward exchange rate price) P1.20 P1.28 P1.27
of P1.650. BATANGAS settled the forward contract and the Strike price
account payable on May 30, when the spot rate for Bath (exercise price) 1.20 1.20 1.20
was P1.600. Fair value of call
option P ? P ? P ?
7. On the settlement of the forward contract on May 30,
2024, BATANGAS should record a forex gain or (loss) 11. On December 31, 2023, the accounts payable
of: amounted to
a. P 4,000 c. P 1,600 a. P 600,000 c. P 635,000
b. P(1,600) d. P(4,000) b. P 0 d. P 640,000

12. On December 31, 2023, the fair value of the Contract

GUIMARAS CORPORATION purchases merchandise from
Option is
Lacoste Company of France for 800,000 Francs. The
a. P 42,000 c. P35,000
merchandise is received on December 1, 2023, with
b. P 3,000 d. P39,000
payent due in 60 days on January 30, 2024. Also on
December 1, 2023, GUIMARAS enters into a 60-day
13. At March 1, 2024 expiration date, the net foreign
forward contract with the Bank to purchase 800,000
exchange gain of (loss) on the hedging relationship is:
francs. The relevant rates for Franc on selected dates are
a. P 0 c. P 5,000
as follows:
b. P2,000 d. P (2,000)
12/1/23 12/31/23 1/30/24
Spot rate P6.01 P6.16 P6.01
14. At the March 1, 2024 expiration date, the intrinsic
30-day forward 6.05 6.07 6.07
component of the Currency contract Option is
60-day forward 6.06 6.08 6.08
a. P 35,000 c. P39,000
8. What is the net foreign exchange gain (loss from this
b. P 3,000 d. P42,000
transaction and hedge that will be reported on
GUIMARAS’ 2023 income statement?
15. Calculate the option’s time value at December 1, 2023
a. P (104,000) c. P 16,000
a. P42,000 c. P40,000
b. P (112,000) d. P 104,000
b. P35,000 d. P 3,000

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17. Calculate the option’s (1) time value and (2) intrinsic
16. Calculate the option’s intrinsic value at December 31, value at March 1, 2024 just before the cash
2023. settlement.
a. P3,000 c. P42,000 a. (1) P 0 and (2) P35,000
b. P35,000 d. P40,000 b. (1) P 4,000 and (2) P39,000
c. (1) P 3,000 and (2) P35,000
d. (1) P35,000 and (2) P 0

☺ - end of AFAR 3610 - ☺

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