hanges in Foreign Exchange Rates Chapter 10 , the Effects. of Changes in Foreign Exchange Rates red standard: 01 The Effects of Changes in Foreign Exchange Rates Ton 30 of the PERS for SMEs : Be yarning Objectives Define an entity’s functional currency. ; Account for foreign currency transactions, , Translate the financial statements of a foreign operation. ° } Introduction a i, ginty ‘AS 21 prescribes the accounting for foreign activities and the lation of financial statements into a presentation currency. wo ways of conducting foreign activities ie | Foreign currency transactions ~ eg., import or export transactions that are to be settled in a foreign currency. These tansactions need to be translated to Philippine pesos before. they can be recorded in the books of accounts: ° i Foreign operations — €.g,'a branch in another country. The. overseas branch will normally maintain its accountirig records and Prepare its financial’ statements in a foreign currency, ‘Ose financial statements need to be translated to Philippine Pesos before they’ can be combined with the home’ office’s nancial statements: ° ‘Wo main accounting issues : “nge rates are coristantly changing. Therefore, the principal les a ae au a accounting for foreign activities are determining: EE ich ne537, pustrat yn 1; Primary and Secondary factors fagc co. 8 mining company registered in Canada whose shares Me waded in the Toronto Stock Exchange. ABC's operating 2 ities take place inthe gold and silver mines nthe Philippines. b, How to report the effects of changes in exchange Rts ag financial statements Functional currency ; ‘ PAS 21 requites an entity to determine and disclose its currency, which is “the currency of the Primary etm ogi: What s the futon curry of ABC Co? ‘environment in which the entity operates.” (PAS21) This functional currency is the currency in which uswer: ABC'S functional currency i ikely to be Philippine pesos, entity's cash inflows and outflows are normally denominated eyen though the company is based in Canada. This is because its and is not necessarily the currency of the country where the ing activities take place in the Philippines and so the isbased. i company will be economically dependent on the pesos if most of ‘An entity considers the following factors (in itssales and operating expenses are in pesos. order) when determining its functional currency: a. the currency that mainly influences the entity's sale Question: What is the presentation currency of ABC Co.? ‘costs of goods or services (primary factors) the currency in which cash flows from fisancing acti operating activities are usually generated and «1 (secondary factors) > Presentation currency ~ is the currency in which the entity’s financial statements are presented. Answer: ABC’s presentation currency is Canadian dollars. This is a requirement of the Canadian financial markets regulator for listed al ney ofa: f ‘companies in Canada. ack operation is essentially an extension of the ently PAS 21 requires ABC Co. to prepare its financial the — foreign operation's functional currency is esa HM statemonts in pesos (enctional currency). However, when ABC files pastel otl acl ior lla arr is financial statements with the Toronto Stock Exchange, it shall ions with the entity, and the nature’ of the translate its financial statements to the Canadian dotlars operation’ cath flows in relation to the entity. : (presentation enrrency). iia — determined, the functional currency is not nila ne change in underlying transactions, Questiow: ABC aequired specialized mining equipment from oo a cases, a change in functional Jepan, invoiced in Japanese yen. What type of currency is the for by translating the financial statements into Ttpanese yen under PAS21 definitions? is a currency other than the entity's funeti fl ao Prospectively from the date of change. ween! cies other than the entity’s functional pr Fores ieee lered foreign currencies, q Fintona carey uswer: The Japanese yen is deemed a foreign eurrency for the Purpose of preparing ABC's accounts.Ilustration 2: Additional factors I ABC Philippines Co, is a branch of ABC US. Co, ARG operates in a Phitippine Economic Zone Authority Economic Zone. ABC Philippines is engaged in ge ‘The functional currency of branch “Y Of the group was deemed to be ibe yuan but by the end of 20%1, 80% of the business woe conducted in the Philippines. At the beginning of 20, 30% ofthe usiness was conducted in Philippine pesos, office in the US. and all of lls finished products ay Questions On December 31, 20:1; should the group's functional directly to US. customers, The U5. customers remit p currency remain as yuan or changed to the Philippine peso? Philippines’ finished products are sold in the Philip lerials imported and finished goods exported, inUS.dollars, Question: What is ABC Philippines Co.'s functional c Answer: Using the primary factors listed earlier, Co.'s functional currency is the U.S. dollar currency that mainly influences ABC Philippines Co, Foreign currency transactions and costs of goods sold. A foreign currency transaction is "s transaction that is denominated Additionally, ABC Philippines Co. ise or requires settlement in a foreign currency.” (ras2120) extension of the U.S. main office. Therefore, ABC Phi Examples: purchase or sale of goods, services or other functional currency is the ULS. dollar, ie. the same wil assets at a price that is denominated in a foreign currency, and Office's functional currency. S Sorrowing, lending or seting receivables or payables at amounts that are denominated in a foreign currency. Initial Recognition . ; A foreign currency transaction is initially a by translating the foreign currency amount into a aoe curency using the spot exchange rate at the ‘ransaction. a Answer: ABC Philippines Co.'s presentation ciirre Philippine peso. ABC Philippines Co.'s ant ‘statements to be filed with the Philippine SEC and\t presented in Philippine pesos, a: te for immediate * Spot exchange rate is “the exchange rat delivery.” 9s 214 or simply, the eurent exchange ale on 8 given date. tion first * Date of racine date on which the kansaton Hs qualifies for recognition in accordance with Illustration 3: Change in functional currency.” ABC Co, started its operations in China, where the yuan. After several years, ABC Co. expanded) and © Product to the Philippines, and conducted: but EESubsequent Measurement i Employee benefits to'be paid ‘At each reporting date, the following items, incash. “ follows: : Provisions and accrued , Closing rate the spot exchange rate at the i > money. ; fotes/Loans Rea ‘ receivable and their related | s allowances and other For example, goods acquired, for: $100 ax vgrized by translating aoe es the date of acquisition. "0 oo Rae aces For practical reasons, am. average rae (2, f dt month) may be used for all transactions occurs period. However, if exchange rates fluctuate si of the average rate for a period isinappropriate. ead i aca stated in: Monetary Items vs. Non-monetary Items). 7 Cae ited Monetary items are currencies held and assets and Now-monetary items are those which do not give 1 receipt or payment of a fixed or determinable ‘money s i the $100 into pesos ti “Monetary liabilities settled by the delivery of a ro 0 ‘on-monetary asset oyabie and other financial | h. Share capital and share premium : payables to be settled in cash. San > Closing rate = > Ex change rate at FRedaegIMR spot exchange rate vs. Closing rate i i The current exchange rates on September 1, 20x1 arid December > Exchange rate at{HeGeme 31, 20x1 are the spot exchange rates on those dates. If the entity when the fair val usts a calendar year period, the dosing rate is the exchange rate determined. on December 31, 20x1. : Direct vs. Indirect quotation {Direct quotation ~ the exchange rate is stated in how much of a ‘be exchanged to receive one unit of a foreign currency, eg, “PASI.” ; b. Indirect quotation = is the opposite of direct quotation. ‘The exchange rate is stated in how much of a foreign currency ‘must be exchanged to receive one unit or a local curroncy, © 6 “Pi$0022.” A direct quotation can be converted to an indirect otation (or vice versa) through division: a @ Inventories” © Property, plant & ¢@8Changes in Foreign Exchange Rae pospeta aes oe ine for €10,000. The contract term is: i FOB shipping point. The Tndivect quotation | Conversi “sine was shipped on December 1, 21 and rear ron I “P1.$0.022 (Pi + $0.02) sc ‘on December 15, 20x. The purchase hema jury 202 : Exchange Differences at rowing are the exchange rates: Exchange-difference is “the difference resulting from tr a 29, 20x1.. given number of units of one currency into another cy different exchange rates.” (PAS218) ‘a Exchange diferences arising from settling or trarslating a. Monetary items are recognized in profit or loss in the which they arise. > When a foreign currency transaction period and settled in another period: i. the exchange difference between the trans: 7 and the end of reporting period is ee” san period of transaction, while weet Lc/raotae air Sanood the exchange difference between the shipping point tom previous reporting period and the date of : ‘Accounts payable 10,000 recognized in the period of settlement. Foreign exchange gain 10,000 to recognize the exchange difference > When a foreign currency transaction ocourm + Noentry is made on the date ofthe purchase order. recognized in that period, 5 ‘© The purchase is recorded on December 1, 20x1 (shipment date) : ¥ bei is FOB shipping point. b. Nonmonetary items = if the gain or loss is 7 tepeiact la bail asia a spot exchange rate comprehensive income (OCI), the exchange com} : on m e ) Deceml cd (Le, P58€1) gain of loss is also recognized in OCI. Con : The fore Pr cachange FOREX) gpin.en De ‘or loss is recognized in profit or loss, the exchange de is also recognized in profit or oss, 4 ' ‘Accounts payable — Dec. 1, 20x (199004?) 18580,000 Ilustration 1: Foreign currency transaction - Purchase. ts payable Dex 15,2001 (10000857) Sno ne On November 29, 20x1, ABC Co. placed a no scree in accounts payable - FOREX 38" purchase order with a company based "in France: rra moe iT puachine is not re-ranslate, © The cost initial recognition. jjgn exchange loss |. ile fvember 29, 20x1, ABC Co. received from a UK-based Access Pay py a non-cancellable sale order for inventories with a sale eel Ft £10,000 (Pound, sterling The contact term is FOB r Fipping point. The inventories were shipped on December 1, follows sith Tne sole was settled on January 3,22. computed as fllows: : i tion ~ Direct quotation = ‘Accounts payable ~ Dec. 15, 201 (€10000 757) following are the exchange rates: ~ Accounts payable = Dec. 31, 20x] (€14 000% 960) Terese in accounts payeble - FOREX loss Tas. | Accounts payable (P580K — F10K + F30K) . 3 | Foreign exchange loss (-queeze) 2022 | Cash €19000x P61) tered te stone! ofthe purse resection Notes: © The effects of the transaction in profit or loss are 2 No entry fi | follows: 1 Accounts receivable (£10,000 x P68) 680,000 * Sale 680,000 FOREX gain —Dee. 15, 20x1 ia to resrd the sale of inventories en an FOB FOREX loss ~ Dee. 31, 20x1 a shiping pint erm ‘Net FOREX loss recognized in 20:1 ‘esos recakvabie aa. ognized in Folsign exchange guia“ 20,000 FOREX loss recognized in 20x2 - (Jan. 3, 2032) to recognize the exchange diffrence Totalnet FOREX loss om the transaction Accounts receivable Dec. 1,20<1 (0000) 680,000 ~ : * Accounts receivable — Dee. 31, 20x1 210000x#70). - __-_700/000_ ‘Monetary items arising from foreign currency tra Increase in accounts receivable - FOREX gaint __? 20,000 frarslated on initial recognition and. re- og {ubsequent period until settlement date. Non-monetary items arising from ~ fo1 transactions that are measured using historical Notice that the sale is mot re-translated subsequent to ial recognition.om ca ee receivable 0K + FOK) Foreign exchange gain (ueeze) | ner teen esters _| ‘The effects of the transaction in profit or lo: Pon, gain ognized in 201 ~ (De. 31, 2030) [FOREX loss recognized in 202 - Jo. 3, 2032) “Total FOREX gain on the transaction Notice in the illustrations. above that recognizes FOREX gains/losses, ‘The counter- French company and the UK-based company) FOREX gains/losses. FOREX’ gains/loss transaction with Pakistan Ca: jocounts payable ~ Dec. 17, 20 (kn 90am «Pi204) : ‘accounts payable - Dec. 31, 0x1. xR 190000 Paz) Tecra in accounts payable — FOREX loos in 204 ‘© Am inerease in payable results to loss. + ‘Arincrease in receivable results to gain, Puoi2. Sale trensaction with Sweden Coz F nis receivable ~Dec. 20,201 Skxo0n-SEKa1a7) 119976 counts receivable — Dec. 31, 20x1 (SEK 20,000+SEK 0.2) 100,000" a Dees in accounts receivable ~ FOREX loss ie 208 719.976 maton for 100,000 rupees on December 17 counts receivable ~Dee. 31, 20x1 gEx2g0nsexo2"° 100,000 ieee me (Cu.recrived on settlement —Jan.5, 202 GEK20N06SEKO28) '_-63,333, ae st in accounts receivable FOREX oss in 222 °°. PIG S67 FOREX loss on the sale transaction Be ee )REX gainlloss by Pakistani Co, and Swedish Co. Zero, Pakistani Co. and Swedish Co. will not recognize any REX gain/loss on the transactions because the transactions. are |poppet Coreen FrrinicimgeRiy sto Lenore The’ MOVEEDES Inthe aang aes are erase and ollar-to-P1 and yen-to-P1 Mecrease, respectively, stration 5: Subsequent meas A : a 1 201, ABC Co. a seein iivect quotations (XC, SXX P00 and Wa cert would have been the movements in the ex during the period? 1 conven Analysis: 4 For a FOREX gain to be recognized on there "dollars should have been received. For that to) indirect quotation should decrease.’ * pequirements: Compute For the following: : fa Exchange rates on December 31; 20x1 and on settlement date in20x2. : . Carrying amount of accounts payable in the 20x1 statement of * financial position. ¢ Cost of equipment in the 20x1 and 20.2 staternents of financial position. . Exchange rate at initial recognition. : . Exchange rate at settlement. f ( Solutions: Let ‘us assume the following information: Receivable on inital recognition: ($1,000 020) .°. = Requirement (a); Exchange rates Receivable on settlement date: ($1,000 + $.018) Accounts payable — Dee. 1, 20x] (BRL 10,000 x24) ‘P240,000 FOREX gain Accounts payable — Dec. 31, 20x] squeezed * _260,000_ ‘nercas in accounts payable - FOREX loss in 20 (gen) *¥20,000 ‘For a FOREX loss to be recognized an the pai should have been paid. For that to happen, th fever pyibl-Des 912 aon juotatio lecrease. ays ivi a a ee Exchange rate on December 31, 2031 26: BRLY Let us assume the following informations en are : ae Accounts payable ~ Dec. 31, 2d ee aoe) 260,000 Exchange rate atiritil recognition. Cash paid on settlement 20x2 (squeeze) Exchange rate at settlement... Decrease in accourits payable - FOREX gain in 2022 (given) 15,000 anneal scraiten (1000+ v1.70 ‘9 ae settlement - 20:2 oe FOREX tose "00.00 + ¥150) change rate om settlement date FSS BRLppepdomentoretiersn ast ant, of Accounts payable Dec. 31 _gngonounts at closing rate: urement CaS 2 comple S10000%855) , zea at cadet) an yale (LOOON RGF 50,000 ; sores 2, ae is it~ 20x1 and 20x2 payables at closing rate equiement (0: Cost ofenepment 208 . sol aes ae ‘czso.gog (13am x Pat echange ae recertin) if casein payables - FOREX loss = ion 6 Exchange ate on intial recognition wee bleed 1 $10,000 loan at the middle of fend of the year, the lean payable is appropriately cep £550,000. None of the principal on the loan has been ps the year. There has been 2 10% increase in, (expressed in direct quotation) from the date, btained to the end of reporting period. spestration 6: Cash account «Cash in bank- US, dollar jen. 1 (048551) $10,000 _ Sept. 30 (P45:81) 20,000 5,000_ Dec. 16 (P4451) i $25,000 Dec.31 (P45$1) Requirement: What is the exchange rate at the date the log obtained? * \ Solution: Requirements: Compute for the following: 1 Amount of cash in bank to be presented in the year-end statement of financial position. b, Net foreign exchange gain or loss to be recognized in the year- melee Asa Son end statement of profit or loss, On July 1, 20x1, ABC Co, obtained a $10,000 loan that R 4 Gil alk ta hectic yoareed annual interest when the spot exchange rate is 1 Be mortey consi a rate on December 31, 20x1 is P55:$1. No payments on the loan during the year. Requirement (b): Net foreign exchange gain or loss i ‘The unadjusted balance of the cish in bank account translated to Requirement: Compute for the foreign exchange & Philippine pesos using spot exchange rates on transaction dates is recognized in the year-end statement of profit or loss. determined as follows: : 19550,000 + $10,000 = P5551 exchange rate atthe end of 155+ 110% = p81 exchange rate on initial recognition Solution arying smut tnt exch ra Lom payable somoxry Interest payable oom a0 ax ‘Total peyebles at intial exchange rate ed CIB ~in Philippine pesos, ~pas0,000 900,000 Dec. 16(P44S1) 7F1160,000_ Dec. 31 (ot)ik opchaneste Fortin Exchange Rates 553 1,500 were spent from January 1, 20%2 to January 3, 20x2. Ma Tgnager Feturmed the MYR 500 excess tothe cashier on ted inbank-unadies 000 x P45) q on Feeosing te 0 range lose mary & 202: The exchange rate on January 3, 20x2 is P12: aces inc OO i 1 " se: Compute forthe following: _soex gain oF loss on December 31,201. 3 FOREX gain or loss on January 3,202. gpiutions: esrement (a FOREX gain Tos on December 3, 20:1 112,000 “The widawal is assumed to have beens made tod pase So ccamaiecar 106,000 » Bis assumed that the amount withdrawn is 4,000 balance, ie, FIFO. pvengerte= (F144 PIS) © 27D ccashinbankat spot exchange rates at dates of pdvances unspent at initial exchange rate (R200 714) ae Opening balance net of withdrawal ($10,000 - $5,000) xP ‘Mvances unspent at closing rate (MYR 2000 <15) Deerase in advances receivable ~ FOREX loss ~ Dec. 31, 2x1 2,000 CCashsale ($29000 P15) Teta s : ‘Cash in bank = adjusted yr-end balance ($25,000 x P45) Total FOREX loss ~ Dec. 31, 201 (4000+2,000) oe FOREX loss = year-end adjustment . Fis cer ea Total FOREX loss (2900+ #15 0) = B_35,000 ° << a1, | Advances to officer GaAs 4) wa 4 Cat ‘ 140,000 Illustration 9; Average rate . q peek Expenses 6,000 [ria +F13)+2)) 108,000 Ca Decade 12h, ABC Coed nd 0 eee he Auoo ‘int personnel to a seminar in Malaysia. ABC Co. vances to officer (8000xP14) 10,000 (ringgits) to the se 4 FOREX loss [2.000% (P14—P13))* 2,000 manager subject to L ‘exchange rate on December 15, 20x] is Pld: MYRIL ‘Advances to officer 20 ‘Te gti repo sited by the key mi Requirement (b); FOREX gain or loss on January 3, 20:2 wing: 4 Ady = MYR 800 t Advances spent at previous closing rate (MYR 1500713) 19,500 were spent from December’ 15, Advances spent at average rate [MYR 1500 x (r13+?12)+2]} 18,750 2d. The ‘exchange rate on December 31, 20x is in advances receivable — FOREX loss ~ Jan. 3, 20:2 ‘ 750ei oe at the end of reporting period). . ‘The effect of this Comparison may be that an impairment pss is recognized in the functional currency but would not be {et ARR EEE ES is at +3] pareeneree ration: Temas measured at other than historical ast sss ad the following foreign currency transactions during xless ‘ FRE ces to ofcer 003213) Asc Ce i ‘Acquired equipment on January 1, 20x1 for THB 10,000 (bahts) from a Thalland-based company when the current exchange tate was 1.2: THB 1. The equipment is deprecated over 5 using the straight-line method. Purchased inventories on December 1, 20x1 for ZAR 1,000 (rands) from a company based in ‘South Africa when the current exchange rate was P5: ZAR 1. oth the acquisitions described above are on cash basis. At year- ‘2d, ABC Co. determined the following: The equipment was found fo have a recoverable amount of eae THB7,000. The closing rates P13: THB 1. = Pee msi wta Half of the inventories purchased remain unsold. ABC Seer cetcalle snout in acta estimated that the met realizable value of the, unsold fpainaentof hots, or inventories is ZAR 300. The closing rate is P6. ___ When such an asset is non-monetary and fie oe te og it is él 7 +4 qui at original te 2 thee or cringe a8 appropri, an eden acai ont sad erga sot ee pe at the date when that amount } Equipment at recoverable amount translated atthe spot rate panied ordiabe Voreintdiate When the recoverable amounts determined, be el aa fale nes ca e, Dee. 31, 20x1 200813) 2100 ue oF recoverable amet Deva au _ = tse a he exhange rae at the anh Sen : *{ translated at original anout i he purchase of goods you have made. The bank gives you Inventory at or" in very P45 you ha dalla fr every PAS you have. PS refers to selling rate. on i6xP5) valve. translated at the Inventor 2 abe vale determined, hen , fe, Dee 31,20 00xPE) cr corging amount = Impairment Foss eamples above, the bank makes profit of P2 for pI purchases and sells. - ay Given different rates, an entity shall use the rate at which to realize or settle a transaction, Accordingly, ifan entity eats to realize a foreign currency receivable by exchanging the rain careency with a currency broker, then the exchange rate {0 jeused is the buying rate. On the other hand, if an entity expects to settle a foreign payable by purchasing foreign currency from a currency er, then the exchange rate tobe used is the selling rate, Observe that the losses are charged a sot 25 “FOREX oss” 20x: Several exchange rates & » Purchased goods worth CHF 10,000 (francs) from Swiss Company, a company based in Switzerland. vy Sold goods with sale price of VEB 1,000 (bolivars) to _ Venezuelan Company, a company based in Venezuela. which the future cash flows represented by. balance could have been settled if those cash flo the measurement date, If exchangeability be : is temporarily lacking, the rate used is the first subseg ih the transactions were settled on April 30-20%. The following, which exchanges could be made. ere the spot exchange rates: Selling selling rates. Buying and selling rates refer to Ul CHEI broker (eg, a bank) is willing to pay or sella c Po cHrl You have 100 US dollars. You go to a bank : dollars to pesos. The bank gives you P43 for rear * PAS refers to buying rate. Ksuirements: Conipute for the FOREX. gain/loss from the Rasactions:; —*gaged value of equipment ~ Dec 31, 20x (12Mx026), 312,000 g amt. of equipment = Dee 31,20:1 (1M#020)x%) __ 150,000 162,000_ differences recognized in OCI eo ‘or loss on anon-monetary item is reco 5 conprekensive income, 2Y ee 62.000 ae is recognized in other comprehensipe ‘score. to recognize revaluation surphis "s (On the other hand, when a gain or loss on, Loren item is recognized in profit or loss, any exchange. : note that gain or loss shall also be recognized in profit o Iamslation of Financlal Statements i Other PFRSs require some gains entity is required to present its financial statements ising its ecognizeil in OCI. For example, PAS 16 requires som | currency (ie, Philippine pesos). However, whenever losses arising on a revaluation of property, plant ded, the entity may translate its financial statements into any to be recognized in OCL When such an asset is my presentation currency (e.g, Japanese yen, US dollars, etc.) foreign currency, PAS 21 requires the revalued, amou . translated sing the rate at the date the value, is da ample . a 7 resulting in an exchange difference that is also recog 3C Co. isa stand-alone entity (ie, itis not part of a group). mae Ey ! * ABC shall determine its functional currency and prepare its financial statements using that currency. However, ABC is Permitted to translate its financial statements and re-present them in any other currency (presentation currency). Ilustration: Revaluation of asset On January 1, 201, ABC Co, acquired equi 11000000 (kwachas) from a company based : ‘quipments estimated useful life is 4 years. ‘straight line method of depreciation and the reval “On December 31;20x1, net appraised value rates are as follows: imple: : BC Co. is a parent based in the Philippines. It has a subsidiary “lin Hongkong, “ABC Co. and the subsidiary shall each determine its functional Surrency and each shall prepare its separate financial statements based on its functional currency. I the subsidiary’s functional the equipment was determ MWK 1,200,000 ‘(kwach Jen.1, 20n. Dec. 31, 201pcs arse arn Rees + wo the sub serene érom the parents ital cosrncy i eT Traated. 10 the gt Om satements That consolidated nancial sta : Penk gs * ereny © 5 es & gil “presented. ie ish . pees ete Pec are tansated int a presenta follows: Fe jorthe year ———iims | el Oe iacome forthe Ce Capris, : Scere mn : rates in 20x! are as follows: (ening compsta8ve®) edorntexcange naa P1:$.027 ‘by Trcome and Expenses ; ‘ _ nese” aching comparatives) 4 an == ditional information: —— cr: | ABC’sequity on January 1, 20: consists of the following: : ua 130,000 M4 For expediency reasons, an average rate for the a matt used, except when exchange rates fluctuate signifi ee dai wom Lnatal equity, Jan. 1, 2031 ‘P60,000, + The share capital was issued when the exchange rate was Pl: $.025, The share premium resulted from this issuance. |) The retained earnings on January 1, 20x) translated to US. dollars is $480. * The cumulative translation gain in the 20x0 translated — i financial statements was $80. - ® In 20x1, ABC Co. paid dividends of 710,000 when the Talend terete | change rate was P1027. Property, plant and equipment Total assets ABC needs to present its financial statements in US the purpose of issuing its debt securities in a foreign im Co's Dix1,Financial statements stated in Philipp ime ; af in Peo equirement: Translate the financial statements into U.S. dollar. ution: LIABILITIES AND EQUITY. Tena otherpyaies® 10,000 0.038 cea Die cumulative trantation adjustment eet (ie, $225) is the Cash . . re” in the stat : fi Snmiieecte 2H MS hic fe ie ar Teo eu 90,000 , count within evity. A red aloe grt spun Property pant iPS Fos 0 ~ ‘ile a debit balance (negative) represent ae Trotatassets____———— OOO we change in the catleie ease, ecijustment during the riod is recognized in other comprehensive i \BILITI EQUITY. = 7 ‘income. This is ees prespeael 7120,000_ 0.028 cx computed ert (825 ending ‘balance less $80 beginning Se 0,025 (HR) balance, given increase, recognized in OCI in 20x). ceil 10.000 ons aay Since all assets and labilities are translated atthe dosing rate, mune emp 40,000 (see been) consequently, total equity is automatically translated at the closing rate (P80,000 x 0.028 = $2,240). However, the individual ‘components of equity are translated as follows: a. Share capital, share premium and all other components of equity, except retained eamings, are trandated at istorical rates (HR). b. Retained earnings is translated taking into account the changes during the period due to, for example, profit or, loss (translated at the average rate) and dividends (translated at the historical rate). © The net difference resulting from translating the components of equity at rates different from the closing rate represents the cumulative translation adjustment. Translation adjustment ~ gain (eqieeze) Total 80,000 sys Rotel quity__Toan_ Total liabilities & equi “200,000 Revenues 120,000 0.027 caRy Expenses (90.000) 0.027 can) Profit for the year 30,000 é tier compretensive income: Gainon transation oe — * The translation adjustment can be reconciled as follows: Translation of opening net assets Netassets, Jan. 1 -at opening rate (@omx0m) 1,560 (6000x0028 ___1,680_ Retained earnings - beg, Profit Dividends . Retained edmings -end,Exchange Rates Dividends: Dividends-at historical rate Dividends - at closing mate Increesein dividends loss Cumulative translation gain - OCI uation Translation Share eapital eC (Co. needs to translate its 2rd poperese yon 53618 Co and ober receivables during the pd. , statements to the (in pesos) 15,000 12,000 8,000 © Alternative method: The translation adjustment, reconciled as follows: i 1) Translation of opening net assets Share copital: Share capital, Jan. 1 -at historical rate Share capita, Jan. 1-at closing rate Increase in share capital ~ gain Shore prviton: Share premium Jan. 1 -at historical rate Share premium, Jan. 1 -at closing rate Increase in share pretium — gain Retained earnings - Jan 1: Ret, earnings Jan. 1-atpretivaly translated amt Retained earings, Jan 1- at closing rate ‘Increase in opening retained earings gain ‘The relevant exchange rates in 20x1 are as follows: Jan, 1, 20x PL: ¥20 ‘Average for the year 20x11: ¥22 Dee.31, 20% riw3 2) Translation of cha Profitor oss: Profit-at average rate Profit-at closing rate a Increase in profit ~ gain tional information: - * ABC's equity on January 1, 20x1 consists ofthe following: Dividends: Dividends at historical rate Fries os aaa ‘capital, Jan. 1 (spot ate om issuance date P1: ¥L8) iin pes erate ined earnings, Jan. 1 (translated at ¥37,200) 18,000 ennai : Peel equty, an. 1, 20e1 738,000 Total translation gain OCTASSETS Cash Tradeandotherreceivbles 12,000 Ber ae) Propeety plant a TTotalaeets rma [LIABILITIES AND EQUITY Tradeand other payables _F 62500 Shae capital 30,000 Realned comings 2,500 Translation ajstment = gan Totateguity 58,500 Total tables @ equity __P120,000, r-end retained earings is translated as follows: erm inpesos) Rates - -fimyens) poincdeneings BE FIg000 (gine © 137,200 pat 14500 22(AR) 3,909 ends . 3000), 225m) __ (6,750) til brings te 729,500 : Yer350 1p the change in the cumulative translation adjustment during the i which is recognized in other comprehensive income is computed as follows: (¥12,500 ending balance “less ¥2,000 beginning balance, given = ¥10,500). ‘c The translation adjustment can be reconciled as follows: 1) Trenslation of opening net assets Netassets, Jan -at opening rate @s00}x29) 76,000 Netasscs, Jan, 1-at closing tate 1800023) __87400_ erase in opening equity — gain E 11,400 Cutaltine trarsation goin —Ja.1,20r1 —. (ghen) "—_* 2800 ‘UTrauslation of changes in net assets during the perfod: ‘bance of additional share capital: Additional sh, issuance - at historical rate (0000x265) 26,000 ‘Additional sh, issuance -at closing rate (1000x238) __ 23,000 . (3,000) a4s00%22) 31,900 (04500%23) _ 33,350 1450Dividends: Dividends -at historical rate Dividends at losing rate Increase in dividends ~ 1058 ~ ota translation gain OCT e Alterative metiod: The translation adjustment reconciled as follows: ie ‘The financial statements of a foreign operation need to be ubted before they can be incoporited into the reporting ‘iy’s financial statements. The translation procelures ounce pose apply (0 the translation of a foreign operation's financial et . 4 barren Sooduoll and fair vatue adjustments ‘Share capital Jon. 1: ans lo: Saves vm 1 -athistorcal rate Fs ae me fie bilnny ihe Share capital Jan. 1 at lasing rate sferences are allocated to both the owners e Increase in share capital ~ gain of the parent: and NCL « ings Jan. 1: ag itustration 1: Translation of goodwill : oun: Ai previowsly translated amount (given) (On January 1, 20x1, a Philippine holding company acquired 100% Retained earnings, Jan. 1-at closing rate interest in a subsidiary’ based in Kenya for KES 10M (shillings). Tncrease in opening retained earnings — gain ie The fair value of the net assets of the subsidiary at that date was a KE58 million (shillings). 2) Translation of changes in net assets during the Issuance of additional share copital: The following are the relevant exchange rates: ‘Additional sh, issuance at historical rate ‘Additional sh, issuance - at closing rate Decrease in share capital ~loss Profitor loss: Profit at average rate Profit- at closing rate Increase in profit gain pee Dividends at historical rate Dividends at losing rate Increase in dividends lose Total reslation sein Oct “ 3 710000.000 10,000,000 Requirements: Compute for the goodwill to be included inthe Icnsolidated financial statements on January 1, 20x1 and on Jan.1.2021 10,000,000spof Changes it Foreign Exchange Rates amseation of anes net asset ding the lta closing rate aoe 160,000 * 9.605) _ 200,000 a - t— gain ference recognized i eet : 40.000 Tlustration 2 Exchange di recognized in.QCy slation of goodwill : ABC Co. has a wholly-owned subsidiary in Indongy, sot ‘Dec. 31 - at opening vate ee following information is available about the Subsidiary posts Dec. 31 - at closing rate fauxmany a year to December 31, 20x1: rac ix sot suit : 4a ual FOREX translation, gain = OCT sank a Netassets, Jan. 1, 2081 Profit for the year Dividends Net assets, Dee. 31, 20X1 « nustrtion 3: Translation ofa subsidiary’s financial statements anwary 1, 20x1, ABC Co. acquired 80% ownership interest in vz. Inc, & Korean company, for 1,500.00 wons. XYZ'g functional currency is the won (KRW). On this date, xYZ's resined earnings balance was 800,000 wons and the fair value of fhe net identifinble assets was 1,400,000 wons, which included a fur value adjustment to a land, NCIis measured at proportionate on “Goodwill of IDR 2,000,000 was recognized on the combination, There were no impairment losse3: on the There were no translation adjustments recognized in years, k ‘The following are the relevant exchange Jan. 1, 20x! “Average for the year. Dee. 31, 20x1.. Requtirement: Compute for the total gain or loss on ‘Solution: ‘DY Translation of opening net assets Netassots, Jan. 1 - at opening rate Net assets, Jan. 1 - at closing rate Increase in opening net assels— gain SSETS westment in sabsidiaty (Cumulative translation difference —Jan. 1| EZ pth sf ES I orig ag Ras LIABILITIES AND EQUITY Liabilities “a ‘Share capital a 1.400.000 Retained earnings : ri -atiributable'to underealued tang cae ‘twons) (1,000,000) Total equi 4b EQUITY ~ piny by: Closing rate z 400,000 TOTAL LIABILITIES SHA i atrbutable to umderelued and Gps ms Statements of profit or loss The FVA is not subsequently depreciated boca For the year ended December 31;20x1 ; sovdepreciable asset muse it relates to Revenues 4p 3s Goodwill computation fol #1: Profit for the year (¢nsideration transferred (x wons) sazaoin, = SAUD econo interest inte acquiree(Lasyarx)-(sep2) 280000 ‘There were no changes in the subsidiary’s share capital durin P*ViouS!Y held equity intefest inthe acquiree ae eg al 1780.00 year s Tirvalue of net identifiable assets acquired (Sip 2) .song00) : hs date 380,000 Requirement: Prepare the cnsolidated financial statements, mein theccned wwii Suabhcaus 0 e ; i. Goan, net —current year (in wons} : 380,000 Solutions é 3 tuliply by: Closing rate ao 70.05 Step 1: Analysis of effects of intercompany transaction Goodwill, net ~currentt year (in esos) F100" We can leave this out because there are no intercompany ta in the problem. +4 Sep 4: Non-controlling interest in net assets Tsnet assets at fair vale ~Dec.31, 20 in wom) (St 2) p 2: Analysis of net assets P ality by: NCI percent 11640,000 20% 20Z, Ine. “ il 328,000 guid: Goodwill to NCI net of accumulated impaiment losses Share capital Clin net assets Dec. 31, 2041 (ia wom) 528,000 Retained earning: ply by: Closing rate F008. Totals at carrying amounts 4,000,000 FVAat acquisition date 400,000 Subsequent depreciation of FVA. NIL Net assets at fair value (in wons) 1,400,000 F500 aClin net assets — Dec. 31, 20:1 Ginpes Fowl is atsbute to NCI Decne NCTis menue at propre share. * The far value adjustment at acquisition dates determined #8changes in Foreign Exchange Rates 575 : Seay Fe ov translation adjustment to good willis attributed only d total -consosaed a 20K" a sure constings DES : Pr Nae at proportionate share and Conan st ein XV net as © si perooren? ee - r 9 ani pr mazes % wt consolidated profit or loss and comprehensive income and eee ent ones . : : Parent Subsidiary Consolidated el sitabutable toParent (Go ss es Pag reat rs jain adjustments - en Ne retained art = Dec. 31, 201 : panies . - - : A euized def : Si 2 net changein XYZ's net assets is computed a. widen INCOME, = NiA e ihe | rie i oes mance share 0 net asets (in wons) (SK 2) nt Fp oveliation adjesinens : = = : a i eejasbefore EVA 360000 9,600 369600, dation of FVA. will ‘ABC's share in Muiiply by: Average exchange rate : aopament of zo0d "ABC's ohare nthe net change in XYZ0 nat esscts (im pesos) Geaolidated a oan ’ ier comprehensive income: ‘Step 5A: Translation gain (108s) ‘Translation gain - (Step 5A) 7 x Ser dan gin (ox) recognized in other comprehensive inane cose So ‘income Poda00__ P2500 Prcomeotidate financial statements is computed a folows: Won awngerte 400% 04-7960) “ aBcea Owners Consoli- . pl sep 7:PfLand Cl attributable to owners of parent and NCI ve ‘ ‘ono ond . 1) Translation of XYZ's opening net assets ofparent "_NCI___dated Netanet Jn 1-atopningrate (LAN 7003) 42,000 x BCs profit before FVA-(Siepé) 360,000. N/A. 360,000 Netissets Jan 1-at closing nate (.AMx FOS) _ 70,000. Sharein XYZ's profit before FVA® — 7,680 1,920 9,600 Increase in opening net assets ~ gatn 28,000 __ 22,400 Depreciation of FVA a = i Camaletce translation difference — Jan. 1 ye Si pairment of goodwill : : i 2 Tato of canes in sets daring the pariod eee ie 367,680 1,920 __ 369.600 average rate Kx 0.04) 9600, prehensive incoyne Profit at closing rate 240K x10.05) 12,000 Share in translation gain - (Step 5A) 31920 _ 6,080 38,000 Remeeltirve “FORE fae 2400 emprehensive income is9,600__P3,000_ 407.600 3) Translation of goodtoilt $ f > Grodwil, De. 31S pening rate (80K ¥7005)' 11,400 Shas tn XV2"s profit befane FVA (Sep 6 (7.400 x 87%) (9400 = 276) Grote Ds ado rat Kx P005) 19 \ a in goodwill - FOREX gain et 3 7,600. 7,600 n Total translation elu OCT nila Consolidation worksheet is prepared as follows:tof a in Fon Exchange Res a ual reconciliations: coche oa =U le subsidary mee 65000 jue adjustments -net (Siep 2) 45,000) il net (Step 3) of inter-company transactions Tidated total assets pic val 19,000 (Step 3) Cons {400,000 + 3,000) = (840,000 + 14,400) ata liailities of ABC Co, {pallablties of XYZ, inc. (6.000% 005 dosing rate) pir value adjustments ~net rtiet of inter-company transactions oasolidated total liabilities 165,000 |(2m + esk + 20K FVA) (Step 2) 62,000 ‘3,000. (omitted) (omitted) share capital of ABC Co. ‘Share premium of ABC Co. quit attributale to owners of the parent Non-controling interests (Step 4) Consolidated total eg 7240000 0.05 (er) 1,040,000 | (omitted) ¥,300,000 | 0.08 «cr [Net investment in a foreign operation [Net investment in a foreign operation is the amount of the reporting cntity’s interest in the net assets of that operation. ‘A monetary item that is receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future is, in substance, a part of eRe '645,000 7,645,000 items may include long-term receivables or loans. They do’ not ‘Include trade receivables or trade payables. Exchange differences arising on a monetary item that part of a reporting entiy’s net investment in a foreign °Peration shall be recognized asfollows: > 576spcsef ana Toren Becharge Rees Ee ea it it or loss it or Toss in the ements of profi 2 repent a iS ABC Co, XYZ, Inc, Pat ADM (On January 1, 20xd, Al c i foreign company- ‘XYZ's functional currency. is, the Dram (AMD), NCI is measured at proportionate share Th tnd financial statements of the entities are as follows: | Statements of financial position 201 1,600, the movements in retained, earings during 20x1 are shown ary (at cost) hao: , euined earnings —Jan. 1, 20e1 1140 1.200 Dividends paid (100) (¢00) Profit for the year 700: 11600 itforthe years 700 Reuined earnings — Dec. 31, 20x 1740 2,000. Additional information: 4) XYZ, Inc. has applied local GAAP, but has made some attempt to adapt to IERSs (to which PFRSs are consistent) As a result XYZ, Inc, has written off research previously capitalized as an extraordinary item prior period adjustment in the sum of ADM100 million, The remainder of the extraordinary item is the recognition of a fall in value ‘of some plant that'was damaged during the year. OTe ee a te at asets of XYZ, Inc at acglsion was : a ADM2.000 milion afte taking into account the removal of capitalized jeearch discused above. Goodvillis wrimpatredChanges in Freon Exchange Res se 1 reviously capitalized by XZ. but were writen of due tothe ‘Thedncrease in te fair value of XYZ, Ine. over c: emp on adapting TFRSs, is attributable to machines which are depreciated, con the straight line basis. ; d) During the year nAS 1 Presentation of Financial =o (fein ind dina ean eS produiction by year 0 Frangible Assets prohibits the capitalization of finished goods have been sold. XYZ, Inc. receive 7 PAS B Accounting Polis, Changes tn Accounting Evfnncs on September 1 and paid on September 21 Pe ejiias commie of oa ete fats od exchange difference remains in current liabilities. eoiieat tha oyesigtalans afsationd ce fl eras e) ABC Co, extended a P50 million loan to XYZ, Ine. j profit or loss. a in after the acquisition on January 1. This is still outta yearend. ABC Co. has recorded the asset in cx The subsidiary has recorded the liability” liabilities atthe rate ruling at year‘start. ) The dividends were dedared by XYZ, Inc, received by ABC Co. on that day. ° ; ‘pe correcting entry is as follows: En Extraordinary items - 100 to adjust the opening Balance of retained ! ‘earnings for prior perio eror inorder to simplify the illustration, the tax effects of corrections are gored. i (a) Extraordinary items ~ Impairment loss ® Additional information (a) above states that the remainder of the: ‘extraordinary items pertains to the dedine in value of a plant that was damaged during the year. ¥ This amount should be recognized as impairment oss and not as extraordinary item. Entry made (EM) = erroneous entry 2x1] Extraordinary items Accumulated impairment losses | The exchange rates are asfallows: + Requirements: Prepare the consolidated financial stat Solutions:Impairment Loss. ‘Extraordinary items te relay the eroscons debit” to cextmordinary it. 8 o Fairvalue adjustments 1a Faie value of net assets after research Costs (given) 'j, ‘Adjusted carrying amount of met assets, Jan. 1 « Fair value adjustment (in dranes) Divide by: Useful life ‘Annual depreciation of FVA (tx drams) 5 15 alse compen loon toneaction Tie an payable was recorded at the exchange rate ‘adjustment has yet been made on January 1 and on 48 of year-end for the change in «The adjusted carrying amount of net assets is comput Share capital Retained earnings adjusted (1,200- 100) (Step at) Adjusted carrying amount of net assets, Jan, 1 ‘The year-end adjustment is determined as follows: . © i Lon payable at opening rate (P50M x AMD5) @ Intercompany inventory transaction * a Laan payable at closing rate (P5M x AMD8) az ‘The intercompany sale of inventory is downstrear Increase in Ic y = —— bielancoeey aemyeat al Me ag arma +S oe Cost of intercompany sale (P30M x 80%) i Gross profit ¥ ‘Multiply by: Unsold portion in ending i pas ing a =r 150 Unrea lized gross profit (in pesos) ‘cadansoas eins ee Additional information (¢) above states that ABC Co, has ‘illerence renee ef, wate ais tate corded the Joan receivable in current assets while XYZ, Inc. has XVzZis books ‘current liabilities,’ ‘This is analyzed eae loan payable in noncurrent liabilities. This provides Sat | Reema ‘ nce that the settlement of the loan is neither planned nor likely ae ae the foreseeable future. Therefore, the loan shall form part Lo rcwd the purchase of inwentry fom parent. ; ABC's net investment in XYZ. " fs Accordingly, the FOREX loss of AMD150 shall be recognized +, efit or loss in XYZ's separate financial statements but recognized sete omPrebenne ‘income vin the consolidated financial Cash (rao once epee,‘Dividends declared by XX, Inc. (in rams) Allocation: Dividends to ABC Co. (60%) Dividenels NCI (40%) 2s is of net assets XYZ, Inc. date Share epital ~ 100 Share premium 200 Retained earnings ~ adjusted (Step 1.41) 1,100 “Totals at carrying amounts (in duns) 1400 Fair value adjustments (Step 16) 600 Depreciation of FVA (Step 1&c) NIL, Unrealized profits (Upstream ony) NIL FOREX loss on trade payable (Step 1.4) NIL ‘Net assets at fir valu (im drems) (2,000. Forex oss on loan payable (Sep) Net assts at fir wale (in dams) 2,000 ‘Acquisition Consol date x piso net Fog Ege ais ,odwill computation fone trasiered (0 ina iden Ap ; ce roling interestin the acasiee aoe, ee ae weyousty eld equity interest inthe acquires , ral owt ; jue of net identifiable assets acquinid es at acquisition date ae fgemlated impairment losses since acqultion date oodil, met — current year Cin dram) pride by: Closing rate ood, et current year (x pesos) sep # Non-controlling interest in net assets yidisnet assets at falr value ~Dec. 31, 20x1 Step 2) Multiply by: NCI percenta Toil ‘Aid: Goodwill to NCI net cf accumulated i NCTin net assets — Dee. 31, 20e1 (in drams) Divide by: Closing rate . NClinnet assets ~ Dec. 31, 0x1 (in peso Step 5: Consolidated retained earnings ABC’ retained earnitigs — Dec. 31, 20x1 Conlidation adjustment ARCS share in the met change in XYZ's net assets © avealized profit (Downstream ely) (Sty LA) Gin ortoss on extinguishment of bonds mest oes on goodwill attributable to it Xetconstidation adjustments Consolidated retained ea 48s share in the net change in XYZ'snet assets is computed as: et change in XYZ's net ase (in wos) (Sep? 765 At backs Prior period adjustment of subsidiary ® 1002 iol ac rae 587 Adjpated net change OX et e266 (in wons) ay by: Controlling interest station of FOREX on loa payable see hangern XZ's net asets (it won ABC's share in i it average rate (50 5x ssa 2 ay Eepxlosatclosigrate (3065) a 2 mite 4 Disa xv2'snet assets (in pesos) ern 5 Ley ABCs share in oct «The prior period adjustment of 100M research c ul trenton LOS (ram) _(r193) «er only in t ck because the parent shall share only ; eat ret assets alter the acquisition date, The _ he profit is computed as follows: , sin the subsidiary’s net a sot share Ch change ‘ rofitfor the year before adjustments (in drans) 1,600 acquisition date. : i esearch costs (Correcting entry #1) (Step Lat) 100 oR€X loss on trade payable (Comacting entry #3) Sip tab 1 “ase profit before FVA (in drams) 1685 Dey jation of FVA, in total (Stepb & ch it after FVA (in drams) Step SA: Translation gain (loss) The translation gain (oss) recognized in other compt is computed as follows: Correcting entry #2 does not affect the reported profit i just a reclassification entry (ie, from extraordinary item 4) Translation of XY2's opening net assets ‘impairment loss). Net assets Jan-1-atopeingrate (2000+5) —P400 ‘The FOREX loss on the loan payable is not included in the Netassts Jan 1-ateloingrate — @0D*8) 250 | computation of profit above because it will be presented in OCI. Decree in net assets oss Aion notes: eet meee eee fee 2 The total translation adjustment to goodwill is attributed only to ABC because goodwill is measured at proportionate share and 2) Translation pf changes in XYZ's net assets during the 4 ppppmalbenes on ea therefore no goodwill is attributed to NCL. Profit-at closing rate (1565+8) 196 * The translation differences on the loan payable are included in Increse in profil gun i‘. 8 the computations above becausse the Joan payable forms part of ABC's met investment in XYZ. (Se discussions Step 10) 3 Translation of goodeill ; Goodwill Dee31-at pening rate (100045) 200 Sep 6: Consolid: i ive income Good — ie ; lated profit or loss and comprehens' will, Dee. 3-at closing rate (Lo00+8) 125 a Parent Subsidiary Consolidated - Increase good sein a (ossliation ‘adjustments: pitlized profits (Sep 14) idend income (Step 14 Closing rate at the date af [Net monetary asets Jan. 1 (restated) 4 the statement of financial yt during the year: - 0 = fn net wonelary F b ige rates at the dates Se peas waht dove 1 {including comparatives) of the transactions urchises (restated) ~ se worksheet bone F All resulting exchange differences are recognized in oiler Other operating expenses (restate) comprehensive income, + Purchasing power loss 1s For expediency reasons, an average rate forthe period may be used, except jen exchange rates Muctaae sigan. Net monetary items, ‘Less: Net monetary items, Chapter 10: Summat _ eh A foreign operation is a subsidiary, associate, joint venture or ‘The two ways of conducting foreign activities are (@j ‘branch that is based in a foreign country and is using a foreign currency transactions and (b) foreign operations: currency. The financial statements of a foreign operation need A reporting entity is required to identify : to be translated before they can be incorporated into the currency, which is the currency of the pri reporting entity's financial statements. The translation environment in which the entity operates. This is rm procedures above apply to the translation of a foreis that mainly affects the entity's sales, cost of Sales fi operation’s financial statements, For foreign subsidiaries, activities and operating activit pel goodwill and fair value adjustments are translated at the closing Once determined, the functional currency is a unless there is a change in those underlying transaction ee The Sarvil sume of a fig cpeation opting conditims, A change in functional currency under a. hyperinflationary ecoromy are restated first prospectively. . accordance with PAS 29 before they are translated to a A foreign currency transaction is initially’ recog presentation currency under PAS 21. After restatement in spot exchange rate at the date of the transaction. accordance with PAS 29, all amounts (ie. assets, liabilities, * Subsequently, foreign currency monetary items ar quity, income and expenses) are translated at the closing rate. at the closing rate, ‘a * Exchange differences arising from the translation oF of monetary items are recognized in profit or 103s, & other PERSs require them to be d comprehensive income. Finandal statements are translated to 2s{ollows: