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    Forex 0

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    John Page
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    FOREX_0

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    Foreign Currency

    Transactions
    ACP 313
    Foreign Currency Transactions
    • Transactions to be settled in a foreign currency and financial
    statements of an affiliate maintained in a foreign currency are
    translated (converted) into pesos using an exchange rate
    Exchange Rate
    • The ratio between a unit of one currency and the amount of another currency for
    which that unit can be exchanged at a particular time

    1. Direct Exchange Rate (DER)


    1 FCU = X LCU MULTIPLY!
    2. Indirect Exchange Rate (IER)
    1 LCU = X FCU DIVIDE!

    Local Currency Unit (LCU) – A currency that is used in a particular country


    Foreign Currency Unit (FCU) – A currency other than the functional
    currency of the reporting entity being referred to
    Illustration
    1. Convert 20,000 FC to Php using the exchange rate 1 FC = P 25
    20,000 FC x 25 = P 500,000

    2. Convert 25,000 to Php using the exchange rate 1 Php = 0.25 FC


    25,000 FC
    0.25 = P 100,000
    Foreign Exchange Rate Exposure
    1. Operating Exposure
    ØReflects the impact of changes in real exchange rates on a firm’s operations in its
    input and output markets

    2. Accounting Exposure
    1. Transaction Exposure
    a) Arises from foreign currency transactions
    b) Results in transaction gains or losses
    c) Recorded in the books of individual entity
    2. Translation Exposure
    a) Arises from translation of Foreign Currency FS of Foreign Operations
    b) Results in transaction gains or losses
    c) Presented in the consolidated FS
    Foreign Currency Transactions include:
    1. Buys or sells goods or services on credit whose prices are
    denominated in foreign currency
    2. Borrows or lends funds and the amounts payable or receivable are
    denominated in foreign currency
    3. Entity is a party to an unperformed forward exchange contract, or
    4. For other reasons, acquires or disposes of assets or incurs or settles
    liabilities denominated in foreign currency.
    Initial Recognition
    • Measured at the TRANSACTION DATE
    • SPOT RATE or HISTORICAL RATE
    Reporting Date / Balance Sheet Date
    ITEM RATE GAIN OR LOSS
    Monetary Closing Rate / Current Rate P&L
    Non-monetary @ Cost Historical Rate No Gain or Loss
    Non-monetary @ FV Rate at the date when FV was P & L or OCI
    determined or
    Closing Rate / Current rate
    Settlement Date
    • CURRENT RATE or ACTUAL RATE
    TRANSACTION RATE
    Import / Borrowing Selling Rate / Offer Rate
    Export / Lending Buying Rate / Bid Rate / Asking Rate
    Generalizations
    If DER: Selling Rate > Buying Rate
    IER: Buying Rate > Selling Rate

    DER IER LCU FCU ASSET LIABILITY


    ⬆ ⬇ ⬇ ⬆ Gain Loss
    ⬇ ⬆ ⬆ ⬇ Loss Gain
    TRANSLATION EXPOSURE
    Reporting Entity should translate the foreign currency financial
    statements of a foreign operation for the purpose of preparing
    consolidated financial statements.

    Foreign operations include subsidiaries, associates, joint-ventures,


    branches
    Subsidiary Characterization
    1. Integrated Foreign Entity
    ØOne that operates as an extension of the parent, with cash flows
    and business lines that are highly interrelated

    2. Self-sustaining Foreign Entity


    ØOne that operates in the local economic environment
    independent of the parent company
    Functional currency determines the
    Translation method.
    Functional Currency
    Øthe currency of the primary economic environment in which the
    subsidiary operates and in which it generates cash flows.
    Øit is the dominant currency used by that foreign subsidiary in its day-
    to-day operations.
    TRANSLATION OF FOREIGN CURRENCY FS
    • While the main purpose of translation is to prepare consolidated
    statements, management uses translated statements to assess
    performance (facilitation of comparisons across many geographically
    distributed subsidiaries).
    Translation Method
    1. Current Rate Method (Closing Rate Method)
    2. Temporal Method

    Regardless of which method is employed, a translation method must


    not only designate at what exchange rate individual balance sheet and
    income statement items are remeasured, but also designate where any
    imbalance is to be recorded (current income or an equity reserve
    account).
    • If the financial statements of the foreign subsidiary are maintained in
    PH peso, translation is not required
    • If the statements are maintained in the local currency, and the local
    currency is the functional currency, they are translated by the current
    rate method
    • If the statements are maintained in local currency, and the PH peso is
    the functional currency, they are remeasured by the temporal
    method
    • If the statements are in local currency and neither the local currency
    or the PH peso is the functional currency, the statements must first be
    remeasured into the functional currency by the temporal method,
    and then translated into PH peso by the current rate method
    Illustration
    1. An American subsidiary of a PH firm has the US$ as its functional
    currency.
    CRM
    2. A Japanese subsidiary of a PH firm has the Ph Peso as its functional
    currency.
    TEMPORAL
    3. An Australian subsidiary of a PH firm , keeping its own records in
    Australian dollars, determines its functional currency is the euro.
    BOTH CRM & TEMPORAL
    Local Currency Functional Presentation Method
    Currency Currency
    $ $ Php CRM
    $ Php Php Temporal
    $ ￥ Php 1st – Remeasure
    2nd – Translate
    Current Rate Method / Closing Rate Method
    Local Currency Functional Currency Presentation Currency
    $ $ Php

    TRANSLATION
    CRM
    ITEM RATE
    Assets Closing Rate
    Liabilities Closing Rate
    Shareholder’s Equity
    Retained Earnings Balancing Figure
    Dividends Historical Rate at the date of declaration
    Others Historical Rate
    Items of the Statement of Theoretical – Historical Rate
    Comprehensive Income Practical – Average Rate
    and Statement Cash Flow
    Illustration

    DATE SPOR RATE


    Jan. 2, 20x4 (date of acquisition) P 40.00
    Sept. 1, 20x4 40.10
    Dec. 31, 20x4 40.25
    Average for the 4th quarter 40.22
    Average for the year 40.20
    Temporal Method
    ØUsed to remeasure the accounts of a foreign entity when its books
    are maintained in currency other than its functional currency
    ØStand-alone entity records its books in a currency other than its functional
    currency but presents its financial statements in its functional currency
    ØForeign operation that records its books in its local currency but its functional
    currency is the parent’s currency
    ØRemeasurement process is similar to that prescribed for recording
    foreign currency transactions
    Temporal Method
    ITEM RATE
    Monetary Closing Rate / Current Rate
    Non-monetary @ Cost Historical Rate
    Non-monetary @ FV Rate at the date when FV was determined or
    Closing Rate / Current rate
    Items of the Statement of Theoretical – Historical Rate
    Comprehensive Income and Practical – Average Rate
    Statement Cash Flow

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