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AFAR 2 Foreign Exchange
Accontancy (Tarlac State University)
Studocu is not sponsored or endorsed by any college or university
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CHAPTER #
13
TITLE
FOREIGN CURRENCY TRANSLATIONS
B. DEVELOPMENTAL ACTIVITIES
INTRODUCTION
Definition of Terms
The following are definition of terms provided by PAS 21:












Closing rate is the spot exchange rate at the end of the reporting period.
Exchange difference is the difference resulting from translating a given number of units of one currency
into another currency at different exchange rates.
Exchange rate is the ratio of exchange for two currencies.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Foreign currency is a currency other than the functional currency of the entity.
Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting
entity, the activities of which are based or conducted in a country or currency other than those of the
reporting entity.
Functional currency is the currency of the primary economic environment in which the entity operates.
A group is a parent and all its subsidiaries.
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or
determinable number of units of currency.
Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of
that operation.
Presentation currency is the currency in which the financial statements are presented.
Spot exchange rate is the exchange rate for immediate delivery
ACCOUNTING PROCEDURES
1. Receive foreign entity’s financial statements, which are reported in foreign currency.
2. Translate the statements in foreign currency to Philippines peso. Each foreign entity account/balance must
be individually translated into the its Philippine peso equivalent, as follows:
account in foreign
appropriate exchange
account in Philippine
currency units
x
rate
=
peso equivalent value
3. Consolidate the translated foreign entity’s accounts, which are now stated in Philippine Peso, with the
Philippine company’s accounts.
Two Approaches to Translations
PAS 21 specifies two approaches to translations 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: Current Rate Method (FCPC/Closing Rate Method/ Net Investment Method/ Translated Method)
 Translation from Functional Currency to Presentation Currency
 This method is used on the following basis:
o Foreign operations operates independently in economic and financial matters (or not an integral
part to the operations of the parent)
o Functional currency (is not the presentation currency) should be the LCU (local currency unit –
currency of the country in which the subsidiary operates) or a third country currency.
o The functional currency is not the currency of hyperinflationary economy.
 The main features of the current rate method:
o Assets and liabilities both monetary and non-monetary are translated at current rate on the
date of the balance sheet.
o Stockholder’s equity account 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.
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o
o
 Dividends – historical rate on the date of declaration, otherwise, date of payment.
Revenue and expense of 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 the exchange rates fluctuate significantly, the use of
average for a period us inappropriate.
Translation Gain or Losses are taken to Other Comprehensive Income until the disposal of the
foreign operation, when they are included in profit or loss.
Method 2: Temporal Method (Remeasurement Method)

Translation into the Functional Currency/ Remeasurement of Foreign Currency Financial Statements to the
Functional Currency
 This method is used on the following basis:
o Foreign operation is integrated with parent’s operation.
o Functional currency should be the parent’s currency/ presentation or reporting currency.
 The main features of the temporal method are as follows:
o Monetary assets and liabilities shall be translated (remeasured) using closing rate.
o Non-monetary items at historical cost or carried at past exchange price shall be translated
(remeasured) using the exchange rate at the date of the transaction (historical rate)
o Non-monetary items at fair value or at current future exchange prices shall be translated
(remeasured) using the exchange rate at the date of the revaluation or fair value determination.
o Stockholders’ equity accounts are translated (or remeasured) using historical rates in effect at
the time equity 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 the date of declaration, otherwise, date of payment.
o Income statement items:
 Related to 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)
 Related to monetary items shall be translated (remeasured) using actual rate (historical
rate); however, for practical reasons, an average rate may be used.
o Remasurement Gains or Losses should be reported as profit or loss for the period;
remeasurement gain or loss arising from revaluation of non-monetary item is taken to Other
Comprehensive Income if the revalution gains or losses are taken to Other Comprehensive
Income.
ILLUSTRATION
Assume that on January 2, 2020, P Company, a Philippine based company, acquired for US$2,400,000 on 80%
interest in S Company maintains its books in US dollars and they are in conformity with GAAP in the Philippines
(parent’s functional and presentation currency is the peso). S Co.’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 US dollars is the functional currency, and
2. The Philippine peso is the functional currency. The exchange rates for the US dollars for the 2020 fiscal
year are as follows:
Date
January 2, 2020 (Date of Acquisition)
September 1, 2020
December 31, 2020
Average for the fourth quarter
Average for the year
Spot Rate
P40.00
40.10
40.25
40.22
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:
Sales
3,624,000
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Cost of Goods Sold
Depreciation expese
Other Expenses
Income tax expense
Retained Earnings, 1/1/20
Dividends declared, 9/1/20
Cash
Accounts Receivable, net
Inventory (FIFO)
Land
Building, net
equipmen, net
Accounts payable
Short-term notes payable
Bonds payable
Common stock, P10 par
Paid in capital in excess of par
2,220,000
120,000
786,000
98,400
576,000
360,000
1,116,000
729,600
996,000
600,000
780,000
516,000
768,000
762,000
1,080,000
1,152,000
360,000
CASE 1: Functional Currency is the Local Currency Unit (US Dollars) – Current Rate Method
Combined Statement of Income
and Retained Earnings
Sales
Less:
Cost of Goods Sold
Depreciation expese
Other Expenses
Income tax expense
Net income to retained earnings
Retained Earnings, 1/1/20
total
Less: Dividends Declared, 9/1/20
Retained Earnings, 12/31/20
Balance Sheet
Cash
Accounts Receivable, net
Inventory (FIFO)
Land
Building, net
equipmen, net
Total
Accounts payable
Short-term notes payable
Bonds payable
Common stock, P10 par
Paid in capital in excess of par
Retained Earnings, 12/31/20
Total
Foreign Currency Translation
Reserves Gain OCI - credit
Total
Adjusted Trial
Balance ($)
3,624,000
2,220,000
120,000
786,000
98,400
399,600
576,000
975,600
360,000
615,600
(A)
Translation
Exchange Rate
40.20
Adjusted Trial
Balance (Pesos)
145,684,800
(A)
(A)
(A)
(A)
40.20
40.20
40.20
40.20
89,244,000
4,824,000
31,597,200
3,955,680
16,063,920
23,040,000
39,103,920
14,436,000
24,667,920
40.00
(H)
40.10
1,116,000
729,600
996,000
600,000
780,000
516,000
4,737,600
(C)
(C)
(C)
(C)
(C)
(C)
40.25
40.25
40.25
40.25
40.25
40.25
44,919,000
29,366,400
40,089,000
24,150,000
31,395,000
20,769,000
190,688,400
768,000
762,000
1,080,000
1,152,000
360,000
615,600
4,737,600
( C)
( C)
( C)
(H)
(H)
40.25
40.25
40.25
40.00
40.00
from above
30,912,000
30,670,500
43,470,000
46,080,000
14,400,000
24,667,920
190,200,420
Balancing Amount
487,980
190,688,400
4,737,600
Verification of the Translation Adjustment – Current Rate Method:
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Translation
Exchange Rate
2,088,000
40.00
Reporting
Currency (Pesos)
83,520,000
40.20
40.10
16,063,920
14,436,000
US$
1/2 Exposed Net Asset Position
Adjustment for changes in net asset
position during year:
Net Icome for year
399,600
Less: Dividends Declared
360,000
Exposed Net Asset Position Translated
using rate in effcet at date of each
transaction
12/31 Exposed Net Asset Position
2,127,600
Change in Cumulative Translation
Adjustment during Year - net increase
1/2 Cumulative translation adjustment
12/31 Cumulative translation adjustment
85,147,920
40.25
85,635,900
487,980
487,980
A condensed balance sheet for S Company on January 2, 2020 was as follows:
US$
1,320,000
Monetary Assets
Non-monetary Assets
Inventory
Fixed Assets
Total
912,000
2,016,000
4,248,000
US$
2,160,000
1,152,000
360,000
576,000
4,248,000
Monetary Liabilities
Common Stock
Paid-in Capital in excess of par
Retained earnings
Total
CASE 2: Translation into the Functional Currency (Philippines Peso) – Temporal Method
Combined Statement of Income and
Retained Earnings
Sales
Less:
Cost of Goods Sold
Depreciation expese
Other Expenses
Income tax expense
Net income before Remeasurement Loss
Remeasurement Loss -debit
Net income to Retaine earnings
Retained Earnings, 1/1/20
total
Less: Dividends Declared, 9/1/20
Retained Earnings, 12/31/20
Adjusted Trial
Balance ($)
3,624,000
2,220,000
120,000
786,000
98,400
399,600
399,600
576,000
975,600
360,000
615,600
(A)
Translation
Exchange Rate
40.20
(H)
(A)
(A)
Schedule
40.00
40.20
40.20
Adjusted Trial
Balance
(Pesos)
145,684,800
89,041,680
4,800,000
31,597,200
3,955,680
16,290,240
242,220
16,048,020
23,040,000
39,330,240
14,436,000
24,652,020
Squeeze
40.00
(H)
40.10
from below
40.25
40.25
Schedule
40.00
40.00
40.00
44,919,000
29,366,400
40,059,120
24,000,000
31,200,000
20,640,000
190,184,520
40.25
40.25
40.25
40.00
40.00
Squeeze
30,912,000
30,670,500
43,470,000
46,080,000
14,400,000
24,652,020
190,184,520
Balance Sheet
Cash
Accounts Receivable, net
Inventory (FIFO)
Land
Building, net
equipmen, net
Total
1,116,000
729,600
996,000
600,000
780,000
516,000
4,737,600
(C)
(C)
Accounts payable
Short-term notes payable
Bonds payable
Common stock, P10 par
Paid in capital in excess of par
Retained Earnings, 12/31/20
Total
768,000
762,000
1,080,000
1,152,000
360,000
615,600
4,737,600
( C)
( C)
( C)
(H)
(H)
(H)
(H)
(H)
Schedule- Translation of Cost of Goods Sold:
Accounts
(H)
(A)
Remeasurement
Exchange Rate
40.00
40.20
(A)
40.22
$
Inventory, beg. (assumed)
Purchase (assumed)
Total
Less: Inventory, end
Cost of Goods Sold
912,000
2,304,000
3,216,000
996,000
2,220,000
Pesos
36,480,000.00
92,620,800.00
129,100,800.00
40,059,120.00
89,041,680.00
Verification of the Translation Adjustment – Temporal Method:
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840,000
Translation
Exchange
40.00
Reporting Currency
(Pesos)
33,600,000
3,624,000
40.20
145,684,800
2,304,000
786000
98,400
360,000
40.20
40.20
40.20
40.10
92,620,800
31,597,200
3,955,680
14,436,000
764,400
40.25
30,524,880
30,767,100
242,220
US$
1/2 Exposed Net Asset Position *
Adjustment for changes in net asset position during
year:
Less: Increase in cash and receivables from sale
Add: decrease in monetary assets or increase in
monetary liabilities:
Purchases
Other Expenses
Income Taxes
Dividends declared
Net Monetary Liability Position translated using rate in
effect at date of each transaction
Less: 12/31 Exposed net monetary liability position **
Remeasurement Gain (Loss)
*The January 2, 2020 condensed balance sheet:
US$
2,160,000
1,320,000
840,000
Monetary Liabilities
Less: monetary assets
Net Monetary Liability Position
**See above:
US$
2,610,000
1,845,600
764,400
Monetary Liabilities (768k +762k + 1,080K)
Less: monetary assets (1,116K + 729.6K)
Net Monetary Liability Position
GOODWILL ARISING FROM THE ACQUISITION OF FOREIGN SUBSIDIARIES
PAS 21 provides that any goodwill arising on the acquisition of foreign operation and any fair value adjustments to
the carrying amounts of assets and liabilities arising from that acquisition of foreign operation shall be treated as
assets and liabilities of that foreign operation.
Illustration: VVL Corporation, whose functional currency is the Philippines peso, acquired the entire common stock
of JK Company, a Japanese company on December 31, 2020 at a cost of P2,000,000. At the date of acquisition, JK
Co.’s paid up capital and retained earnings were 3,000,000 yen and 5,000,000 respectively. The assets and liabilities
or JK Co. at the date of acquisition by VVL Corp. approximated their fair values except for building that was
undervalued by 100,000 yen. Deferred tax liability on the undervalued building was 20,000 yen. The exchange rate
on December 31,2020 was P 0.50 = 1 yen.
Translation of Goodwill and Fair Value Differential
Fair Value of Subsidiary
Consideration
Cash
Less:
Book Value of Stockholders’ JK Co.
Retained Earnings
Allocated Excess (excess of cost over book value)
Less:
Over/ Undervaluation of assets and liabilities
Increase in Building (100K yen x P.50 x 100%)
Increase in Deferred Tax Liability on Building (20K yen x
P.50x100%
Positive excess:
Goodwill
Goodwill in Yen
(P210,000 x 1 yen / P.50)
Journal Entries:
Common Stock – JK Co.
Retained Earnings – JK Co.
P 2,000,000
P 1,500,000
250,000
50,000
(10,000)
40,000
P 210,000
420,000 yen
1,500,000
250,000
1,750,000
Building
Goodwill
1,750,000
50,000
210,000
Deferred Tax Liability
Investment in JK Co.
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10,000
250,000
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Assume that the building is depreciated on a straight line basis over a period of 25 years. The exchange rate on
December 31, 2021 is 1 yen = P0.45; and the average rate for 2018 was 1 yen = P0.48.
Case 1: Current Rate Method
On Goodwill:
Goodwill on December 31, 2020 (420k yen x P.50)
Goodwill on December 31, 2021 (420k yen x P.45)
Translation adjustment loss on goodwill – OCI
P210,000
189,000
P (21,000)
Case 2: Temporal Method
On Goodwill:
Goodwill on December 31, 2020 (420k yen x P.50)
Goodwill on December 31, 2021 (420k yen x P.50)
Translation adjustment gain/loss on goodwill
P210,000
189,000
P0
FUNCTIONAL CURRENCY IS THE CURRENCY OF A HYPERINFLATIONARY ECONOMY
PAS 29 provides that the financial statements of an entity whose functional currency is the currency of a
hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be
stated in terms of the measuring unit current at the end of the reporting period.
Indicators of Hyperinflationary Economy:
Paragraph 3 of PAS 29 provides some indicators of hyperinflationary economy:
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 is approaching, or exceeds, 100%.
Restate-Translate Approach



This approach requires that firstly, financial statement should be restated. Secondly, these statements are
translated.
Restatement is made by applying a general price index.
o Monetary items are not restated that are already stated at measuring unit at the balance sheet date
are not restated.
o Assets and liabilities linked by agreement to changes in prices should be adjusted in accordance
with the agreement.
o All other asset 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.
o 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 general
price index from the dates when the items of income and expenses were initially recorded in the
financial statements.
o A gain or loss on the net monetary position is included in net income. It should be disclosed
separately.
For an entity whose functional currency is the currency of a hyperinflationary economy, and for which the
comparatives amount are translated into the currency of a different hyperinflationary shall be translated into
a different presentation currency using the following procedures:
o All amounts shall be translated at the closing rate at the date of the most recent balance sheet,
except that
o When amount are translated into the currency of a non-hyperinflationary economy, comparative
amounts shall be those that were presented in the prior year financial statements.
Illustration: VVL Co. operates in a hyperinflationary economy. Its balance sheet at December 31, 2020, follows:
FC
Cash
350,000
Inventory
2,700,000
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Property, plant and equipment
Total Assets
9000
3,950,000
Current Liabilities
Non-current Liabilities
Total Liabilities
Common Stock
Retained Earnings
Total Shareholders’ Equity
Total Liabilities and Equity
700,000
500,000
1,200,000
400,000
2,350,000
2,750,000
3,950,000
The General Price Index and exchange rates of peso to FC are as follows:
Price Index
Exchange rate
2016
100
100
2017
130
130
2018
150
150
2019
240
240
2020
300
300
The property and equipment were purchase on December 31, 2018 and there is a six-month inventory held. The noncurrent liabilities were a loan raised on March 31, 2020.
Restate-Translate Approach:
FC
Price Index
Cash (M)
Inventory (M)
PPE (N)
TOTAL
350,000
2,700,000
900,000
3,950,000
300/270
300/150
Current Liability (M)
Noncurrent Liability (N)
Common Stock (N)
Retained Earnings (N)
TOTAL
700,000
500,000
400,000
2,350,000
3,950,000
300/100
Restated (in
FC)
350,000
3,000,000
1,800,000
5,150,000
700,000
500,000
1,200,000
2,750,000
5,150,000
Exchange
Rate
1.75
1.75
1.75
1.75
1.75
1.75
Translated
Pesos
612,500
5,250,000
3,150,000
9,012,500
1,255,000
875,000
2,100,000
4,812,000
9,012,500
Economy Ceases to be a Hyperinflationary
When an economy ceases to be hyperinflationary and an entity discontinues the preparation and presentation of
financial statements prepared in accordance with this Standard, it shall 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. The entity must disclosed the fact that the financial statements have been restated, the price
index used for restatement and whether the financial statement are prepared on the basis of historical cost or current
cost.
HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS


Paragraph 6.5.13 of PFRS 9 provides that hedges of a net investment in a foreign operation, including a
hedge of a monetary item that is accounted for as part of the net investment shall be accounted for similarly
to cash flow hedges:
o the portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge shall be recognised in other comprehensive income; and
o the ineffective portion shall be recognised in profit or loss.
The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has
been accumulated in the foreign currency translation reserve shall be reclassified from equity to profit or
loss as a reclassification adjustment on the disposal or partial disposal of the foreign operation.
Illustration:
Assume that VVL Corporation, a Philippine corporation has 30% equity investment in Hongkong company, JK Inc.
On December 31, 2020, the balance in VVL’s investment in JK account is P3,120,000, equals to 30% of JK’s net
asset of 2,000,000 Hkg$ times a P5.20 year end exchange rate. On this date VVL has no translation adjustment
balance relative to its investment in JK. To hedge its net investments in JK, VVL borrows 500,000 Hkg$ for 1 year at
12% interest on January 1, 2021 at a spot rate of P5.20. The loan is denominated in Hkg$ with principal and interest
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payable on January 1, 2022.
January 1, 2021
Cash
2,600,000
Loans Payable
2,600,000
Assume that on November 2, 2021, JK declares and pays 100,000 Hkg$ dividend, when the spot rate is P5.35. On
December 31, JK reports net income of 400,000 Hkg$. The weighted average exchange rate for the year is P5.30
and the closing exchange rate for December 31 is P5.40.
Hong Kong
Dollars
2,000,000
400,000
(100,000)
Net Assets – 1/1/2020
Comprehensive Income (12/31/21)
Dividends paid
Translation Adjustment –OCI
Net Assets-12/31/2021
Philippine Pesos
P5.20
5.30
5.35
2,300,000
November 2, 2021
Cash
10,400,000
2,120,000
(535,000)
435,000
P12,420,000
P5.40
160,500
Investment in JK
December 31, 2021
Investment in JK
(100k Hkg$ x
P5.35x 30%)
160,500
776,500
Income from Subsidiary
Translation Adjustment-OCI
Translation Adjustment-OCI
(400k Hkg$ x
P5.35x 30%)
(P435,000 x 30%)
636,000
130,000
100,000
Loan Payable
Interest Expense
Forex Loss
Exchange Rate
(500k Hkg$ x 12% x P5.30)
Accrued Interest Payable
January 1, 2022
Loans Payable
Accrued Interest Payable
[500k Hkg$ (P5.40 – P5.20)]
130,000
318,000
6,000
(500k Hkg$ x 12%
x P5.40)
324,000
2,700,000
324,000
Cash
(500k Hkg$ x P5.40
spot rate)
3,024,000
Disposal of a Foreign Operation
PAS 21 provides that on the disposal of a foreign operation, the cumulative amount of the exchange differences
relating to that foreign operation, recognised in other comprehensive income and accumulated in the separate
component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain
or loss on disposal is recognised.
C. CLOSURE ACTIVITIES
Problem 1: Certain balance sheet accounts of a foreign subsidiary of Parker company at 12-31-20 have been
restated into pesos as follows:
Current Rates
Historical Rates
Cash
47,500
45,000
Account Receivables
95,000
90,000
Inventory, at market
76,000
72,000
Land
57,000
54,000
Equipment
142,500
135,000
Total
418,000
396,000
a) Assuming the functional currency of the subsidiary is the peso. What total should be included in Parker’s
consolidated balance sheet at 12-31-20 for the above items?
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b) Assuming the functional currency of the subsidiary is the local currency. What total should be included in
Parker’s consolidated balance sheet at 12-31-20 for the above items?
Problem 2: CC Corp. owns a subsidiary in Japan whose balance sheet in Japanese Yen for the last years follow:
December 31, 2020
December 31, 2021
Assets
Cash and Cash equivalents
¥ 30,000
¥ 25,000
Receivables
122,500
147,500
Inventory
160,000
170,000
Property and Equipment, net
255,000
230,000
Total Assets
¥ 567,500
¥ 572,500
Liabilities and Equity
Accounts Payable
¥ 55,000
¥ 75,000
Long-term debt
322,500
285,000
Common stock
115,000
115,000
Retained earnings
75,000
97,500
Total Liabilities and Equity
¥ 567,500
¥ 572,500
Relevant exchange rates are:
January 1, 2020
December 31, 2020
December 31, 2021
September 12, 2020
Average 2020
¥ 1 = P 45
¥ 1 = P 42.50
¥ 1 = P 47.50
¥ 1 = P 40
Y 1= P 43.75
CC formed the subsidiary on January 1, 2020. Income of the subsidiary was earned evenly throughout the years and
the subsidiary declared dividends worth ¥15,000 on September 12, 2020 and none were declared during 2019. How
much is the cumulative translation adjustment for 2021?
Problem 1: The following are taken from the records of EIB Imports Company, a foreign subsidiary in new Zealand,
NZ Dollar
146,000
45,000
Total assets
12/31/20
Total liabilities
12/31/20
Common Stock 12/31/20
60,000
Retained earnings
01/01/20
29,000
Net Income
2020
15,000
Dividends declared
12/31/20
3,000
Exchange rates:
Current rate
Historical rate
Weighted Average
P10
11
12
The peso balance of retained earnings on 12/31/20 is P325,000
What amount of Cumulative Translation Adjustments is to be reported in the Consolidated Statement of
Financial Position on 12/31/20?
Problem 3: Abercrombie Co., a Phil firm, formed a foreign company in 2014 by purchasing the common stock of the
newly formed Dolce Inc. the functional currency of Dolce is the foreign currency (FC) During heir first three years.
Dolce experienced the following activity in retained earnings:
20x19
net loss
100,000 FCs
2020
net income
200,000 FCs
January 1 2021 Dividend
50,000 FCs
2021
net income
75,000 FCs
The following exchange rates were given:
Date
1FC equal to
12-31-19
P0.20
12-31-20
P0.22
Average 2020
P0.215
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01-01-21
Average 2020
12-31-21
Average 2021
P0.245
P0.24
P0.26
P0.25
Using the current rate method, what is the translated 12-31-21 balance of the retained earnings for Dolce
Inc?
Problem 4: A Phil l owned foreign subsidiary has the following beginning and ending stockholders equity for 2020:
January 1
December 31
Common Stock
120,000 FC
140,000 FC
Paid-in Capital in excess of par
30,000
40,000
Retained Earnings
60,000
100,000
210,000
280,000
The change in common stock resulted from a sale of stock to the parent firm on May 15. The changes in retained
earnings resulted from a July 1 dividend of 10,000 FC, and net income for 2020. Various exchange rates were as
follows:
Date
1FC equal to
January 1, 2020
P1.10
May 15, 2020
P1.12
July 1, 2020
P1.13
December 31, 2020
P1.15
2020 average
P1.125
How much the 2020 translation adjustment for the foreign subsidiary?
Problem 5: XXX a Philippine company acquired 100% of the common stock of BB a Thailand company on January
1, 2020, for P402,000. BB subsidiary’s net income amounted to 300,000 baht on the date of acquisition. On the same
date, the book values of its identifiable assets and liabilities approximated their fair values. On December 31, 2020
BB company’s subsidiary adjusted trial balance, translated Phil. Pesos, contained P12,000 more debits than credits.
BB company reported net income of 25,000 baht for 2020 and paid a cash dividend of 5,000 baht on November 30,
2020. Included in BB subsidiary’s income statement was depreciation expense of 2,500 baht. XXX uses the basic
equity method of accounting for its in the BB subsidiary and determined goodwill in the first year and had an
impairment loss of 10% of its initial amount. Exchange rate at various dates during 2020 follows:
January 1
1 baht = P1.20
November 30
1 baht = P1.30
December 31
1 baht = P1.32
Average for 2020 1 baht = P1.24
On the consolidated statement 0f the financial position of XXX company as of December 31, 2020, what
amount should be reported for the goodwill acquired on January 1, 2020?
Problem 6: M company is a subsidiary of N Company and is located in a foreign country, Chile where the currency is
the foreign currency (FC). Data on M Company’s inventory and purchases are as follows:
Inventory, January 1, 2020
500,000 FC
Purchases during 2020
1,000,000 FC
Inventory
400,000 FC
The beginning inventory was acquired during the fourth quarter of 2020, and the ending inventory was acquired
during the fourth quarter of 2020. Purchases were made evenly over the year. Exchange rates were as follows:
Fourth quarter of 2019
January 1, 2020
Average during 2020
Fourth during 2020
December 31, 2020
1FC = P0.00148
1FC = P0.00152
1FC = P0.00160
1FC = P0.00162
1FC= P0.00165
The translation of cost of goods sold for 2020, assuming that the currency of a third country is the functional
currency is
Problem 7: PPP CO. operates in a hyperinflationary economy. Its balance sheet at 12-31-2020 follows:
Assets
Baht (‘000)
Property, plant and equipment
900
Inventory
2,700
Cash
350
Share Capital (issued 2007)
400
Retained Earnings
2,350
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Non-current liabilities
Current liabilities
500
700
The general price index had moved in this way:
2016
2017
2018
2019
2020
December 31
100
130
150
240
300
The property plant and equipment was purchased on 12-31-18, and there is a six months’ inventory held. The nocurrent liabilities were a loan raised on march 31,2020.
Required:
1. How much is the total assets after adjusting for hyperinflation?
2. How much is the Retained Earnings on 12-31-20?
3. How much is the Retained Earnings on 12-31-20? Assuming the following exchange rates:
2016
2017
2018
2019
2020
December 31
1.20
1.24
1.27
1.50
1.75
IV. SYNTHESIS/ GENERALIZATION
CHAPTER SUMMARY:
Net Assets @ Current/ year – end rate
Less:
Net Asset @ roll-forward:
Net Assets @ rate of previous year – end
Add: Net Income @ Average Rate
Add: Dividends @ Rate of Declaration
Translation Gain or Loss, Bal. – OCI (Current Year)- Equity
Less:
Translation Gain or Loss, Beg.
Translation Gain or Loss, Current Year (Statement of Comprehensive
Income)
xx
xx
xx
xx
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xx
xx
xx
xx
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Where:
XG – exchange gain
Assume: Philippines
(Parent Co.); and
U.S. (Subsidiary Co.)
XL – exchange loss
Functional
Currency is the
Currency of a
Hyperinflationary
Economy
Functional Currency
is NOT the Currency
of Hyperinflationary
Economy (PAS 21:
20-40)
Current Rate Method
(Translation from Functional
Currency to Presentation
Currency) - Foreign operation
operates independetly (PAS 21:
38-41)
Temporal Method Foreign Operation is
integral with parent's
operation
Functional
Currency
LCU - $
XG/ XL 0f net monetary
position - Net Income
Peso
XG/ XL - Net Income
XG/XL - OCI
(2) Then Translate
Restatement of F/S then
Consolidate
Currency of a Third
Country ( for example
Japanese Yen)
(1) Remeasure first
V. EVALUATION
The student’s performance will be evaluated as follows:
20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)
VI. ASSIGNMENT/ AGREEMENT
VII. REFERENCES
Dayag, Advanced Financial Accounting and Reporting 2019e
Dayag, Advanced Financial Accounting and Reporting Reviewer
PAS 21 The Effects of Changes in Foreign Exchange Rates
PAS 29 Financial Reporting in Hyperinflationary Economies
Guerrero, Advanced Accounting 2017e
END OF CHAPTER 13
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