ACCOUNTING FOR FOREIGN EXCHANGE
ACTIVITIES
Many companies in the Philippines engage in international activities such as exporting or
importing goods, establishing a foreign branch, or holding an equity investment in a foreign
company. Recording and reporting problems are encountered when transactions with a foreign
company or the financial statements of a foreign branch are measured in a currency other than
Philippine currency. In addition, transactions to be settled in a foreign currency must be translated
or must be expressed in pesos before they can be aggregated with the domestic transactions of
the Philippine firm.
A. KINDS OF CURRENCY
1. Functional Currency – This is the currency of the primary economic environment in which
the entity operates. Usually, this is also synonymous to the local currency of the country.
It has the following primary and secondary factors:
a. Primary Factors
✓ Currency that mainly influences the sales price for goods and services.
Normally, this is the currency in which sales are denominated and settled.
✓ Currency of the country whose competitive forces and regulations
determine the sales price for goods and services.
✓ Currency that mainly influences the labor, material, and other costs of
goods and services. This is normally the currency in which costs of labor
and materials ae denominated and settled.
b. Secondary Factors
✓ Currency in which funds from financing activities is obtained.
✓ Currency in which receipts from operating activities are usually retained.
2. Presentation Currency – This is the currency in which the financial statements are
presented and is equal to the functional currency of a stand-alone entity. This is also the
currency of the company that is:
a. Required to follow as mandated by government regulators.
b. Opted to follow depending on the rules and regulations of the entity.
B. EXCHANGE RATES
A foreign exchange rate is the price of a currency expressed in terms of another currency. This is
the measure of how much of one currency may be exchanged for another currency. It may be
expressed in two different quotations:
1. Direct Quotation – This is one in which the exchange rate is quoted in terms of how many
units of the local currency can be converted into one unit of foreign currency.
a. If Direct Quotation increases = Purchasing power of local currency weakens.
b. If Direct Quotation decreases = Purchasing power of local currency strengthens.
2. Indirect Quotation – This is an exchange rate often stated in terms of converting one unit
of local currency into units of foreign currency.
a. If Indirect Quotation increases = Purchasing power of local currency strengthens.
b. If Indirect Quotation decreases = Purchasing power of local currency weakens.
Kinds of Exchange Rates
1. Spot Rate – Rate for immediate delivery on a given date.
2. Historical Rate – Rate at the time the transaction took place.
3. Closing Rate – Rate on the balance sheet date or at the end of the period.
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AUDITING IN SPECIALIZED INDUSTRIES HANDOUT 2304
MYLENE P. ALFANTA, CPA
4. Forward Rate – Rate for the exchange or delivery at a specified future date predetermined
in a forward contract.
5. Future Rate - Rate for the exchange or delivery at a specified future date predetermined
in a future contract.
6. Average Rate – This is the average of the beginning and closing rate. If volatile, the closer
the better. But if stable, the wider the better.
7. Buying Rate – Rate which a trader would buy an amount of a foreign currency. This is
the rate used for export transactions.
8. Selling Rate – Rate which a trader would sell an amount of foreign currency. This is the
rate used for import transactions.
C. CLASSIFICATION OF ITEMS USED IN FOREIGN EXCHANGE
1. Monetary Items – These are units of currency held and assets and liabilities to be
received of paid in fixed or determinable number of units of currency. These also referred
to items whose balances are fixed in terms of a currency regardless of changes in the
general price level.
2. Non-monetary Items – These referred to accounts in which the amounts of which they
are presented in the financial statements differ from what they are actually realized or
represents. These include all items that are not classified as monetary.
Monetary Items
▪
▪
▪
Cash
Financial Asset at Amortized Cost
Accounts and Notes Receivable
▪
Allowance for Doubtful Accounts
▪
Advances to Employees
▪
▪
▪
▪
▪
▪
Prepaid Interest
Receivables under Finance Lease
Marketable Securities at Cost
Long Term Receivables
Recoverable Special Deposits
Pension, Sinking, and other fund
consisting of bonds at amortized cost
Cash Surrender Value
Discount on Bonds Payable
Accounts and Notes Payable
Accrued Expenses
Cash Dividend Payable
Liability for Returnable Deposits
Accrued Losses on Firm’s Purchase
Commitments
Bonds Payable
Obligations under Finance Lease
Pension Benefits paid in cash
Provisions settled in cash
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
Non-monetary Items
Financial Assets at FVTPL
Financial Assets at FVTOCI
Inventories
Prepaid Insurance, Taxes, Rent, and
Advertising
Pension, Sinking, and other fund
consisting of bonds at fair value
Property, Plant, and Equipment
Accumulated Depreciation
Advances to Suppliers
Intangible Assets
Goodwill
▪
Advances from Customers
▪
▪
▪
▪
▪
▪
Deferred Revenue
Non-Controlling Interest
Preference Share Capital
Ordinary Share Capital
Share Premium
Biological Asset
▪
Investments in Equity Securities
▪
▪
▪
Retained Earnings
Warranty Payable
Derivatives
▪
▪
▪
▪
▪
D. KINDS OF FOREIGN EXCHANGE ACTIVITIES
1. PAS 21: Foreign Currency Transactions
2. PAS 21: Translation of Financial Statements in a Foreign Currency
3. PAS 29: Restatement of Financial Statements
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AUDITING IN SPECIALIZED INDUSTRIES HANDOUT 2304
MYLENE P. ALFANTA, CPA
PAS 21: FOREIGN CURRENCY TRANSACTIONS
Foreign Currency Transactions are transactions to be settled in a foreign currency. For example,
a transaction of a Philippine company with a foreign company that requires payment or settlement
in a foreign currency, and not to be settled in Philippine pesos. Examples of foreign currency
transactions are the following:
1. Importing and exporting of goods and services
2. Borrowing or Lending money denominated in foreign currency
IMPORTANT DATES IN FOREIGN CURRENCY TRANSACTIONS
1. Ordering Date – This is when the two parties agreed to buy and sell commodities but still
no shipment and delivery of commodities happened. In simplest terms, this is the date of
order, and no entry will be recorded in the accounting books.
2. Transaction Date – This is the date when the purchase or sale of goods or services takes
place and is usually evident during delivery, shipment, and recording of invoice.
Accordingly, transaction is recorded at the spot rate.
3. Balance Sheet Date – This is the date when financial statements are closed during the
end of the accounting period. The measurement depends on the classification of items:
a. Monetary Items – At closing rate
b. Non-monetary Items carried at Cost – At historical date
c. Non-monetary Items carried at Fair Value – At rate during the date when the fair
value was determined.
Recognition of Exchange Differences:
a. Monetary Items – P/L
b. Non-monetary Items required to be in Profit or Loss – P/L
c. Non-monetary Items required to be in Other Comprehensive Income – OCI
4. Settlement Date – This is the date when payment or receipt shall be made.
a. If Payable – This usually arise during importing of goods or services.
Journal Entry:
Accounts Payable at Historical Rate
xx
Foreign Exchange Loss
xx
Foreign Exchange Gain
Cash at Spot Rate
xx
xx
b. If Receivable – This usually arise during exporting of goods or services.
Journal Entry:
Cash at Spot Rate
xx
Foreign Exchange Loss
xx
Foreign Exchange Gain
xx
Accounts Receivable at Historical Rate
xx
Transaction
Rate
Exposed Accounts
Import
Selling Rate
Payable
Export
Buying Rate
Receivable
▪
▪
▪
▪
Analysis
If Rate Increases = Forex Loss
If Rate Decreases = Forex Gain
If Rate Increases = Forex Gain
If Rate Decreases = Forex Loss
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AUDITING IN SPECIALIZED INDUSTRIES HANDOUT 2304
MYLENE P. ALFANTA, CPA
PRACTICE PROBLEMS
PROBLEM 1: On December 1, 2023, WHISTLE Corporation ordered equipment FOB shipping
point from an American company for US $10,000. The equipment was shipped and invoice to
Whistle Corporation on December 16, 2023. Whistle Corporation paid the invoice on January 15,
2024. Relevant spot rates for US Dollars on the respective dates are as follows:
Date
December 1, 2023
December 16, 2023
December 31, 2023
January 15, 2024
Buying Spot Rate
P48.50
P48.90
P49.50
P50.00
Selling Spot Rate
P49.00
P50.00
P51.00
P50.50
Requirements:
1. Prepare all journal entries on Whistle Corporation’s books to record the above transactions
2. Determine the following:
a. Foreign Exchange Gain or Loss:
✓ December 16, 2023
✓ December 31, 2023
✓ January 15, 2024
b. Amount to reported in the Balance Sheet as of December 31, 2023:
✓ Accounts Payable
✓ Equipment
PROBLEM 2: SMITTEN Exports Corporation sold merchandise called metal crafts to a Canadian
Corporation for a 10,000 Canadian Dollars. Pertinent information on exchange conversion rates
related to this transaction were as follows:
Date
November 16, 2023 – Receipt of Order
December 16, 2023 – Date of Shipment
December 31, 2023 – Balance Sheet Date
January 15, 2024 – Date of Collection
Buying Spot Rate
P51.50
P52.50
P53.50
P53.00
Selling Spot Rate
P52.00
P53.00
P53.75
P54.00
Requirements:
3. Prepare all journal entries on Smitten Exports Corporation’s books to record the above
transactions.
4. Determine the following:
c. Foreign Exchange Gain or Loss:
✓ December 16, 2023
✓ December 31, 2023
✓ January 15, 2024
d. Amount to reported in the Balance Sheet as of December 31, 2023:
✓ Accounts Receivable
✓ Merchandise Inventory
PROBLEM 3: On September 1, 2023, JLN Company, a Philippine based company ordered 1,000
units of inventory from a US Corporation for $25,000. The inventory was shipped and invoiced to
JLN Corporation on December 1, 2023 and to be paid on February 1, 2024. JLN’s fiscal year end
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AUDITING IN SPECIALIZED INDUSTRIES HANDOUT 2304
MYLENE P. ALFANTA, CPA
is December 31. Assume that JLN did not engage in any form of hedging activity. The following
are the spot rates for US Dollars at various time as follows:
Date
September 1, 2023
December 1, 2023
December 31, 2023
February 1, 2024
Buying Spot Rate
P38.90
P40.00
P40.60
P40.45
Selling Spot Rate
P40.10
P40.30
P40.85
P40.65
Requirements:
1. How much is foreign exchange gain or loss on December 31, 2023?
2. How much is the outstanding accounts payable as of December 31, 2023?
3. How much is the foreign exchange gain or loss on February 1, 2024?
4. How much is the net foreign exchange gain or loss?
PROBLEM 4: On November 1, 2023, APG Company, a Philippine based company received an
order of 1,500 units of inventory from a US Based Company for $50,000. The inventory was
shipped by APG Company on December 1, 2023. APG Company received the customer
remittance in full on March 2, 2024. APGs fiscal year end is December 31. Assume that APG did
not engage in any form of hedging activity. The following are the spot rates for US Dollars at
various time as follows:
Date
November 1, 2023
December 1, 2023
December 31, 2023
March 2, 2024
Buying Spot Rate
P39.90
P40.00
P40.60
P40.40
Selling Spot Rate
P40.10
P40.20
P40.85
P40.70
Requirements:
1. How much is foreign exchange gain or loss on December 31, 2023?
2. How much is the outstanding accounts receivable as of December 31, 2023?
3. How much is the foreign exchange gain or loss on March 2, 2024?
4. How much is the net foreign exchange gain or loss?
PROBLEM 5: Cloud Trading Corporation purchased goods from Nimbus Corporation, a company
based in France, for 1,200,000 Euros. The exchange rate at this time is P1.00 = 12.50 Euros.
Cloud pays 30 days later when the prevailing exchange rate is P1.00 = 16.00 Euros. How much
is the foreign exchange gain or loss on the books of Cloud and Nimbus respectively?
a. P21,000 forex gain and P21,000 forex loss
b. P21,000 forex gain and P0
c. P4,200,000 forex loss and P0
d. P4,200,000 forex loss and P4,200,000 forex gain
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AUDITING IN SPECIALIZED INDUSTRIES HANDOUT 2304
MYLENE P. ALFANTA, CPA