COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
IAS 21 Effects of Changes in Foreign Exchange Rates
Overview
An entity may carry on foreign activities in two ways. It may have transactions in foreign
currencies, or it may have foreign operations. In addition, an entity may present its financial
statements in a foreign currency.
This Standard shall be applied: (a) in accounting for transactions and balances in foreign
currencies, except for those derivative transactions and balances that are within the scope of
IFRS 9 Financial Instruments; (b) in translating the results and financial position of foreign
operations that are included in the financial statements of the entity by consolidation or the equity
method; and (c) in translating an entity’s results and financial position into a presentation currency.
Module Objectives:
After successful Completion of this module, you should be able to:


prescribe how to include foreign currency transactions and foreign operations in the
financial statements of an entity and how to translate financial statements into a
presentation currency; and
identify which exchange rate(s) to use and how to report the effects of changes in
exchange rates in the financial statements.
Course Materials:
Definition of Terms
Closing rate - the spot exchange rate at the end of the reporting period.
Exchange difference - the difference resulting from translating a given number of units of one
currency into another currency at different exchange rates.
Exchange rate - the ratio of exchange for two currencies.
Foreign currency - a currency other than the functional currency of the entity.
Foreign operation - 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 - the currency of the primary economic environment in which the entity
operates.
Monetary items - 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 - the amount of the reporting entity’s interest in the net
assets of that operation.
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COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
Presentation currency - the currency in which the financial statements are presented.
Spot exchange rate - the exchange rate for immediate delivery.
Functional Currency
The primary economic environment in which an entity operates is normally the one in
which it primarily generates and expends cash. An entity considers the following factors in
determining its functional currency:
(a) the currency:
1. that mainly influences the sales prices for goods and services; and
2. of the country whose competitive forces and regulations mainly determine the
sales prices of its goods and services.
(b) the currency that mainly influences labor, material and other costs of providing goods
or services.
The following factors may also provide evidence of an entity’s functional currency:
(a) the currency in which funds from financing activities are generated.
(b) the currency in which receipts from operating activities are usually retained.
Foreign Currency Transaction
A foreign currency transaction is a transaction that is denominated or requires settlement
in a foreign currency. Examples are transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are denominated in
a foreign currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in
a foreign currency.
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COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
Recognition of exchange differences
1. Exchange differences arising on the settlement of monetary items or on translating monetary
items at rates different from those at which they were translated on initial recognition during the
period or in previous financial statements shall be recognized in profit or loss in the period in which
they arise, except those exchange differences arising on a monetary item that forms part of a
reporting entity’s net investment in a foreign operation.
2. When a gain or loss on a non-monetary item is recognized in other comprehensive income,
any exchange component of that gain or loss shall be recognized in other comprehensive income.
Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any
exchange component of that gain or loss shall be recognized in profit or loss.
Translation to the presentation currency
An entity may present its financial statements in any currency (or currencies). If the
presentation currency differs from the entity’s functional currency, it translates its results and
financial position into the presentation currency.
The results and financial position of an entity whose functional currency is not the currency
of a hyperinflationary economy shall be translated into a different presentation currency using the
following procedures:
(a) assets and liabilities for each statement of financial position presented shall be
translated at the closing rate at the date of that statement of financial position;
(b) income and expenses for each statement presenting profit or loss and other
comprehensive income shall be translated at exchange rates at the dates of the
transactions; and
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COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
(c) all resulting exchange differences shall be recognized in other comprehensive
income.
For items of income and expenses in (b), a rate that approximates the exchange rates at
the dates of the transactions, for example an average rate for the period, is often used for practical
reasons.
The exchange differences referred in (c) result from:
(a) translating income and expenses at the exchange rates at the dates of the
transactions and assets and liabilities at the closing rate.
(b) translating the opening net assets at a closing rate that differs from the previous
closing rate.
The results and financial position of an entity whose functional currency is the currency of a
hyperinflationary economy shall be translated into a different presentation currency using the
following procedures:
(a) all amounts (ie assets, liabilities, equity items, income and expenses, including
comparatives) shall be translated at the closing rate at the date of the most recent
statement of financial position, except that
(b) when amounts are translated into the currency of a non-hyperinflationary economy,
comparative amounts shall be those that were presented as current year amounts in the
relevant prior year financial statements (ie not adjusted for subsequent changes in the
price level or subsequent changes in exchange rates).
Hedge Accounting
Hedging means entering into a financial contract with a bank in order to offset the (gain
or) loss arising from foreign exchange movements. It is way by which a company is protected
from losing money brought by changes in foreign exchange rate, changes in interest rate and
changes in market prices. It reduces the risk associated with a company’s exposure to foreign
currency balances and transactions.
Companies enter into hedge arrangements to protect themselves from the following risks:
a. Currency risk or exchange rate risk. The risk that the value of financial instrument
will fluctuate because of changes in foreign exchange rate.
b. Interest rate risk. The risk that the value of financial instrument will fluctuate
because of changes in market interest rates.
c. Price risk. The risk that the value of financial instrument will fluctuate as a result of
changes in market prices, whether those changes are caused by factors specific to the
individual instrument or its issuer or factors affecting all instruments traded in the
market.
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COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
Forward Contract
Forward contract is a type of derivative. It is contract to buy or sell an amount of a currency
at a defined rate (forward rate) at inception of the contract at a future date. Two parties agreed to
exchange a specified amount of foreign currency at a specified date in the future with the price or
exchange rate (forward rate) being set now. It is recognized as asset or liability at the commitment
date because both parties have a contractual right and a contractual obligation to deliver the
goods.
When an entity becomes party to a forward contract, the rights and obligations at the
commitment date are often equal, so that the net fair value of the forward is zero.
Read:
International Accounting Standards Board, IAS 21: The Effects of Changes in Foreign Exchange
Rates effective 2005.
Activities/Assessments:
A. On November 1, 2020, Mia Corporation acquired on account goods from a foreign supplier at
a cost of $3,000. The accounts payable are paid on February 14, 2021. On December 1, 2020,
Mia Corporation sold on account goods to a foreign customer at a selling price of $4,500. The
accounts receivable is collected on March 22, 2021. The entity is operating in Philippine economy
wherein the functional currency is the Philippine Peso. The following exchange rates are provided:
Buying spot rate
Selling spot rate
November 1, 2020
P40
P42
December 1, 2020
39
40
December 31, 2020
45
47
1. What is the carrying amount of monetary asset on December 31, 2020?
2. What is the carrying amount of monetary liability on December 31, 2020?
3. In the 2020 Income Statement, what amount of net foreign exchange gain or loss will
be reported by Mia Corporation?
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COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
B. Sexbomb Bebe Company, a Philippine Company, holds an 80% interest in Sexbomb Jhim
Company, a Japanese Company. The trial balance of Sexbomb Jhim Company in Japanese Yen
at December 31, 2020 is presented below:
Account
Cash
Accounts Receivable
Merchandise Inventory, end
Machinery
Equipment
Cost of Goods Sold
Selling Expenses
Administrative Expenses
Other Expenses
Accounts Payable
Notes Payable
Ordinary Share Capital
Ordinary Share Premium
Retained Earnings, beg.
Sales
Sales Returns and
Allowances
Debit
20,000
80,000
61,000
200,000
150,000
210,000
5,000
7,000
5,000
Credit
20,000
50,000
120,000
30,000
220,000
300,000
2,000
The functional currency of Sexbomb Jhim Company is the Japanese Yen. The ordinary shares
were issued two years ago when the exchange rate was P0.44, same with the machinery and
equipment. Spot rates for January 1 and December 31, 2020 were P0.48 and P0.55, respectively.
The average exchange rate for 2020 is P0.52.
Compute for the following:
1. Translated amount of net income
2. Translated amount of assets
3. Translated amount of contributed capital
C. Liberty Company sold goods to foreign companies of different foreign currencies for the first
quarter of 2020 as follows:

January 14, 8,000 Hong Kong Dollars (HKD) 6.57

January 31, 3,600 Malaysian Ringgit (MR) 12.46

February 24, 5,000 Brunei Dollars (BD) 37.83

March 15, 10,000,000 Indonesian Rupiah (IR) P0.0037
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COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
Spot Rate
Transaction
Date
Settlement Date
PHP to HKD
P6.57
P.6.48
PHP to MR
12.46
12.87
PHP to BD
P37.83
37. 98
PHP to IR
0.0037
0.0030
1. Compute the net foreign exchange gain or loss upon settlement.
D. Philippine Mares Corporation is a subsidiary of Singaporean Sophies Corporation. The
functional currency of Philippines Mares is Peso (P) while the presentation currency of its parent,
Singaporean Sophies is Singaporean Dollars (SD). For the year ended December 31, 2020,
Philippine Mares has the following foreign currency denominated assets with the related historical
rates:
Asset
Amount
Historical Rate
Accounts
Receivable
$15,000
$1=P45; P1=0.5SD
Notes Receivable
20,000
$1=P42; P1=0.6SD
The exchange rate on December 31, 2020 is $1=P48 and P1=0.65SD.
1. What is the book value of Accounts Receivable and Notes Receivable in the
separate statement of financial position of Philippine Mares?
2. What is the book value of Accounts Receivable and Notes Receivable in the
consolidated statement of financial position of Singaporean Sophies?
E. Nes Corporation bought merchandise for 725,000 euros from a French Company on December
1, 2020. Payment in euros was due on February 28, 2021. On the same date, SBC entered into
a 90-day forward contract to sell 725,000 from RJ Bank. Exchange rates for euros on different
dates are as follows:
12/1/2020
12/31/2020
2/28/2021
Spot rates
61.55
62.85
62.05
30-day forward rate
62.45
62.65
63.55
60-day forward rate
61.95
62.35
62.75
90-day forward rate
60.75
62.75
63.55
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COLLEGE OF ACCOUNTANCY AND FINANCE
ACCO 30023 – Accounting for Business Combination
1. Prepare the journal entries from December 1, 2020 to February 28, 2021.
2. Forex gain (loss) on the hedged item on 12/31/20
3. Net forex gain (loss) on 12/31/20
4. Forex gain (loss) on the hedged item on 2/28/21
5. Forex gain (loss) on the forward contract on 2/28/21
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