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FOREIGN CURRENCY

I. Transactions (Direct Exchange Rate)

1. Sales – accounts receivable is in foreign currency. Adjust A/R amount at the end of period and upon collection.
Spot rate on Inception date
Forex Gain (increase) / Loss (decrease)
Spot rate on financial reporting period
Forex Gain (increase) / Loss (decrease)
Spot rate on maturity date

2. Purchases – accounts payable is in foreign currency. Adjust A/P amount at the end of period and upon
payment.
Spot rate on Inception date
Forex Gain (decrease) / Loss (increase)
Spot rate on financial reporting period
Forex Gain (decrease) / Loss (increase)
Spot rate on maturity date
(Importer) Payable in FC (Exporter) Receivable in FC
Increase in indirect exchange rate Forex gain Forex loss
Decrease in indirect exchange rate Forex loss Forex gain
Note: The effect on direct exchange rate opposite indirect exchange rate

Reporting at the ends of subsequent reporting periods

At the end of each reporting period the following translations of foreign currency should be carried out.
Items Exchange Rate
Monetary items Closing rate (i.e. the spot exchange rate at the end of the reporting period)
Non-monetary items measured at Rate of exchange at the date of the original transaction (i.e. the date of
historical cost purchase of the non-current asset)
Non-monetary items measured at Exchange rate at the date when the fair value was determined
fair value

Recognition of exchange differences

 The difference that arises from translating the same amounts at different exchange rate is referred to as
an exchange difference. Such amounts will generally arise in the preparation of a set of financial
statements from the settlement of monetary amounts payable or receivable in a foreign currency and the
retranslation at the entity’s period end.
 Exchange difference should normally be recognized as part of the profit or loss for the period. However,
where gains and losses on a non-monetary item are recognized in other comprehensive income, for
example a gain on the revaluation of a property in accordance with IAS 16 Property, plant and equipment,
any exchange difference resulting from retranslation of the revalued asset is also reported as part of other
comprehensive income.

II. Translation

An entity can present its financial statements in any currency. If the presentation currency differs from the
functional currency, the financial statements are retranslated into the presentation currency. The presentation
currency, although the overall approach required by IAS 21 is for an entity to translate foreign currency items and
transactions into its functional currency, it is not required to present its financial statements using this currency.

An entity has a completely free choice of the currency in which its financial statements are presented. This is
referred to as the presentation currency.
 Closing rate method/Current rate method/Net investment method is used.
 Assets and liabilities are translated using closing rate (exchange rate on financial reporting period)
 SHE accounts are translated at historical rate (exchange rate on transaction date).
 Revenues and Expenses are translated at historical rate (exchange rate on transaction date). However,
for practical purposes, average rate for the period may be used (for accounts resulting from voluminous
and repetitive transactions) but if exchange rates fluctuate significantly, the use of average rate is
inappropropriate.
 All resulting exchange differences are recognized as a separate component of the SHE.
 Note: The above rules do not apply on a hyper-inflationary economy.

When preparing group accounts, it is normal to deal with entities that utilize different currencies. The financial
statements should be translated into the presentation currency.
 Any goodwill and fair value adjustments are treated as assets and liabilities of the foreign entity and therefore
are retranslated at each statement of financial position date at the closing spot rate.
 Exchange differences on intragroup items are recognized in profit or loss unless the difference arises on the
retranslation of an entity’s net investment in a foreign operation when it is classified as equity (other
comprehensive income).
 Dividends paid in a foreign currency by a subsidiary to its parent company may lead to exchange differences in
the parent’s financial statements and will not be eliminated on consolidation but recognized in profit or loss.

Today we will look at standard IAS 21 on The Effects of Changes in Foreign Exchange Rates, which gives us
answers to all these questions.
You will learn 2 things here:
 How to translate foreign currency amounts to your functional currency Example. An Indian company who
has some receivables towards a German company in EUR currency. How should this be translated to rupees?
(that’s our Indian company with German receivables)
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 How to translate a foreign operation’s financial statements to presentation currency Example. An

American company who has a subsidiary in Mexico. (Mexican subsidiary of American company).

Do you know the difference between functional currency and presentation currency?

FUNCTIONAL currency is the currency of the primary economic environment in which the company operates. And,
you need to translate all foreign currency amounts to your FUNCTIONAL currency.

PRESENTATION currency is the currency in which the financial statements are presented.
In many cases, functional and presentation currency are the same.

But in many cases they are not – for example, when a subsidiary needs to be consolidated with the parent in the
parent’s functional currency.

 The choice of presentation currency is an accounting policy and any change should therefore be applied
retrospectively.
 A change in the functional currency does not represent a change in accounting policy, and so it should be
accounted for prospectively from the date of change.

How to determine functional currency?

You must be careful here! Functional currency is not necessarily the local currency of the country where the
business is established. Let me give you an example:

ABC company has its seat and factory in China. ABC is primarily financed by the external loan in USD. ABC’s main
activity is producing engines. ABC buys materials in USD and sells them in USD to its American customers. Wages,
electricity and other local expenses are paid in Chinese yuans.

So guess what the functional currency of ABC is?

Yep, it’s probably USD, although the local currency is that of China. But selling price is quoted in USD, most
material expenses are in USD – these are primary factors for determining functional currency.

So how do you translate foreign currency amounts to functional currency?

Let me give you a few basic steps:

1. Determine your functional currency – we have just talked about it.

2. Initially, translate all foreign currency amounts at the rate of exchange at the date of the transaction.
3. At each subsequent closing date, you shall translate:
 all monetary items in foreign currency -> use CLOSING exchange rate at the reporting date.
 non-monetary items in foreign currency carried at historical cost -> use HISTORICAL exchange rate (at
the date of transaction).
 non-monetary items in foreign currency carried at fair value -> use exchange rate at the date when fair
value was determined.
4. Recognize all exchange rate differences on monetary items in profit or loss (except for net investment in foreign
operation, but let’s not complicate things here).
So now you should know how the Indian company translates its receivables to the German company to its
functional currency – rupees.

How to translate foreign operation’s financial statements to presentation currency?

Well, let me say why we do it. Because when you want to consolidate the parent’s and the subsidiary’s financial
statements, they must be prepared in the same currency.
You just cannot aggregate EUR and USD amounts, could you?

So please remember the following rules:

 Assets (including goodwill) and liabilities  use CLOSING exchange rate of that balance sheet.
 Income and expenses  use HISTORICAL exchange rates (at the dates of transaction). You can use
average rates for the period instead.
 Post-acquisition reserves, capital increases and dividends paid  use HISTORICAL exchange rates (at the
dates of transaction).
 Share capital and share premium exchange rates  use ACQUISITION exchange rates (at the dates of
acquisition).
 Recognize all exchange rate differences in other comprehensive income as a separate line. It is called
“CTD” or currency translation difference.

Hedging a Net Investment in a Foreign Entity

 A company in the Philippines with investment in foreign entity may enter into forward exchange contracts to
offset the effects of the fluctuation in foreign exchange rate on their net investment.

 Cumulative translation adjustment (OCI) is used to accumulate the exchange rate adjustments on
transactions that are intended to hedge a net investment in a foreign entity.
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III. Hedging

Two elements of Hedging:

Fair value
1. Hedged item – asset/liability
– or transaction that exposes the entity to risks in the
Cash flow
2. Hedging instrument – financial instrument which must be a derivative; non-derivative instrument only in case of
hedging Foreign Currency Risk.
 Forward contract
 Futures
 Options – Put; Call
 Swap
Requisites:
 An entity should formally designate/document a hedging relationship when it is entered into:
o Hedged item
o Hedge instrument
o Risk hedged Fair value
 Hedge instrument should be highly effective in offsetting the
and capable of being measured reliably.
Cash flow
 For a forecasted transaction that is classified as CFA, the occurrence should be highly probable and lead to
exposure to differences in resulting cash flow.

 The hedge is continually assessed for effectiveness and determined to have been highly effective.

In FV of the CF of Hedged Highly effective In FV of the Hedging

item (80%-125%) Instrument

Types of Hedges
 Fair Value Hedge – hedges the exposure to changes in FV of an item/transaction.
 Cash Flow Hedge – hedges the exposure to changes in expected cash flows.
 Net investment in Foreign Operation (as if a cash flow hedge)

Summary:
 Hedged of an existing asset/liability commitment (Undesignated Hedge)
Gain or Loss on Hedged Item
[Spot Rate on Inception Date vs Spot Rate on B/S Date vs Spot Rate on Maturity Date] = P/L
Gain or Loss on Hedged Instrument
[Forward Rate on Inception Date vs Forward Rate on B/S Date vs Spot Rate on Maturity Date] =
P/L
 Hedged a Firm Commitment (non-cancellable) – now a FV hedge (PAS 39) however if FX it may be
designated as Cash Flow Hedge.
Fair Value Hedge Cash Flow Hedge

G/L on Hedged item = P/L G/L on Hedged item - not recognized

G/L on Hedged instrument = P/L Net Gain/Loss G/L on Hedging Instrument - Equity (to the extent that it is effective,
the ineffective portion goes to the IS. Note: The G/L that is accounted
as Equity Component will be taken to P/L when the related
Asset / Liability is already included in the P'L determination

 Hedged a Forecasted Transaction (Cash Flow Hedge)

Gain/Loss on Hedged Item = Not recognized
Effective Portion [ Equity ( Until the A/L affects
Gain/Loss on Hedging Instrument = the NI)]

 Hedge of a Net Investment in Foreign Operation

Gain/Loss = Equity (CTA)

 Speculative = Gain / Loss = P/L

FORWARD CONTRACTS

A forward contract is an agreement between a buyer and seller that requires the delivery of some commodity at a
specified future date at a price agreed to today (the exercise price). A typical example of forward contract is
FOREIGN CURRENCY FORWARD CONTRACTS.
A foreign currency forward contract is an agreement to buy or sell a foreign currency at:
1. a specified future date (usually within 12 months), and
2. a specified exchange rate. This rate is a called forward rate.

At the inception of the contract, the forward rate normally varies from the spot rate. The difference between the
two rates is referred to as a discount (premium) if the forward rate is less than (greater than) the spot rate.
Forward Rate < Spot Rate = Discount
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Forward Rate > Spot Rate = Premium

Hedge Accounting : Summary

Fair Value Hedge Cash Flow Hedge
Hedging Instrument (Forward On balance sheet carried at Fair On balance sheet carried at Fair value
Contract) value
Gain or loss on Hedging Recognized immediately in P and To the extent, the hedge is effective,
Instrument L recognized in other comprehensive income

The ineffective portion of the gain or loss will

be reported immediately in P and L

Gain or loss on the HEDGED Recognized immediately in P and Not applicable – forecasted transactions are
ITEM due to hedged risk L not recognized

Gain or loss in the Equity Not applicable If the item hedged is a forecasted purchase
section is transferred to P and of inventory, the gains and losses on the
L hedge will be reclassified into earnings when
inventory is sold, or when a forecasted
purchase of equipment, the gain or losses
on the hedge will be reclassified into
earnings as the equipment is depreciated.

Hedging Accounting Summary of Accounting for Foreign Exchange Gain and Effectiveness
Purpose of the Type of Hedge Hedging Accounting Treatment Accounting Result
Foreign Exchange Accounting
Derivatives Applies
To hedge a foreign ”Undesignated No Recognized immediately in Concurrent
exchange receivable Hedge” P&L ( same treatment for recognition in P&L
or payable foreign exchange gain or
loss on hedged item)
To hedge a firm Fair value hedge Yes Recognized immediately in Concurrent
commitment P&L ( same treatment for recognition in P&L
foreign exchange gain or
loss on hedged item)
To hedge a Cash flow hedge Yes To the extent, the hedge is Concurrent
forecasted foreign effective, recognized in OCI recognition in P&L
transaction on a delayed basis
To ineffective portion of the
gain or loss will be
recognized immediately in P
&L
To hedged an Net investment Yes Recognized in OCI. Concurrent
investment in a Hedge Remove and recognized in recognition on a
subsidiary P&L upon disposal of the delayed basis
investment
To speculate Not applicable No Recognize immediately in Recognition in P&L
P&L currently

Option Contracts
An option contract between two parties – the buyer and the seller – gives the buyer (option holder) the right, but
not the obligation, to purchase or sell something to the option seller (option writer) at a date in the future at a
price agreed to at the time the option contract is exchanged.

A foreign currency option contract is a contractual agreement giving the holder the right to buy or sell a given
amount of currency at a specified price (the exercise or strike price) for a specified of time or a point in time.

Option Terminologies
1. Call is an option to buy
2. Put is an option to sell
3. Holder is the party having the right to buy or sell
4. From the perspective of the holder, the option contract is referred to as a Purchased Option.
5. Writer is the party that grants the holder this contractual right.
6. From the perspective of the writer, the option contract is referred to as a Written Option.
Foreign Currency Option Situations
Option Spot Market Price Equals Spot Market Price is More Spot Market Price is Less
the Exercise Strike Price Than the Exercise Strike Than the Exercise Strike
(P5 = P5) Price Price
(P5 > P5) (P5 < P5)
Call (buy) At the money In the money Out of the money
Put (sell) At the money Out of the money In the money
In the money – the holder would exercise the option since it is favorable to the holder.

Out of the money – the holder would not exercise the option since it is unfavorable to the holder.

Accounting for Foreign Currency Option Premiums

Time Value Element. If at the inception of the foreign currency option, the option is either out of the money or at
the money, the entire premium is called the time value. The time value is analogous to a prepaid insurance
premium that could be amortize to income over the life of the option period.
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Intrinsic Value. On the other hand, if the inception of the foreign currency option, the option is in the money, the
option holder will have paid a higher premium – the incremental amount equaling the difference between spot
market price and the exercise strike price – to be placed in this favorable position. This incremental premium paid
is called the foreign currency’s intrinsic value.

Note: (Cash Flow Hedge) Note: (Fair Value Hedge)

If Splitting: Fair value of call option = IV + TV
Changes in intrinsic value  profit or loss
Fair value of call option = IV + TV Changes in time value  profit or loss
Changes in intrinsic value  other comprehensive
income (effective)
Changes in time value  profit or loss(
Ineffective)

If no splitting  OCI
Intrinsic Value: (Buyer VS Seller)
On the last day: Buyer : ( IV = MP – EP)
Effective = 0 Seller : (IV = EP – MP )
Intrinsic value = time value
Time value = 0

Foreign Currency

Problem 1: (Direct and Indirect Quotation)

Direct quotation is when the Foreign Currency Unit (FCU) is the base amount or denominator. Indirect Quotation is
when the Local Currency Unit (LCU) is the base amount or denominator.

Direct Quote = Local Currency Unit (LCU) = “X” LCU

Foreign Currency Unit (FCU) 1 FCU

Case 1: If 40 Philippine Peso can be exchanged for 1 Singaporean Dollar:

1. What is the direct quotation expressed in Philippine Peso?
a. 40 Peso : 1SD b. 1SD : 40 Peso c. 0.025 Peso : 1SD d. 0.025 SD : 1 Peso

2. What is the direct quotation expressed in Singaporean Dollar?

a. 40 Peso : 1SD b. 1SD : 40 Peso c. 0.025 Peso : 1SD d. 0.025 SD : 1 Peso

Case 2: If 0.020 US Dollar can be exchanged for 1 Philippine Peso:

1. What is the direct quotation expressed in Philippine Peso?
a. 50 Peso : 1 USD b. 1USD : 50 Peso c. 0.020 Peso : 1 USD d. 0.020 USD : 1 Peso

2. What is the direct quotation expressed in US Dollar?

a. 50 Peso : 1 USD b. 1USD : 50 Peso c. 0.020 Peso : 1 USD d. 0.020 USD : 1 Peso

Case 1:
1 P40 ÷ 1SD 40.000
2 1SD ÷ P40 0.025

Case 2:
1 P1 ÷ 0.020 50.000
2 $0.020 ÷ P1 0.020
Page 6 of 23

Problem 2: (Importing Transaction – Exposed Liability Position)

On September 1, 20x6, ABC Company a Philippine based company ordered 1,000 units of inventory from a U.S.
Corporation for $25,000. The inventory was shipped and invoiced to ABC firm on December 1, 20x6 to be paid on
February 1, 20x7. ABC’s fiscal year end is December 31. Assume that ABC did not engaged in any form of
hedging activity. The following are the spot rates for U.S. Dollars at various times are as follow:
Buying Spot Rates Selling Spot Rates
September 1, 20x6 P38.90 P40.10
December 1, 20x6 40.00 40.30
December 31, 20x6 40.60 40.85
February 1, 20x7 40.45 40.65

Required:
1. How much is the ForEx gain or (loss) on December 31, 2016?
A. (6,250) C. (15,000)
B. (13,750) D. (18,750)

2. How much is the outstanding accounts payable as of December 31, 2016?

A. 1,015,000 C. 1,021,250
B. 1,016,250 D. 1,035,000

3. How much is the ForEx gain or loss on February 1, 2017?

A. (5,000) C. 3,250
B. 5,000 D. (3,750)

4. How much is the Net ForEx gain or loss?

A. 11,250 C. 8,750
B. (11,250) D. (8,750)

Selling Spot Rate

12/1 40.30
12/31 40.85
2/1 40.65

12/1 Inventory 1,007,500

Accounts payable 1,007,500
40.30 25,000 1,007,500

12/31 Forex Loss 13,750 (13,750)

Accounts payable 13,750
12/1 40.30 25,000 1,007,500
12/31 40.85 25,000 1,021,250
Loss 13,750

2/1 Accounts payable 1,021,250

C ash (40.65 x 25,000) 1,016,250
Forex Gain 5,000 5,000
(8,750)
Page 7 of 23

Problem 3: (Exporting Transaction – Exposed Asset Position)

On November 1, 2016, BMK Company a Philippine Based Company received an order of 1,500 units of inventory
from a HK Company a U.S. based Company for $50,000. The inventory was shipped by BMK Company and billed
HK firm on December 1, 2016. BMK Company received the customer remittance in full on March 2, 2017. BMK’s
fiscal year end is December 31. Assume that BMK did not engage in any form of hedging activity.

The following are the spot rates for U.S. Dollars at various times are as follow:
Buying Spot Rates Selling Spot Rates
November 1, 20x6 P39.90 P40.10
December 1, 20x6 40.00 40.20
December 31, 20x6 40.60 40.85
March 2, 20x7 40.40 40.65

1. How much is the ForEx gain or (loss) on December 31, 2016?

A. 37,500 C. 30,000
B. 35,000 D. 32,500

2. How much is the outstanding accounts receivable as of December 31, 2016?

A. 2,030,000 C. 2,060,000
B. 2,042,500 D. 2,075,000

3. How much is the ForEx gain or loss on March 2, 2017?

A. 10,000 C. 7,5000
B. (10,000) D. (7,500)

4. How much is the Net ForEx gain or loss?

A. (20,000) C. 20,000
B. 25,000 D. (25,000)

Buying Spot Rate

12/1 40.00
12/31 40.60
3/2 40.40

12/1 Accounts receivable 2,000,000

Sales 2,000,000
40.00 50,000 2,000,000

12/31 Accounts receivable 30,000

Forex Gain 30,000 30,000

12/1 40.00 50,000 2,000,000

12/31 40.60 50,000 2,030,000
Gain 30,000

3/2 C ash (50,000 x 40.40) 2,020,000

Forex Loss 10,000 (10,000)
Accounts receivable 2,030,000
20,000
Page 8 of 23

Problem 4: (Speculation – To Buy Currency)

On November 1, 2016, BELLE Corporation entered into forward exchange contracts to purchase U.S.$ 20,000 in 90
days for delivery on February 1, 2017. The fiscal year-end for BELLE Corporation is December 31. The Exchange
rates available on various dates are as follows:

1-Nov-16 31-Dec-16 1-Feb-17

SPOT RATE P40.00 P 40.25 P 40.40
30 -DAY Forward Rate 40.10 40.35 40.50
60 -DAY Forward Rate 40.15 40.40 40.70
90 -DAY Forward Rate 40.20 40.45 40.65
1. How much is the ForEx gain or (loss) on December 31, 2016?
A. (3,000) C. 4,000
B. 3,000 D. (4,000)

2. How much is the foreign currency receivable as of December 31, 2016?

A. 804,000 C. 807,000
B. 805,000 D. 808,000

3. How much is the peso payable balance as of December 31, 2016?

A. 804,000 C. 807,000
B. 805,000 D. 808,000

4. How much is the ForEx gain or loss on February 1, 2017?

A. (1,000) C. 1,000
B. 2,000 D. (2,000)

5. How much is the Net ForEx gain or (loss)?

A. (1,000) C. 1,000
B. 4,000 D. (4,000)

11/1 40.00 40.20

12/31 40.25 40.35
2/1 40.40 40.40

Hedged item Hedging instrument

11/1 Fwd. Contract Receivable 804,000
Fwd. Contract Payable 804,000
(20,000 x P40.20)

12/31 Fwd. Contract Receivable 3,000

Forex gain 3,000 3,000
Nov. 1 ( 20,000 x P40.20) 804,000
Dec. 31 (20,000 x P40.35) 807,000
Forex gain 3,000

2/1 Inventory 808,000 Fwd. Contract Receivable 1,000

Accounts payable 808,000 Forex gain 1,000 1,000
(20,000 x P40.40) Dec. 31 (20,000 x P40.35) 807,000
Feb. 1 (20,000 P40.40) 808,000
Forex gain 1,000

Accounts payable 808,000 4,000

Fwd. Contract Receivable 808,000

Fwd. Contract payable 804,000 Fwd. Contract payable 804,000

Cash 804,000 Cash 804,000
To record payment to exchange dealer

Investment in FC 808,000
Fwd. Contract Receivable 808,000
To record receipt of foreign currency

Cash 808,000
Investment in FC 808,000
To record conversion of US dollars into cash
Page 9 of 23

Problem 5: (Speculation – To Sell Currency)

On December 1, 2016, PEPPER Corporation entered into forward exchange contracts for speculative purposes in
anticipation for a gain to sell U.S. $ 10,000 in 90 days for delivery on March 1, 2017 for P40.25. The fiscal year end
for PEPPER Corporation is December 31. The Exchange rates available on various dates are as follows:

1-Dec-16 31-Dec-16 1-Mar-17

SPOT RATE P40.00 P40.25 P40.35
30-DAY Forward Rate 40.10 40.35 40.50
60-DAY Forward Rate 40.15 40.40 40.70
90-DAY Forward Rate 40.25 40.45 40.65
120-DAY Forward Rate 40.30 40.50 40.70

1. How much is the ForEx gain or loss on December 31, 2016?

A. (1,500) C. 1,000
B. 1,500 D. (1,000)

2. How much is the ForEx gain or loss on March 1, 2017?

A. 0 C. 500
B. (500) D. (1,000)

3. How much is the Peso Receivable from XD on March 1, 2017 prior to collection?
A. 402,500 C. 403,500
B. 403,000 D. 404,000

4. How much is the Foreign currency Payable on March 1, 2017 prior to settlement?
A. 402,500 C. 403,500
B. 403,000 D. 404,000
5. How much is the Net ForEx gain or (loss)?
A. (1,500) C. 1,000
B. 1,500 D. (1,000)

12/1 40.00 40.25

12/31 40.25 40.40
3/1 40.35 40.35

Hedged item Hedging instrument

12/1 Fwd. Contract Receivable 402,500
Fwd. Contract Payable 402,500
(10,000 x P40.25)

12/31 Forex loss 1,500 (1,500)

Fwd. Contract Payable 1,500
Dec. 1(10,000 x P40.25) 402,500
Dec. 31 (10,000 x P40.40) 404,000
Forex gain 1,500

3/1 Accounts receivable 403,500 Fwd. Contract payable 500

Sales 403,500 Forex gain 500 500
(10,000 x P40.35) Dec. 31 (10,000 x P40.40) 404,000
Mar. 1 (10,000 P40.35) 403,500
Forex gain 500
Fwd. Contract payable 403,500
Accounts receivable 403,500 (1,000)

C ash 402,500
Fwd. Contract receivable 402,500 C ash 402,500
Fwd. Contract receivable 402,500
To record collection of receivable from exchange dealer

Investment in FC 403,500
C ash 403,500

Fwd. Contract payable 403,500

Investment in FC 403,500
To record the delivery of FC to exchange dealer
Page 10 of 23

Hedging Instrument

Problem 6: (Forward Contracts – Hedging an Exposed Liability)

OCDC Enterprise purchases inventory from a foreign supplier on September 1, 2016 with payment due on
December 31, 2016. The transaction will be settled in 1,000,000 foreign currency units (FCUs). Management of
OCDC immediately enters into a forward contract to hedge this transaction. The relevant exchange rates and
forward contract fair values are as follows:
Date Spot Rate Nov. 1 Forward Rate Forward Contract Fair Value
Sept 1 P1.120 P1.124 P0
Nov. 1 1.129 1.128 4,000
Dec. 31 1.140 1.140 16,000

1. What is the amount of exchange gain or (loss) recognized with respect to the accounts payable account on
November 1, 2016?
A. (4,000) C. 4,000
B. 9,000 D. (9,000)

2. What is the amount of exchange gain or (loss) recognized with respect to Forward Contract on November
1, 2016?
A. (4,000) C. 4,000
B. 9,000 D. (9,000)

3. What is the amount of exchange gain or (loss) recognized with respect to Forward Contract on December
31, 2016?
A. 4,000 C. 12,000
B. 9,000 D. 18,000

4. How much is the net gain or (loss) on November 1, 2016?

A. 1,000 C. 5,000
B. (5,000) D. (1,000)

5. How much is the net gain or loss on December 31, 2016?

A. 1,000 C. 5,000
B. (5,000) D. (1,000)

6. How much is the outstanding accounts payable as of November 1, 2016?

A. 1,120,000 C. 1,128,000
B. 1,124,000 D. 1,129,000

7. How much is the outstanding peso-payable as of November 1, 2016?

A. 1,120,000 C. 1,128,000
B. 1,124,000 D. 1,129,000

8. How much is the outstanding FC-receivable as of November 1, 2016?

A. 1,120,000 C. 1,128,000
B. 1,124,000 D. 1,129,000

9/1 1.120 1.124

11/1 1.129 1.128
12/31 1.140 1.140

Hedged item Hedging instrument

9/1 Inventory 1,120,000 Fwd. Contract Receivable 1,124,000
Accounts payable 1,120,000 Fwd. Contract Payable 1,124,000
(1.120 x 1,000,000) 9/1 9/1 (1.124 x 1,000,000) 1,124,000

11/1 Forex loss 9,000 Fwd. Contract Receivable 4,000 (9,000)

Accounts payable 9,000 Forex gain 4,000 4,000 (5,000)
9/1 (1.120 x 1,000,000) 1,120,000 9/1 (1.124 x 1,000,000) 1,124,000
11/1 (1.129 x 1,000,000) 1,129,000 11/1 (1.128 x 1,000,000) 1,128,000
Forex loss 9,000 Forex gain 4,000

12/31 Forex loss 11,000 Fwd. Contract Receivable 12,000 (11,000)

Accounts payable 11,000 Forex gain 12,000 12,000 1,000
11/1 (1.129 x 1,000,000) 1,129,000 11/1 (1.128 x 1,000,000) 1,128,000
12/31 (1.140 x 1,000,000) 1,140,000 11/1 (1.140 x 1,000,000) 1,140,000
Forex loss 11,000 Forex gain 12,000

Accounts payable 1,140,000

Fwd. Contract Receivable 1,140,000

Fwd. C ontract payable 1,124,000

Cash 1,124,000
Page 11 of 23

Problem 7: (Forward Contract – Hedging an Exposed Asset)

On November 1, 20x6, APIC Corporation sold merchandise to Allan Corporation on November 1, 20x6 for U.S.
$50,000. Payment will be received on February 1, 20x7. APIC Corporation entered into forward exchange
contracts to hedge the transaction on November 1, 20x6. The fiscal year-end for APIC Corporation is December
31. The exchange rates on various dates are as follows:
November 1, 20x6 December 31, 20x6 February 1, 20x7
Spot rate P40.00 P40.25 P40.50
30-day forward rate 40.10 40.35 40.55
60-day forward rate 40,20 40.40 40.65
90-day forward rate 40.30 40.45 40.60

1. How much is the ForEx gain or (loss) on December 31, 20x6 with respect to accounts receivable?
A. 2,500 C. (2,500)
B. 12,500 D. (12,500)

2. How much is the ForEx gain or (loss) on December 31, 20x6 with respect to forward contract?
A. 2,500 C. (2,500)
B. 12,500 D. (12,500)

3. How much is the forward contract fair value as of December 31, 20x6?
A. 2,500 C. (7,500)
B. (2,500) D. (10,000)

4. How much is the forward contract fair value as of February 1, 20x7?

A. 2,500 C. (7,500)
B. (2,500) D. (10,000)

5. How much is the net ForEx gain or (loss) on February 1, 20x7?

A. 5,000 C. 7,500
B. (5,000) D. (7,500)

6. How much is the outstanding accounts receivable as of December 31, 20x6?

A. 2,012,500 C. 2,015,000
B. 2,017,500 D. 2,025,000

7. How much is the outstanding peso-receivable as of December 31, 20x6?

A. 2,012,500 C. 2,017,500
B. 2,015,000 D. 2,025,000

8. How much is the Outstanding FC-payable as of December 31, 20x6?

A. 2,012,500 C. 2,017,500
B. 2,015,000 D. 2,025,000

11/1 40.000 40.300

12/31 40.250 40.350
2/1 40.500 40.500

Hedged item Hedging instrument

11/1 Accounts receivable 2,000,000 Fwd. C ontract receivable 2,015,000
Sales 2,000,000 Fwd. C ontract payable 2,015,000
(50,000 x 40) (50,000 x 40.30)

12/31 Accounts receivable 12,500 Forex loss 2,500

Forex gain 12,500 Fwd. C ontract payable 2,500
11/1 (50,000x 40) 2,000,000 11/1 (50,000 x 40.30) 2,015,000
12/31 (50,000 x 40.25) 2,012,500 12/31 (50,000 x 40.35) 2,017,500
Forex gain 12,500 Forex loss 2,500

Fwd. C ontract receivable 2,015,000

Fwd. C ontract payable 2,017,500
Nominal value 2,500
PV factor - cannot determined no discount rate
Fair value 2,500

2/1 Accounts receivable 12,500 Forex loss 7,500 (7,500)

Forex gain 12,500 Fwd. C ontract payable 7,500 12,500 5,000
12/31 (50,000 x 40.25) 2,012,500 12/31 (50,000 x 40.35) 2,017,500
2/1 (50,000 x 40.50) 2,025,000 2/1 (50,000 x 40.50) 2,025,000
Forex gain 12,500 Forex loss 7,500

Fwd. C ontract receivable 2,015,000

Fwd. C ontract payable 2,025,000
Nominal value 10,000
PV factor - cannot determined no discount rate
Fair value 10,000

Fwd. contract payable 2,025,000

Accounts receivable 2,025,000

C ash 2,015,000
Fwd. C ontract receivable 2,015,000
Page 12 of 23

Problem 8: (Forward Contracts – Hedging a Firm Commitment as fair value hedge)

On September 30, 2015, CCC ordered MACHINERY from a Japanese firm. The purchase order is non-cancellable.
The purchase price is 5,000,000 yens with delivery and payment to be on March 31, 2016. On September 30,
2015, CCC entered into forward contract to buy 5,000,000 yens on March 31, 2016. On March 31, 2016, the
MACHINERY was delivered.
9/30/2015 12/31/2015 3/31/2016
Spot rate 0.38 0.42 0.46
Forward rate 0.39 0.44 -

1. The December 31, 2015 profit or (loss), net foreign exchange gain or (loss) (Forward contract and
commitment)?
A. 0 C. 100,000
B. 50,000 D. 250,000

2. The March 31, 2016 profit or (loss), foreign exchange gain or (loss) (Forward contract)?
A. 0 C. 100,000
B. 50,000 D. (100,000)

3. The March 31, 2016, foreign exchange gain or (loss) (on firm commitment), to be presented in OCI?
A. 0 C. 100,000
B. 50,000 D. (100,000)

4. What is the Firm Commitment Account balance as of December 31, 2015?

A. 250,000 Asset C. 350,000 Asset
B. (250,000) Liability D. (350,000) Liability

5. The fair value of the forward contract on December 31, 2015?

A. 0 C. (250,000)
B. 250,000 D. (350,000)
6. What is the value of the equipment on September 30, 2015?
A. 0 C. 1,950,000
B. 1,900,000 D. 2,300,000

7. What is the value of the equipment on March 31, 2016?

A. 0 C. 1,950,000
B. 1,900,000 D. 2,300,000

9/30 0.380 0.390

12/31 0.420 0.440
3/31 0.460 0.460

Hedged item Hedging instrument

9/30 Forward C ontract Receivable 1,950,000
Forward C ontract Payable 1,950,000
(5,000,000 x .390)

12/31 Forex loss 250,000 Forward C ontract Receivable 250,000

Firm C ommitment 250,000 Forex gain 250,000
9/30 (5,000,000 x. 390) 1,950,000
12/31 (5,000,000 x .440) 2,200,000
Forex gain 250,000

Fwd. Contract receivable 2,200,000

Fwd. Contract payable 1,950,000
Nominal value 250,000
PV factor - cannot determined no discount rate
Fair value 250,000

3/31 Forex loss 100,000 Forward C ontract Receivable 100,000

Firm C ommitment 100,000 Forex gain 100,000
12/31 (5,000,000 x .440) - 2,200,000
Equipment 2,300,000 3/31 (5,000,000 x .460) 2,300,000
Accounts payable 2,300,000 Forex gain 100,000
(5,000,000 x .460)

Firm commitment 350,000

Equipment 350,000

Accounts payable 2,300,000

Forward C ontract Receivable 2,300,000

Forward C ontract Payable 1,950,000

C ash 1,950,000
Page 13 of 23

Problem 9: (Forward Contract – Hedging a forecasted transaction as cash flow hedge)

On October 31, 20x5, AAA Corporation ordered equipment from JJJ Firm, a Japanese firm. The purchase is
probable but no binding agreement fixed by the parties. The purchase price is 1,000,000 yens with delivery and
payment to be on January 31, 20x6. On October 31, 20x5, AAA Corporation entered into forward contract to buy
1,000,000 yens on January 31, 20x6. On January 31, 20x6, the equipment was delivered.
10/31/20x5 12/31/20x5 1/31/20x6
Spot rate P0.35 P0.38 P0.45
30-day forward rate 0.38 0.40 0.41
60-day forward rate 0.40 0.42 0.43
90-day forward rate 0.42 0.44 0.44

1. How much is the peso payable as of December 31, 20x5?

A. 380,000 C. 420,000
B. 400,000 D. 450,000

2. The fair value of the forward contract as of October 31, 20x5?

A. 0 C. 30,000
B. (20,000) D. 50,000

3. The fair value of the forward contract as of December 31, 20x5?

A. 0 C. 30,000
B. (20,000) D. 50,000

4. The fair value of the forward contract as of January 31, 20x6?

A. 0 C. 30,000
B. (20,000) D. 50,000

5. The December 31, 20x5, net foreign exchange gain or (loss) (Hedging instrument and item) to be
presented in profit or loss?
A. 0 C. 20,000
B. (20,000) D. 30,000

6. The December 31, 20x5, net foreign exchange gain or (loss) (Hedging instrument and item) to be
presented in OCI?
A. 0 C. 30,000
B. (20,000) D. 50,000

7. The January 31, 20x6, foreign exchange gain or (loss) (Hedging instrument) to be presented in OCI
(statement of comprehensive income)?
A. 20,000 C. 30,000
B. (20,000) D. 50,000

8. The January 31, 20x6, foreign exchange gain or (loss) (Hedge item) to be presented in OCI?
A. 20,000 C. (30,000)
B. (20,000) D. 50,000

9. The January 31, 20x6, net foreign exchange gain or (loss) (Hedge instrument and item to be presented in
OCI?
A. 0 C. (20,000)
B. 20,000 D. 50,000

10. What is the value of the equipment on January 31, 20x6?

A. 380,000 C. 420,000
B. 400,000 D. 450,000
Page 14 of 23

10/31 0.350 0.420

12/31 0.380 0.400
1/31 0.450 0.450

Hedged item Hedging instrument

10/31 Forward contract receivable 420,000
Forward contract payable 420,000
(1,000,000 x .420)

12/31 Forex loss-OCI 20,000

Forward contract receivable 20,000

10/31 (1,000,000 x .420) 420,000

12/31 (1,000,000 x .400) 400,000
Forex loss 20,000

Fwd. Contract receivable 400,000

Fwd. Contract payable 420,000
Nominal value 20,000
PV factor - cannot determined no discount rate
Fair value 20,000

1/31 Equipment 420,000 Forward contract receivable 50,000

Forex gain - OCI 30,000 Forex gain - OC I 50,000
Accounts payable 450,000 12/31 (1,000,000 x .400) 400,000
1/31 (1,000,000 x.450) 450,000
Accounts payable 450,000 Forex gain 50,000
Forward contract receivable 450,000

Forward contract payable 420,000

Cash 420,000

Option Contract

Problem 10: (Call Option – Hedge and Exposed Liability)

On December 1, 2017, Philip Company paid P3,000 to purchase a 90-day call option for 500,000 Thailand Baht.
The option’s purpose is to protect an exposed liability of 500,000 baht relating to a purchase of merchandise
received on December 1, 2017 and to be paid on March 1, 2018.

Relevant rates and market values at different dates are as follows:

12/01/2017 12/31/2017 03/01/2018

Spot rate (market price) P1.20 P1.28 P1.27
Strike price (exercise price) 1.20 1.20 1.20
Fair value of call option P3,000 P42,000 P35,000

1. What is the Forex Contract value-option as of December 31, 2017

A. P3,000
B. P35,000
C. P40,000
D. P42,000

2. What is the Net forex gain or (loss) as of December 31, 2017

A. P3,000
B. P2,000
C. P1,000
D. (P1,000)

3. Net forex gain or (loss) as of March 1, 2018 (expiration date)

A. P2,000
B. (P2,000)
C. P1,000
D. (P1,000)

4. Option’s time value at December 1, 2017

A. P 0
B. P2,000
C. P3,000
D. P40,000

5. Option’s intrinsic value at December 31, 2017

A. P 0
Page 15 of 23

B. P2,000
C. P3,000
D. P40,000

6. Option’s time value at March 1, 2018

A. P 0
B. P2,000
C. P35,000
D. P40,000

7. Option’s intrinsic value at March 1, 2018

A. P 0
B. P2,000
C. P35,000
D. P40,000

12/1/20x7 12/31/20x7 3/1/20x8

Market price 1.20 1.28 1.27
Exercise price 1.20 1.20 1.20
Intrinsic value - 0.08 0.07

FV option IV TV
12/1/20x7 3,000 3,000
12/31/20x7 42,000 40,000 2,000
3/1/20x8 35,000 35,000 -

CURRENT RATE METHOD VS TEMPORAL METHOD

Current Rate Method VS. Temporal Method
 Current Rate Method/Closing Rate Method – translation into the presentation currency ( Translation from
the functional currency to presentation currency) (If the Subsidiary’s foreign operations operate
independently in economic and financial matters – not an integral part to the operation of parent).

 Remeasurement/ Temporal Method – functional currency is the Philippine Peso ( Translation into the
functional currency) (If the subsidiary’s foreign operation is integral part to the operation of parent).

Comparison of the Two Methods

Balance Sheet Current/Closing Rate Method Remeasurement/Temporal Method
Monetary assets and liabilities Current / Closing Rate Current / Closing Rate
(e.g. receivables, payables, cash
and fixed deposits)
Non-monetary items at historical Current / Closing Rate Historical rate
costs (e.g. fixed assets, For subsidiaries that have been
investments at cost, prepaid acquired by the parent, the exchange
items, inventories and intangible rate on the date of acquisition serves
assets) as the historical rate for items that
were acquired before the date of
acquisition of the subsidiary by the
parent.
Non-monetary items at fair value Current/Closing Rate Rate at the date of the revaluation or
(e.g. equity investment and fair value determination.
revalued fixed assets)
Capital stocks and pre-acquisition Historical (or actual ) rate Historical (or actual) rate
retained earnings
Post-acquisition retained earnings Not translated using a single Not translated using a single exchange
exchange rate. This is rate. This is accumulative figure that
accumulative figure that is carried is carried forward from year to year.
forward from year to year.
Translation gains or losses Direct to OCI- Other Taken to Income statement as gains or
Comprehensive Income (e.g. losses; remeasurement gain or loss
Foreign Currency Translation arising from the revaluaiton of a non-
Reserve or the Foreign Currency monetary item is taken to OCI if the
Translation Gain/Loss) revaluation gains or losses are taken
to OCI.
Income Statement Accounts Current/Closing Rate Method Remeasurement/Temporal Method
Sales, purchases, expenses and Historical rate or actual rate; Historical or Actual rate; however, for
income items that result to however, for practical purpose, an practical purpose, an average rate may
outflow or inflow of monetary average rate may be used on the be used.
items assumption that the items are
evenly spread out over the period.
Cost of sales Historical rate or actual rate at the Historical or actual rate at the date
date when inventory is sold or when inventory is sold or average rate
average rate if the cost of sales is if the cost of sales is evenly spread
evenly spread out. out.
Depreciation, amortization and Historical or actual rate at the date Historical rate of original acquisition
any other allocation of non- when the expense is incurred, or (either at the date of purchase for
monetary items average rate if the expense is historical cost items or the date of
incurred evenly throughout the valuation for items carried at fair
Page 16 of 23

Balance Sheet Current/Closing Rate Method Remeasurement/Temporal Method

year. value)
Dividends and other appropriation Historical or Actual Rate Rate at the date of the revaluation or
of profits fair value determination.

Monetary and Non-Monetary Items

Monetary or Current Rate Temporal Method

Nonmonetary? Method Exchange Exchange Rate
Rate
Assets
Cash, demand deposits, and time deposits Monetary Current Current
Marketable securities carried at cost
Equity Securities Nonmonetary
Debt Securities Current Historical
Current Historical
Marketable securities at fair value Nonmonetary Current Current
Accounts and notes receivable and related Monetary Current Current
unearned discount
Allowance for uncollectible accounts and Monetary Current Current
notes
Inventories
Carried at cost Nonmonetary Current Historical
Carried at lower of cost or NRV Current *
* When the books are not maintained in the functional currency and the lower of cost or NRV rule is applied to
inventories, inventories at cost are remeasured using historical rates. Then the historical cost in the functional
currency is compared to NRV in the functional currency.
Prepaid insurance, advertising and rent Nonmonetary Current Historical
Prepaid interest Monetary Current Current
Refundable deposits Monetary Current Current
Property, plant and equipment Nonmonetary Current Historical
Accumulated depreciation on property, plant Nonmonetary Current Historical
and equipment
Equipment Nonmonetary Current Historical
Cash surrender value Monetary Current Current
Patents, trademark, licenses, and formulas Nonmonetary Current Historical
Goodwill Nonmonetary Current Historical
Other Intangible assets Nonmonetary Current Historical
Deferred charges and credits, except Nonmonetary Current Historical
deferred income taxes and policy acquisition
costs for life insurance companies
Deferred income taxes** Nonmonetary Current Current
**PFRIC 7- applying the restatement approach under PAS 29- deferred tax items are considered non-monetary
items that need to be remeasured.
Liabilities
Accounts and notes payable and overdraft Monetary Current Current
Accrued expenses Monetary Current Current
Liability of refundable deposits Monetary Current Current
Non-refundable deposits Nonmonetary Current Historical
Deferred income tax liabilities** Nonmonetary Current Current
**PFRIC 7- applying the restatement approach under PAS 29- deferred tax items are considered non-monetary
items that need to be remeasured.
Deferred/ unearned revenue Nonmonetary Current Historical
Other deferred credits Nonmonetary Current Historical
Bonds payable and other long-term debt Monetary Current Current
Stockholders’ Equity
Common stock Nonmonetary Historical*** Historical
Preferred stock carried at issuance price Nonmonetary Historical*** Historical
Other paid in capital Nonmonetary Historical*** Historical
*** Translation at historical rates is necessary for elimination of reciprocal parent investment and subsidiary equity
accounts. It should be noted that conversion of all asset, liability, and equity accounts at current exchange rates
would obviate the “equity adjustment from translation” component.
Retained earnings (it is a residual amount ) Not be classified as Not translated Not remeasured
monetary or
nonmonetary items
Income statement items related to
monetary items
Sales, purchases expenses and income Average **** Average *****
items that result to outflow or inflow of
monetary items
**** 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 expense
***** Income statement items related to monetary items are transferred or remeasured at weighted average
exchange rates to approximate the exchange rates in existence at the time of the related transactions.
Intercompany dividends are converted at the rate in effect at the time of payment under both the remeasurement
and translation approaches.
Income statement items related to
nonmonetary items
Page 17 of 23

Monetary or Current Rate Temporal Method

Nonmonetary? Method Exchange Exchange Rate
Rate
Cost of goods sold Average **** Historical
Depreciation of property, plant and Average **** Historical
equipment
Amortization of intangible items (Patent, Average **** Historical
etc..)
Amortization of deferred income taxes Average **** Current
Amortization of deferred charges and credits Average **** Historical
Amortization of policy acquisition costs for Average **** Historical
life insurance companies
**** For practical reasons, the average rate is usually used for items whose transactions are numerous and occur
evenly throughout

PROBLEMS

Problem 1 (Current Rate Method/Closing Rate Method) (Translation into the Presentation Currency)
(The foreign currency is the functional currency)

Peake Corporation, a Philippine company, formed a British subsidiary on January 1, 20X5 by investing £450,000 in
exchange for all of the subsidiary’s no-par common stock. The British subsidiary, Searle Corporation, purchased
real property on April 1, 20X5 at a cost of £500,000, with £100,000 allocated to land and £400,000 allocated to a
building. The building is depreciated over a 40-year estimated useful life on a straight-line basis with no salvage
value. The British pound is Searle’s functional currency and its reporting currency. The British economy does not
have high rates of inflation. Exchange rates for the pound on various dates were:
January 01, 20X5 = 1£ = P1.50
April 01, 20X5 = 1£ = P1.51
December 31, 20X5 = 1£ = P1.58
20X5 average rate = 1£ = P1.56

In Pounds
Debits:
Cash £220,000
Accounts receivable 52,000
Inventory 59,000
Building 400,000
Land 100,000
Depreciation expense 7,500
Other expenses 110,000
Cost of goods sold 220,000
Total debits £1,168,500

Credits
Accumulated £7,500
depreciation
Accounts payable 111,000
Common stock 450,000
Retained earnings 0
Equity adjustment 0
Sales revenue 600,000
Total credits £1,168,500

Required: Prepare Searle's:

1. Translation working papers;
2. Translated income statement; and
3. Translated balance sheet.
Page 18 of 23

Year 1 Debit Credit

Assets 823,500 1.58 1,301,130
Liabilities 111,000 1.58 175,380
Common stock 450,000 1.50 675,000
Net income 262,500 1.56 409,500
1,301,130 1,259,880
Cumulative translation adjustment 41,250
1,301,130 1,301,130

Net assets beginning 450,000 1.50 675,000

Issuance of shares
Net income 262,500 1.56 409,500
Dividend
Net assets ending 712,500 1,084,500
Changes in translation adjustment 41,250
712,500 1.58 1,125,750

Problem 2

Continuation of Problem 1 and proceeds forward with Searle’s second year of operations.

Searle Corporation, a British subsidiary of Peake Corporation (a Philippine company) was formed by Peake on
January 1, 20X5 in exchange for all of the subsidiary's common stock. Searle has now ended its second year of
operations on December 31, 20X6. Relevant exchange rates are:
January 01, 20X5 = 1£ = P1.50
December 31, 20X6 = 1£ = P1.65
20X6 average rate = 1£ = P1.63
Searle's adjusted trial balance is presented below for the calendar year 20X6. The amount of equity adjustment
carried over from 20X5 is a credit balance of P41,250 (in pesos).

In Pounds
Debits:
Cash £ 75,000
Accounts receivable 362,000
Inventory 41,000
Building 400,000
Land 100,000
Depreciation expense 10,000
Other expenses 133,000
Cost of goods sold 380,000
Total debits £ 1,501,000

Credits
Accumulated depreciation £ 17,500
Accounts payable 154,750
Common stock 450,000
Retained earnings 262,500
Sales revenue 616,250
Total credits £ 1,501,000
Required: For Searle's second year of operations, prepare the:
1. Translation working papers;
2. Translated income statement; and
3. Translated balance sheet.
Page 19 of 23

Year 2 Debit Credit

Assets 960,500 1.65 1,584,825
Liabilities 154,750 1.65 255,338
Common stock 450,000 1.50 675,000
Retained earnings, beginning 409,500
Net income 93,250 1.63 151,998
1,584,825 1,491,836
Cumulative translation adjustment 92,989
1,584,825 1,584,825

Net assets beginning 712,500 1.58 1,125,750

Issuance of shares
Net income 93,250 1.63 151,998
Dividend
Net assets ending 805,750 1,277,748
Changes in translation adjustment 51,740
805,750 1.65 1,329,488

Beginning 92,989
Ending 41,250
Chnanges 51,739
P1 due to rounding off

Problem 3 (Temporal Method/Remeasurement Method) (Translation into the Functional Currency)

(Philippine Peso is the functional currency)

Similar to Problem 1 except that the exchange rates have been changed and the temporal method is used instead
of the current rate method.

The Pearce Corporation, a Philippine corporation, formed a British subsidiary on January 1, 20X7 by investing
£550,000 in exchange for all of the subsidiary’s no-par common stock. The British subsidiary, Seakam Corporation,
purchased real property on April 1, 20X7 at a cost of £500,000, with £100,000 allocated to land and £400,000
allocated to the building. The building is depreciated over a 40-year estimated useful life on a straight-line basis
with no salvage value. The Philippine Peso is Seakam’s functional currency, but it keeps its records in
pounds. The British economy does not experience high rates of inflation. Exchange rates for the pound on various
dates are:

January 01, 20X7 = 1£ = P1.40

April 01, 20X7 = 1£ = P1.42
December 31, 20X7 = 1£ = P1.45
20X7 average rate = 1£ = P1.44

Seakam's adjusted trial balance is presented below for the year ended December 31, 20X7.

In Pounds
Debits:
Cash £ 200,000
Accounts receivable 72,000
Notes receivable 99,000
Building 400,000
Land 100,000
Depreciation expense 7,500
Other expenses 115,000
Salary expense 208,000
Total debits £ 1,201,500

Credits
Accumulated depreciation £ 7,500
Accounts payable 100,000
Common stock 550,000
Retained earnings 0
Equity adjustment 0
Sales revenue 544,000
Total credits £ 1,201,500

Required: Prepare Seakam's:

1. Translation working papers;
2. Translated income statement; and
3. Translated balance sheet.
Page 20 of 23

Year 1 Debit Credit

Monetary assets (200,000+72,000+99,000) 1.45 537,950
Non-monetary assets (492,500) 1.42 699,350
Monetary liabilities (100,000) 1.45 145,000
Common stock (550,000) 1.40 770,000
Sales (544,000) 1.44 783,360
Depreciation expense (7,500) 1.42 10,650
Other expense (115,000) 1.44 165,600
Salary expense (208,000) 1.44 299,520
1,713,070 1,698,360
Remeasurement gain 14,710
1,713,070 1,713,070

Problem 4:

Continuation of Problem 3 and proceeds forward with Seakam’s second year of operations.

Seakam Corporation, a British subsidiary of Pearce Corporation (a Philippine company) was formed by Pearce on
January 1, 20X7 in exchange for all of the subsidiary's common stock. Seakam has now ended its second year of
operations on December 31, 20X8. Relevant exchange rates are:

January 01, 20X7 = 1£ = P1.40

April 01, 20X7 = 1£ = P1.42
December 31, 20X8 = 1£ = P1.37
20X8 average rate = 1£ = P1.36
Seakam's adjusted trial balance is presented below for the calendar year 20X8.

In
Pounds
Debits:
Cash £ 172,000
Accounts receivable 308,000
Notes receivable 98,000
Building 400,000
Land 100,000
Depreciation expense 10,000
Other expenses 117,000
Salary expense 376,000
Total debits £ 1,581,000

Credits
Accumulated depreciation £ 17,500
Accounts payable 200,000
Common stock 550,000
Retained earnings 213,500
Sales revenue 600,000
Total credits £ 1,581,000

Required: Prepare Seakam's:

1. Translation working papers;
2. Translated income statement; and
3. Translated balance sheet.

Year 2 Debit Credit

Monetary asset 578,000 1.37 791,860
Non-monetary asset 482,500 1.42 685,150
Monetary liabilities 200,000 1.37 274,000
Ordinary shares 550,000 1.40 770,000
Retained earnings, beginning *** 322,300
Sales 600,000 1.36 816,000
Depreciation expense 10,000 1.42 14,200
Other expense 117,000 1.36 159,120
Salary expense 376,000 1.36 511,360
2,161,690 2,182,300
Remeasurement loss 20,610
2,182,300 2,182,300
Page 21 of 23

Problem 5. Indicate the exchange rate to use in translating the FS of foreign operations (e.g., foreign subsidiary)
into the presentation currency of the reporting company (e.g. parent). Choose one from the following rates:
CLOSING RATE AVERAGE RATE HISTORICAL RATE
Non-hyperinflationary Hyperinflationary
Economy Economy
Assets Closing Closing
Liabilities Closing Closing
Shareholder’ Equity Historical Closing
Income and Expenses *Average Closing
* Under PAS 21, income and expenses in income statement are translated at the exchange rate at the date of
transaction or the average rate for the period when this is a reasonable estimation.

Problem 6: Functional Currency is the Currency of a Hyperinflationary Economy

Papay Company operates in a hyperinflationary economy. Its balance sheet at December 31, 20x4, follows:
FC
Cash…………………………………………………….. 420,000
Inventory……………………………………………….. 3,240,000
Property, plant and equipment…………………….. 1,080,000
Total assets…………………………………………… 4,740,000
Current liabilities……………………………………… 840,000
Non-current liabilities…………………………………. 600,000
Total liabilities……………………………………… 1,440,000
Common Stock (issued 20x0)……………………….. 480,000
Retained earnings…………………………………….. 2,820,000
Total stockholder’s equity………………………… 3,300,000
Total liabilities and stockholders’ equity…………… 4,740,000

The general price index and exchange rates of peso to FC are as follows:
Price Index Exchange Rate
20x0……………….. 100 1.50
20x1……………….. 130 1.60
20x2……………….. 150 1.70
20x3……………….. 240 1.80
20x4………………. 300 1.75

The property, plant and equipment were purchased on December 31, 20x2 and there is a six months inventory
held. The noncurrent liabilities were a loan raised on March 31, 20x4.

Required: Prepare restated then translated financial statements.

Functional Currency
Is the Currency of a Hyperinflationary Economy
Price Restated Exchange Translated
FC Index (in FC) Rate (in Pesos)
Cash (M) . . . . . . . . . . . . . . . . . . . . . . 420,000 * 420,000 (C) 1.75 735,000
Inventory (N) . . . . . . . . . . . . . . . . . . . 3,240,000 300/270 3,600,000 (C) 1.75 6,300,000
Property, plant and equipment (N) 1,080,000 300/150 2,160,000 (C) 1.75 3,780,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

Current liabilities (M) . . . . . . . . . . . . 840,000 * 840,000 (C) 1.75 1,470,000

Non-current liabilities (M) . . . . . . . . 600,000 * 600,000 (C) 1.75 1,050,000
Common stock (issued 20x0) (N) . . 480,000 300/100 1,440,000 (C) 1.75 2,520,000
Retained earnings . . . . . . . . . . . . . . 2,820,000 3,300,000 (C) (B/A) 5,775,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

M – monetary; N – non-monetary
C – current rate
B/A – balancing amount
*monetary – no restatement

Net Investment Hedge

Problem 1 (Net Investment Hedge)

Wisdom Corporation of Makati paid P960,000 for a 40% interest in Knowledge Company of Taiwan on January 1,
20X2, when knowledge’s net asset totaled 1,500,000 NT Dollar and the exchange rate for NT Dollar was P1.60. A
summary of changes in Siam’s net assets during 20X2 is as follows:
NT Exchange
Dollar Rates
Net assets, January 1 1,500,000 1.60
Net income for 20X2 300,000 1.55
Dividends paid for 20X2 100,000 1.54

Wisdom Corporation anticipated a strengthening of the Philippine peso against the NT Dollar during the last half of
20X2, and it borrowed 600,000 NT Dollar from a Taiwanese bank for one year at 10% interest on July 1, 20X2 to
hedge its net investment in Knowledge. The loan was made when the exchange rate for NT Dollar was P1.55. The
loan was denominated in NT dollar and the current exchange rate at December 31, 20X2 was P1.50. The other
comprehensive income – translation adjustment in 20X2 is:
Page 22 of 23

Answer: (34,400)

Problem 2: A Philippine-owned foreign subsidiary has the following beginning and ending stockholders’ equity for
20x4:
January 1 December 31
Common Stock………………………………. FC 120,000 FC 140,000
Paid-in capital in excess of par……………. 30,000 40,000
Retained earnings…………………………… 60,000 100,000
The change in common stock resulted from a sale of stock to the parent firm on May 15. The change in retained
earnings resulted from a July 1 dividend of 10,000 FC and net income for 20x4. Various exchange rates were as
follows:
Date 1 FC equal to
January 1, 20x4……………………….. P 1.100
May 15, 20x4…………………………… P 1.120
July 1, 20x4…………………………….. P 1.130
December 31, 20x4……………………. P 1.150
20x4 average…………………………… P 1.125
Required: Compute the 20x4 translation adjustment for the foreign subsidiary.

Beginning-of-year net assets x change in exchange rate during the year:

210,000 x (P1.15 P1.10) P10,500
Net income for 20X1 x (current rate average rate):
50,000 x (P1.15 P1.125) 1,250
Increase in net assets from stock issue x (current rate - historical rate):
30,000 x (P1.15 P1.12) 900
Decrease in assets from dividends (current rate dividend date rate):
(10,000) x (P1.15 P1.13) (200)
P12,450

Foreign Currency Translation

Problem 1: The foreign subsidiary of Delta Corporation has certain balance sheet accounts on December 31,
2016. Information relating to these accounts in Philippine Peso as follows:

Translated at Translated at
CURRENT Rates HISTORICAL Rates
Accounts Receivable 180,000 200,000
Prepaid Insurance 90,000 100,000
Marketable Securities, at cost 65,000 75,000
Inventories 500,000 530,000
Patent 80,000 85,000
Equipment 200,000 220,000
Goodwill 80,000 85,000
TOTAL 1,195,000 1,295,000

1. What total amount should be included in Delta's December 31, 2016 consolidated balance sheet for the
above accounts if the Subsidiary's foreign operations operate independently in economic and financial
matters (or Not integral part to the operation of parent)? (Closing Rate Method under PAS 21)
a. 1,195,000 c. 1,255,000
b. 1,275,000 d. 1,295,000
2. What is the total amount should be included in Delta's December 31, 2016 consolidated balance sheet for
the above accounts if the Subsidiary's foreign operation is integral part to the operation of parent?
(Temporal Method)
a. 1,195,000 c. 1,255,000
b. 1,275,000 d. 1,295,000

Problem 2: A foreign subsidiary of Araneta Jeans Corp. (a Philippine based firm) has certain balance sheet
accounts on December 31, 2016. The functional currency of the subsidiary is US Dollar and currency of record is
the US Dollar (as LCU) and the parent's books are kept in Peso. Information relating to these accounts in Peso
value as follows:
Accounts Receivable 3,700 USD
Inventories 8,400 USD
Prepaid Insurance (acquired on 1/1/2016) 400 USD
Land (purchased on 1/1/14) 400 USD

Exchange rates at various dates:

January 1, 2014 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 LCU (USD): P 40
January 1, 2016 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 LCU (USD): P 48
December 31, 2016 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 LCU (USD): P 50
Average rate for year ended 2016 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 LCU (USD): P 45

3. What amount should be included as total assets on Araneta Jean's balance sheet on December 31, 2016
as the result of the above information applying closing rate method under PAS 21?
a. P 598,200 c. P 770,000
Page 23 of 23

b. P 645,000 d. P 785,000

Problem 3: On January 1, 2016, SMB Company formed a foreign branch. The branch purchased
merchandise at a cost of 720,000 local currency units (LCU) on February 15, 2016. The purchase price was
equivalent to P 180,000 on this date. The branch's inventory at December 31, 2016, consisted solely of
merchandise purchased on February 15, 2016, and amounted to 240,000 LCU. The exchange rate was 6 LCU to P1
on December 31, 2016, and the average rate of exchange was 5 LCU to P1 for 2016. Assume that the LCU is the
functional currency of the branch. In SMB's December 31, 2016 balance sheet, the branch inventory balance of
240,000 LCU should be translated to Philippine Peso at (Closing Rate Method under PAS 21)
a. P 40,000 c. P 60,000
b. P 48,000 d. P 84,000

Income Statement Accounts

Problem 4: A wholly owned subsidiary of Trump, Inc. has certain expense accounts for the year ended
December 31, 2016 stated in local currency units (LCU) as follows:
LCU
Depreciation of equipment (related assets were purchased Jan. 1, 2014) 120,000
Provision for doubtful accounts 80,000
Rent 200,000

The exchange rates at various dates are as follows:

Peso Equivalent of 1 LCU
December 31, 2016 P0.40
Average for the year ended 12/31/16 0.44
January 1, 2014 0.50

1. Assume that the LCU is subsidiary's functional currency and that the charges to the expense accounts occurred
approximately evenly during the year. What total Peso amount should be included in Trump's 2016 consolidated
income statement to reflect these expenses? (Current Rate Method under PAS 21)
a. P160,000 c. P176,000
b. P168,000 d. P183,200

2. The subsidiary's operations were an extension of the parent company's operations, thus, the functional currency
is Peso. What total dollar amount should be included in Trump's income statement to reflect the above expenses
for the year ended December 31, 2016? (Temporal Method)
a. P160,000 c. P176,000
b. P168,000 d. P183,200

Problem 5: Sakuragi Enterprises, a subsidiary of James Enterprises based in Philippines, reported the following
information at the end of its first year of operations (all in yen): assets -- 110,000,000; expenses -- 41,000,000;
liabilities -- 97,500,000; capital stock -- 5,500,000; revenue -- 48,000,000. Relevant exchange rates are as
follows:

On date subsidiary stock was purchased ............................ P .085

Average rate for the year..................................................... .078
At year end........................................................................ .075

As a result of the translation process, what amount is recorded on the financial statements as the translation
adjustment?
a. P 21,000 debit adjustment c. P 21, 000 credit adjustment
b. P 76,000 debit adjustment d. P 76, 000 credit adjustment