SAINT COLUMBAN COLLEGE
College of Business Education
Pagadian City
HANDOUT ASI 2403
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.
4. Forward Rate – Rate for the exchange or delivery at a specified future date predetermined in
a forward contract.
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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2403
MYLENE P. ALFANTA, CPA
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 Non-monetary Items
▪ Cash and Cash Equivalents ▪ Financial Assets at FVTPL
▪ Financial Asset at Amortized Cost ▪ Financial Assets at FVTOCI
▪ Accounts and Notes Receivable ▪ Inventories
▪ Prepaid Insurance, Taxes, Rent, and
▪ Allowance for Doubtful Accounts
Advertising
▪ Pension, Sinking, and other fund
▪ Advances to Employees
consisting of bonds at fair value
▪ Prepaid Interest ▪ Property, Plant, and Equipment
▪ Receivables under Finance Lease ▪ Accumulated Depreciation
▪ Marketable Securities at Cost ▪ Advances to Suppliers
▪ Long Term Receivables ▪ Intangible Assets
▪ Recoverable Special Deposits ▪ Goodwill
▪ Pension, Sinking, and other fund
▪ Advances from Customers
consisting of bonds at amortized cost
▪ Cash Surrender Value ▪ Deferred Revenue
▪ Discount on Bonds Payable ▪ Non-Controlling Interest
▪ Accounts and Notes Payable ▪ Preference Share Capital
▪ Accrued Expenses ▪ Ordinary Share Capital
▪ Cash Dividend Payable ▪ Share Premium
▪ Liability for Returnable Deposits ▪ Biological Asset
▪ Accrued Losses on Firm’s Purchase
▪ Investments in Equity Securities
Commitments
▪ Bonds Payable ▪ Retained Earnings
▪ Obligations under Finance Lease ▪ Warranty Payable
▪ Pension Benefits paid in cash ▪ Derivatives
▪ Provisions settled by delivery of non-
▪ Provisions settled in cash
monetary assets
▪ Loans and Receivables including
allowances
▪ Recoverable Special Deposits
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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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2403
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
3. Acquisition or Disposal of assets 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 rate
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 xx
Cash at Spot Rate 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 Analysis
▪ If Rate Increases = Forex Loss
Import Selling Rate Payable
▪ If Rate Decreases = Forex Gain
▪ If Rate Increases = Forex Gain
Export Buying Rate Receivable
▪ If Rate Decreases = Forex Loss
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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2403
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 Buying Spot Rate Selling Spot Rate
December 1, 2023 P48.50 P49.00
December 16, 2023 P48.90 P50.00
December 31, 2023 P49.50 P51.00
January 15, 2024 P50.00 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 Buying Spot Rate Selling Spot Rate
November 16, 2023 – Receipt of Order P51.50 P52.00
December 16, 2023 – Date of Shipment P52.50 P53.00
December 31, 2023 – Balance Sheet Date P53.50 P53.75
January 15, 2024 – Date of Collection P53.00 P54.00
Requirements:
1. Prepare all journal entries on Smitten Exports 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 Receivable
✓ Merchandise Inventory
PROBLEM 3: On October 1, 2021, Pale Company, a Philippine company, ordered equipment from
Hin Corporation, a Singapore company for 25,000 Singapore Dollars. The terms of the purchase are
FOB Shipping Point which require payment on January 30, 2022. The equipment was shipped and
invoiced on October 10, 2021 and was received by Pale Company on October 15, 2021. On October
25, 2021, Singh Company purchase goods from Pale Company for P100,000 rupees. The terms of
the sale require payment in Indian rupee on January 15, 2022.
The spot rates for Singapore dollars and Indian rupee on the respective dates were:
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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2403
MYLENE P. ALFANTA, CPA
Date Singapore Dollars Indian Rupee
October 01, 2021 P1 = 0.027027 P1 = 1.4706
October 10, 2021 P1 = 0.026316 P1 = 1.4286
October 15, 2021 P1 = 0.026178 P1 = 1.4925
October 25, 2021 P1 = 0.026110 P1 = 1.5385
December 31, 2021 P1 = 0.027100 P1 = 1.3333
January 15, 2022 P1 = 0.026110 P1 = 1.4815
January 30, 2022 P1 = 0.026385 P1 = 1.5000
Requirements:
1. Prepare all the journal entries.
2. Compute for the foreign exchange gain or loss.
PROBLEM 4: Pink Company, a Philippine company, received a promissory note denominated in a
foreign currency from the sales made to US-based customer. On November 16, 2021, Pink Company
sold goods to a Red Company, a US Company for a 90-day, 10% promissory note for $50,000, at a
buying spot rate of $1 = P50.60. On December 31, 2021, the buying spot rate of $1 = P51.00. On
February 14, 2022, the buying spot rate is $1 = P51.20.
Requirements:
1. Prepare all the journal entries.
2. Compute for the foreign exchange gain or loss.
PROBLEM 5:
Eves Incorporated, a Philippine company, issued a promissory note denominated in foreign currency
for the purchase of machine from a supplier in Japan on November 1, 2021 for a 90-day, 12%
promissory note for P1,000,000 yen at a selling rate of 1 yen = P0.50. On December 31, the selling
spot rate is 1 yen = P0.45. On January 30, 2022, the selling spot rate is 1 yen = P0.48.
Requirements:
1. Prepare all the journal entries.
2. Compute for the foreign exchange gain or loss.
PROBLEM 6: 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 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 Buying Spot Rate Selling Spot Rate
September 1, 2023 P38.90 P40.10
December 1, 2023 P40.00 P40.30
December 31, 2023 P40.60 P40.85
February 1, 2024 P40.45 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?
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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2403
MYLENE P. ALFANTA, CPA
PROBLEM 7: 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 Buying Spot Rate Selling Spot Rate
November 1, 2023 P39.90 P40.10
December 1, 2023 P40.00 P40.20
December 31, 2023 P40.60 P40.85
March 2, 2024 P40.40 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 8: 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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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2403
MYLENE P. ALFANTA, CPA
