THE EFFECTS OF CHANGES IN

FOREIGN EXCHANGE RATES

 OVERVIEW
 DEFINITION OF TERMS
 INITIAL RECOGNITION
 MEASUREMENT AT REPORTING DATE
 RECOGNITION OF EXCHANGE DIFFERENCE OF MONETARY ITEMS
 RECOGNITION OF EXCHANGE DIFFERENCE OF NON-MONETARY ITEMS
 ACCOUNTING FOR CHANGE IN FUNCTIONAL CURRENCY
 ACCOUNTING FOR TRANSLATION OF FINANCIAL STATEMENTS TO A PRESENTATION
CURRENCY
 DISCLOSURES AND PRESENTATION
 ILLUSTRATIVE ACCOUNTING ENTRIES
OVERVIEW
• THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES outlines
how to account for foreign currency transactions and operations in
financial statements, and also how to translate financial statements
into a presentation currency. An entity is required to determine a
functional currency based on the primary economic environment in
which it operates and generally records foreign currency transactions
using the spot conversion rate to that functional currency on the date
of the transaction.
DEFINITION OF TERMS
Spot exchange rate – the exchange rate for immediate delivery.
Closing rate – the spot exchange rate at the reporting date.
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 – the currency other than the functional currency of
the entity.
Functional Currency – the currency of the primary economic
environment in which the entity operates.
Foreign Currency Transactions – are transactions that are denominated
and require settlement in foreign currency, including transactions arising
when an entity:
• Buys or sells goods or services whose price is denominated in a foreign currency
• Borrows or lends funds when the amounts payable or receivable are denominated in
a foreign currency
• Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated
in a foreign currency
Monetary items – are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.
Non-Monetary items – items which essential feature is the absence of a
right to receive (or an obligation to deliver) a fixed or determinable number
of units of currency.
INITIAL RECOGNITION
• A foreign currency transaction shall be recorded, on initial recognition
in the functional currency, by applying to the foreign currency amount
the spot exchange rate between the functional currency and the
foreign currency at the date of the transaction.
• For practical reasons, a rate that approximates the actual rate at the
date of the transaction is often used
Example
An average rate for a week or a month might be used for all
transactions in each foreign currency occurring during that
period. However, if exchange rates fluctuate significantly, the use
of the average rate for a period is inappropriate.
MEASUREMENT AT REPORTING DATE
At each reporting date:
Foreign currency monetary items shall be translated using the closing
rate
Non-monetary items that are measured in terms of historical cost in a
foreign currency shall be translated using the exchange rate at the
date of the transaction
Non-monetary items that are measured at fair value in a foreign
currency shall be translated using the exchange rates at the date
when the fair value was determined.
RECOGNITION OF EXCHANGE DIFFERENCE OF
MONETARY ITEMS
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 surplus or deficit in the period in which they
arise.
RECOGNITION OF EXCHANGE DIFFERENCE OF
NON-MONETARY ITEMS
• When a gain or loss on a nonmonetary item is recognized directly in
net assets/equity, any exchange component of that gain or loss shall
be recognized directly in net assets/equity.
• When a gain or loss on a nonmonetary item is recognized in surplus
or deficit, any exchange component of that gain or loss shall be
recognized in surplus or deficit
ACCOUNTING FOR CHANGE IN FUNCTIONAL
CURRENCY
• The entity shall apply the translation procedures applicable to the
new functional currency prospectively from the date of the change.
The entity translates all items into the new functional currency using
the exchange rate at the date of the change. The resulting translated
amounts for nonmonetary items are treated as their historical cost.
The functional currency can only be changed if there are
modifications to the underlying transactions, events, and conditions
that are relevant to the entity.
• When there is a change in an entity’s functional currency, the entity
shall apply the translation procedures applicable to the new
functional currency prospectively from the date of the change.
• The effect of a change in functional currency is accounted for
prospectively. In other words, an entity translates all items into the
new functional currency using the exchange rate at the date of the
change. The resulting translated amounts for nonmonetary items are
treated as their historical cost. Exchange differences arising from the
translation of a foreign operation previously classified in net
assets/equity are not recognized in surplus or deficit until the disposal
of the operation.
• An entity’s functional currency reflects the underlying transactions,
events, and conditions that are relevant to it. Once determined, the
functional currency is not changed unless there is a change in those
underlying transactions, events, and conditions.
ACCOUNTING FOR TRANSLATION OF FINANCIAL
STATEMENTS TO A PRESENTATION CURRENCY
The financial performance and financial position of an entity shall be
translated into a different presentation currency using the following
procedures
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
 Revenue and expenses for each statement of financial performance
shall be translated at exchange rates at the dates of the transactions
c. All resulting exchange differences shall be recognized as a separate
component of net assets/equity.
DISCLOSURES AND PRESENTATION

The entity shall disclose:

The amount of exchange differences recognized in surplus or deficit;
Net exchange differences recognized and accumulated in a separate
component of net assets/equity, and a reconciliation of the amount
of such exchange differences at the beginning and end of the period.
ILLUSTRATIVE ACCOUNTING ENTRIES
The illustrative accounting entries at initial recognition, at reporting
date and settlement are as follows:

Example
On June 2, 2014, the BTr received credit advice amounting to
$1,000,000 from the BSP for loan received from WB for the
rehabilitation of roads in provinces affected by calamities. The loan is
payable within 30 years. Exchange rate at the transaction date is
P46:$1.
 At initial recognition:

To recognize the loan received from World Bank

 At the reporting date:
Assume that at year-end (reporting date) the exchange rate is P47:$1.

ACCOUNT TITLE ACCOUNT CODE DEBIT CREDIT

Loss on Foreign 50504010 P1,000,000

Exchange
Loans Payable-Foreign 20102050 P1,000,000

To recognize the change in the foreign exchange rate at reporting date

(P47 x $1,000,000) – P46,000,000 = P1,000,000
 At the settlement date:
Assume that payment of 1st installment is on June 30, 2013 of $33,333.
As at that date, the exchange rate is P45:$1.

ACCOUNT TITLE ACCOUNT CODE DEBIT CREDIT

Loans Payable-Foreign 20102050 P1,566,666.67

Cash in Bank-Foreign
Currency, Bangko 10103010 P1,500,000.00
Sentral ng Pilipinas

Gain on Foreign
Exchange (FOREX) 40501010 66,666.67

To recognize the first installment payment

(P47 x $ 33,333.33) – (P45 x $33,333.33) = P1,500,000