PAS 21 - the effects of changes in foreign exchange rates

• What Philippine accounting standard prescribes the accounting for foreign activities and the translation of financial statements into a presentation currency?

  PAS 21
• Two ways of conducting foreign activities

  1. FOREIGN CURRENCY TRANSACTIONS - transactions to be settled in a foreign currency. These transactions need to be translated into Philippine peso before they can be recorded into the book of accounts
  2. FOREIGN OPERATIONS - overseas branch where they normally maintain their records in a foreign currency where they operate. Those financial statements needs to be translated to peso before they can be combined with the home office's financial statements
• PAS 21 requires the entity to determine and disclose its functional currency
• What do you call to the currency of the primary economic environment in which the entity operates?

  functional currency
• Functional currency is the currency in which the entity's cashflow are normally dominated into and is not necessary the currency of the country where the entity is based
• The factors an entity considers when determining its functional currency

  1. the currency that mainly influences the entity's sale prices and cost of goods and services
  2. the currency in which the cashflows from financing activities and operating activities are usually generated and retained
• additional factors to be considered are;

  1. whether the foreign operation is essentially an extension of the entity
  2. the proportion of the foreign operation's transaction with the entity
  3. and the nature of the foreign operation's cash flow in relation to the entity
• a foreign currency transaction is initially recognized by translating foreign currency amount into the functional currency using the spot exchange rate at the date of the transaction
• spot exchange rate is the current exchange rate on a given date
• subsequent measurement

  A) closing rate

  B) historical cost

  C) fair value

  D) fair value was

  
• What do you call to the difference resulting from translating a given number of units of one currency into another currency at different exchange rates?

  exchange difference
• Exhange differences arising from settling or translating are recognized as;

  1. if monetary items - profit or loss
  2. if non monetary items;
  3. if the gain or loss is recognized in OCI, the exchange component is also recognized in OCI
  4. if the gain or loss is recognized in profit or loss, the exchange component is also recognized in profit or loss
• an entity is required to present its financial statements using its functional currency. However, whenever needed, the entity may translate its financial statements into any presentation currency
• translation of financial statements