Accounting For Foreign Currency Transaction PDF

Accounting for Foreign Currency Transaction
Measured versus Denominated

It is useful to have an understanding of these two terms used in accounting of foreign currency
transactions. Assets and liabilities are denominated in one currency if their amount is fixed in terms of
that currency. However, they must be measured (for financial reporting purposes) in another currency.
When a transaction is to be settled by the receipt or payment of a specific currency, the receivable or
payable is said to be denominated in that currency. Regardless of the currency in which a transaction is
denominated, the party to the transaction measures and records the transaction in the currency (local
currency) in which the party is located. For example, a Philippine importer purchases goods on credit
from a U.S exporter who is to be paid in U.S dollars. The transaction is denominated in US dollars ($) but
measured and recorded by the Philippine importer in Philippine pesos (₱). However, the U.S exporter’s
transaction is both denominated and measured in US dollars.
Conversion and Translation

It is important to know the distinction between the conversion and translation of foreign currencies. In
the case of the example above, the Philippine importer converts Philippine pesos on the date of payment
into US dollars at the prevailing rate of exchange.
On the other hand, the assets, liabilities, and operating items of a foreign branch or subsidiary are
translated into Philippine pesos to consolidate them into the financial statements of the Philippine hone
office or parent company. No actual exchange of currencies is involved, only a translation into a single
currency.
Currency Exchange Rate

The exchange rate is the rate in which the currencies of two countries are exchanged at a particular time.
The buying and selling of foreign currencies as though they were commodities result in variation in the
exchange rate between the currencies of two countries. For example, a daily newspaper might quote
exchange rates for the US dollars ($) as follows, based on the prior day’s transactions in the Philippines
Stock Exchange:
ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS

A transaction that requires settlement or payment in a foreign currency is called a foreign currency
transaction. A transaction with a foreign company that is to be pain in Philippine peso is not a foreign
currency transaction to a Philippine company, because the amount of peso to be received or paid to
settle the account is fixed and is not affected by subsequent changes in the exchange rate. Thus, a
transaction of a Philippine company with a foreign company to be settled in pesos is accounted for in the
same manner s if it transaction had been with a company in the Philippines.
Often, however, the transaction described is negotiated and settled in terms of the foreign company’s
local currency unit. In such cases, the Philippine company must account for the transaction denominated
in foreign currency in terms of Philippines pesos. This accounting, described as foreign currency
translation, is accomplished by applying the appropriate exchange rate between the foreign currency
and the Philippine pesos.
Some of the more common foreign currency transactions are:

1. Importing and exporting goods on credit with the receivable or payable denominated in foreign
currency.
2. Borrowing or lending denominated in foreign currency.
3. Entering into a forward exchange contract to buy and sell foreign currency.
Importing and Exporting of Goods

This is the most common form of foreign currency transaction. In each unsettled foreign currency
transaction, there are three (3) issues of concern to the accountant. These issues and the appropriate
exchange rate to be used in translating accounts denominated in units of foreign currency (except for
forward exchange contracts) are as follows:
1. At the date the transaction is first recognized, Each asset, liability, revenue, gain or loss arising from
the transaction is measured and recorded in Philippine pesos by multiplying the units of foreign exchange
by the closing exchange rate, that is, the spot rate in effect on a given date.
2. At each balance sheet date that occurs between the transaction date and the settlement date.
Recorded balances that are denominated in a foreign currency are adjusted to reflect the closing
exchange rate in effect at the date o the statement of financial position. Foreign exchange (forex) gain or
loss is recognized for the difference in the exchange rate between the transaction date and the balance
sheet date.
3. At the settlement date. In the case of a foreign currency payable, a Philippine company must convert
Philippine pesos into foreign currency units to settle the account, while foreign currency units received to
settle a foreign currency receivable will be converted into pesos. Although translation is not required, a
foreign exchange (forex) gain or loss is recognized if the amount of peso paid or received upon
conversion does not equal the carrying value of the related payable or receivable.
Marginal Deposit on Letter of Credit (LC). Some banks may require importers to make a marginal deposit
upon opening of LC. As an example, let us assume that BPI required Manila Corporation to give a 25%
marginal deposit on the $10,000 letter of credit. The exchange rate given by the bank on November 15,
2017 is P50.00 to US$1. The entry to record this transaction is:
2017
Nov. 15: Marginal deposit on LC 125,000
Cash 125,000
To record marginal cost on LC
25% x ($10,000 x P50.00).
On the date of settlement of the LC, this marginal deposit is applied as payments.
Two- Transaction Perspective and One- Transaction Perspective
The journal entries above reflect the two-transaction perspective for recording foreign trade transaction.
Under the concept, Manila’s transaction with the US supplier basically were two-separate transactions.
One transaction was the purchase of the merchandise; the second transaction was the acquisition of the
foreign currency required to pay the LC for the merchandise purchased.
Under the one-transaction perspective, Manila’s total foreign exchange loss of P4,000 on its purchase
from the US supplier should be applied to increase the cost of merchandise purchased. Under the
approach, Manila would not prepare a journal entry on December 31, 2016, but would prepare the
following entry on January 10, 2017.
2017
Jan. 10: Acceptance payable 505,000
Purchases 4,000
Cash 509,000
To record payment of LC for P509,000
($10,000 x P50.90), and increase purchase for resulting forex loss.
In effect, the one-transaction perspective considers the original amount recorded for the purchase of
foreign merchandise as an estimate, subject to adjustment when the exact cash outlay required for the
purchase is known.
The authors supports the two-transaction perspective for foreign trade transactions and for loans
receivable and payable denominated in foreign currency.
Foreign Exchange (forex) Gains and Losses
From the foregoing illustrations, it shows that increases in the selling spot rate for a foreign currency
required by a Philippine Company to settle a liability denominated in that currency generate foreign
exchange (forex) losses to the company because more Philippine pesos are required to obtain the foreign
currency. Conversely, decreases in the selling spot rate produce foreign exchange (forex) gains to the
company because fewer Philippine pesos are required to obtain the foreign currency. In contrast,
increases in the buying spot rate for a foreign currency to be received by a Philippine company in
settlement of receivable denominated in that currency generate foreign exchange (forex) gains to the
company; decreases in the buying spot rate produce foreign exchange (forex) losses. These relationships
are summarized below:
Statement of FP Effect on balance Statement
account affected reported of CI effect
Increase in exchange rate:
Importing transaction Payable Increase Loss
Exporting transaction Receivable Decrease Gain
Decrease in exchange rate:

Importing transaction Payable Decease Gain
Exporting transaction Receivable Decrease Loss
Foreign exchange gains and losses are included in the measurement of net income for the accounting
period in which the exchange rate (spot rate) changes (PAS 21).

Accounting For Foreign Currency Transaction PDF

Uploaded by

Copyright:

Available Formats

Accounting For Foreign Currency Transaction PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting For Foreign Currency Transaction PDF

Uploaded by

Copyright:

Available Formats

Accounting for Foreign Currency Transaction

Measured versus Denominated

Conversion and Translation

Currency Exchange Rate

ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS

Some of the more common foreign currency transactions are:

Importing and Exporting of Goods

Two- Transaction Perspective and One- Transaction Perspective

Foreign Exchange (forex) Gains and Losses

Decrease in exchange rate:

You might also like