Afar 2 Module CH 13
Afar 2 Module CH 13
Afar 2 Module CH 13
B. DEVELOPMENTAL ACTIVITIES
INTRODUCTION
Definition of Terms
Closing rate is the spot exchange rate at the end of the reporting period.
Exchange difference is the difference resulting from translating a given number of units of one currency into
another currency at different exchange rates.
Exchange rate is the ratio of exchange for two currencies.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Foreign currency is a currency other than the functional currency of the entity.
Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting entity,
the activities of which are based or conducted in a country or currency other than those of the reporting
entity.
Functional currency is the currency of the primary economic environment in which the entity operates.
A group is a parent and all its subsidiaries.
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.
Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that
operation.
Presentation currency is the currency in which the financial statements are presented.
Spot exchange rate is the exchange rate for immediate delivery
ACCOUNTING PROCEDURES
1. Receive foreign entity’s financial statements, which are reported in foreign currency.
2. Translate the statements in foreign currency to Philippines peso. Each foreign entity account/balance must
be individually translated into the its Philippine peso equivalent, as follows:
account in foreign appropriate exchange account in Philippine
currency units x rate = peso equivalent value
3. Consolidate the translated foreign entity’s accounts, which are now stated in Philippine Peso, with the
Philippine company’s accounts.
PAS 21 specifies two approaches to translations and the approach to be used depends on whether the functional
currency (is not the currency of a hyperinflationary economy) of the foreign subsidiary is the same as the
presentation currency and whether the books are kept in the functional currency:
Method 1: Current Rate Method (FCPC/Closing Rate Method/ Net Investment Method/ Translated Method)
Translation from Functional Currency to Presentation Currency
This method is used on the following basis:
o Foreign operations operates independently in economic and financial matters (or not an integral
part to the operations of the parent)
o Functional currency (is not the presentation currency) should be the LCU (local currency unit –
currency of the country in which the subsidiary operates) or a third country currency.
o The functional currency is not the currency of hyperinflationary economy.
The main features of the current rate method:
o Assets and liabilities both monetary and non-monetary are translated at current rate on the date of
the balance sheet.
o Stockholder’s equity account are translated using historical rates in effect at the time equities were
first recognized (date of investment) in the foreign entity’s accounting records, except:
Beginning retained earnings is set equal to the ending balance of last year.
Dividends – historical rate on the date of declaration, otherwise, date of payment.
o Revenue and expense of foreign operation are translated at the dates of transactions, i.e. actual or
spot rates (historical rates). 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 expenses, but, if the exchange rates fluctuate significantly, the use of
average for a period us inappropriate.
o Translation Gain or Losses are taken to Other Comprehensive Income until the disposal of the
foreign operation, when they are included in profit or loss.
Translation into the Functional Currency/ Remeasurement of Foreign Currency Financial Statements to the
Functional Currency
This method is used on the following basis:
o Foreign operation is integrated with parent’s operation.
o Functional currency should be the parent’s currency/ presentation or reporting currency.
The main features of the temporal method are as follows:
o Monetary assets and liabilities shall be translated (remeasured) using closing rate.
o Non-monetary items at historical cost or carried at past exchange price shall be translated
(remeasured) using the exchange rate at the date of the transaction (historical rate)
o Non-monetary items at fair value or at current future exchange prices shall be translated
(remeasured) using the exchange rate at the date of the revaluation or fair value determination.
o Stockholders’ equity accounts are translated (or remeasured) using historical rates in effect at the
time equity were first recognized (date of investment) in the foreign entity’s accounting records,
except:
Beginning retained earnings is set equal to the ending balance of last year.
Dividends – historical rate on the date of declaration, otherwise, date of payment.
o Income statement items:
Related to non-monetary items shall be translated (or remeasured) using historical rate
(either at the date of purchase for historical cost items or the date of valuation for items
carried at fair value)
Related to monetary items shall be translated (remeasured) using actual rate (historical
rate); however, for practical reasons, an average rate may be used.
o Remasurement Gains or Losses should be reported as profit or loss for the period; remeasurement
gain or loss arising from revaluation of non-monetary item is taken to Other Comprehensive
Income if the revalution gains or losses are taken to Other Comprehensive Income.
ILLUSTRATION
Assume that on January 2, 2020, P Company, a Philippine based company, acquired for US$2,400,000 on 80%
interest in S Company maintains its books in US dollars and they are in conformity with GAAP in the Philippines
(parent’s functional and presentation currency is the peso). S Co.’s financial statements are prepared in the local
currency unit (the foreign currency unit – dollars).
Sales 3,624,000
Cost of Goods Sold 2,220,000
Depreciation expese 120,000
Other Expenses 786,000
Income tax expense 98,400
Retained Earnings, 1/1/20 576,000
Dividends declared, 360,000
9/1/20 Cash 1,116,000
Accounts Receivable, 729,600
net Inventory (FIFO) 996,000
Land 600,000
Building, net 780,000
equipmen, net 516,000
Accounts payable 768,000
Short-term notes payable 762,000
Bonds payable 1,080,000
Common stock, P10 par 1,152,000
Paid in capital in excess of par 360,000
CASE 1: Functional Currency is the Local Currency Unit (US Dollars) – Current Rate Method
Balance Sheet
Cash 1,116,000 (C) 40.25 44,919,000
Accounts Receivable, net 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 (C) 40.25 40,089,000
Land 600,000 (C) 40.25 24,150,000
Building, net 780,000 (C) 40.25 31,395,000
equipmen, net 516,000 (C) 40.25 20,769,000
Total 4,737,600 190,688,400
CASE 2: Translation into the Functional Currency (Philippines Peso) – Temporal Method
Adjusted Trial
Combined Statement of Income and Adjusted Trial Translation Balance
Retained Earnings Balance ($) Exchange Rate (Pesos)
Sales 3,624,000 (A) 40.20 145,684,800
Less:
Cost of Goods Sold 2,220,000 Schedule 89,041,680
Depreciation expese 120,000 (H) 40.00 4,800,000
Other Expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Net income before Remeasurement Loss 399,600 16,290,240
Remeasurement Loss -debit - Squeeze242,220
Net income to Retaine earnings 399,600 16,048,020
Retained Earnings, 1/1/20 576,000 40.00 23,040,000
total 975,600 39,330,240
Less: Dividends Declared, 9/1/20 360,000 (H) 40.10 14,436,000
Retained Earnings, 12/31/20 615,600 from below24,6 52,020
Balance Sheet
Cash 1,116,000 (C) 40.25 44,919,000
Accounts Receivable, net 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 Schedule 40,059,120
Land 600,000 (H) 40.00 24,000,000
Building, net 780,000 (H) 40.00 31,200,000
equipmen, net 516,000 (H) 40.00 20,640,000
Total 4,737,600 190,184,520
PAS 21 provides that any goodwill arising on the acquisition of foreign operation and any fair value adjustments to
the carrying amounts of assets and liabilities arising from that acquisition of foreign operation shall be treated as
assets and liabilities of that foreign operation.
Illustration: VVL Corporation, whose functional currency is the Philippines peso, acquired the entire common stock of
JK Company, a Japanese company on December 31, 2020 at a cost of P2,000,000. At the date of acquisition, JK
Co.’s paid up capital and retained earnings were 3,000,000 yen and 5,000,000 respectively. The assets and
liabilities or JK Co. at the date of acquisition by VVL Corp. approximated their fair values except for building that was
undervalued by 100,000 yen. Deferred tax liability on the undervalued building was 20,000 yen. The exchange rate
on December 31,2020 was P 0.50 = 1 yen.
Journal Entries:
PAS 29 provides that the financial statements of an entity whose functional currency is the currency of a
hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall
be stated in terms of the measuring unit current at the end of the reporting period.
Restate-Translate Approach
This approach requires that firstly, financial statement should be restated. Secondly, these statements are
translated.
Restatement is made by applying a general price index.
o Monetary items are not restated that are already stated at measuring unit at the balance sheet
date are not restated.
o Assets and liabilities linked by agreement to changes in prices should be adjusted in accordance
with the agreement.
o All other asset and liabilities are non-monetary. Some non-monetary items are carried at amounts
current at the balance sheet date, such as net realizable value and market value, so they are not
restated. All other non-monetary assets and liabilities are restated.
o All items in the income statement are expressed in terms of the measuring unit current at the
balance sheet date. Therefore, all amounts need to be restated by applying the change in general
price index from the dates when the items of income and expenses were initially recorded in the
financial statements.
o A gain or loss on the net monetary position is included in net income. It should be disclosed
separately.
For an entity whose functional currency is the currency of a hyperinflationary economy, and for which the
comparatives amount are translated into the currency of a different hyperinflationary shall be translated into
a different presentation currency using the following procedures:
o All amounts shall be translated at the closing rate at the date of the most recent balance sheet,
except that
o When amount are translated into the currency of a non-hyperinflationary economy, comparative
amounts shall be those that were presented in the prior year financial statements.
Illustration: VVL Co. operates in a hyperinflationary economy. Its balance sheet at December 31, 2020, follows:
FC
Cash 350,000
Inventory 2,700,000
Property, plant and equipment 9000
Total Assets 3,950,000
The General Price Index and exchange rates of peso to FC are as follows:
Price Index Exchange rate
2016 100 100
2017 130 130
2018 150 150
2019 240 240
2020 300 300
The property and equipment were purchase on December 31, 2018 and there is a six-month inventory held. The
non- current liabilities were a loan raised on March 31, 2020.
Restate-Translate Approach:
When an economy ceases to be hyperinflationary and an entity discontinues the preparation and presentation of
financial statements prepared in accordance with this Standard, it shall treat the amounts expressed in the
measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its
subsequent financial statements. The entity must disclosed the fact that the financial statements have been restated,
the price index used for restatement and whether the financial statement are prepared on the basis of historical cost
or current cost.
Paragraph 6.5.13 of PFRS 9 provides that hedges of a net investment in a foreign operation, including a
hedge of a monetary item that is accounted for as part of the net investment shall be accounted for similarly
to cash flow hedges:
o the portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge shall be recognised in other comprehensive income; and
o the ineffective portion shall be recognised in profit or loss.
The cumulative gain or loss on the hedging instrument relating to the effective portion of the hedge that has
been accumulated in the foreign currency translation reserve shall be reclassified from equity to profit or
loss as a reclassification adjustment on the disposal or partial disposal of the foreign operation.
Illustration:
Assume that VVL Corporation, a Philippine corporation has 30% equity investment in Hongkong company, JK Inc.
On December 31, 2020, the balance in VVL’s investment in JK account is P3,120,000, equals to 30% of JK’s net
asset of 2,000,000 Hkg$ times a P5.20 year end exchange rate. On this date VVL has no translation adjustment
balance relative to its investment in JK. To hedge its net investments in JK, VVL borrows 500,000 Hkg$ for 1 year at
12% interest on January 1, 2021 at a spot rate of P5.20. The loan is denominated in Hkg$ with principal and interest
payable on January 1, 2022.
January 1, 2021
Cash 2,600,000
Loans Payable2,600,000
Assume that on November 2, 2021, JK declares and pays 100,000 Hkg$ dividend, when the spot rate is P5.35. On
December 31, JK reports net income of 400,000 Hkg$. The weighted average exchange rate for the year is P5.30
and the closing exchange rate for December 31 is P5.40.
November 2, 2021
Cash 160,500
Investment in JK (100k Hkg$ x P5.35x 30%) 160,500
January 1, 2022
Loans Payable 2,700,000
Accrued Interest Payable 324,000
Cash (500k Hkg$ x P5.40 3,024,000
spot rate)
PAS 21 provides that on the disposal of a foreign operation, the cumulative amount of the exchange differences
relating to that foreign operation, recognised in other comprehensive income and accumulated in the separate
component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the
gain or loss on disposal is recognised.
C. CLOSURE ACTIVITIES
Problem 1: Certain balance sheet accounts of a foreign subsidiary of Parker company at 12-31-20 have been restated
into pesos as follows:
Current Rates Historical Rates
Cash 47,500 45,000
Account Receivables 95,000 90,000
Inventory, at market 76,000 72,000
Land 57,000 54,000
Equipment 142,500 135,000
Total 418,000 396,000
a) Assuming the functional currency of the subsidiary is the peso. What total should be included in Parker’s
consolidated balance sheet at 12-31-20 for the above items?
b) Assuming the functional currency of the subsidiary is the local currency. What total should be included in
Parker’s consolidated balance sheet at 12-31-20 for the above items?
Problem 2: CC Corp. owns a subsidiary in Japan whose balance sheet in Japanese Yen for the last years follow:
December 31, 2020 December 31, 2021
Assets
Cash and Cash equivalents ¥ 30,000 ¥ 25,000
Receivables 122,500 147,500
Inventory 160,000 170,000
Property and Equipment, net 255,000 230,000
Total Assets ¥ 567,500 ¥ 572,500
Liabilities and Equity
Accounts Payable ¥ 55,000 ¥ 75,000
Long-term debt 322,500 285,000
Common stock 115,000 115,000
Retained earnings 75,000 97,500
Total Liabilities and Equity ¥ 567,500 ¥ 572,500
CC formed the subsidiary on January 1, 2020. Income of the subsidiary was earned evenly throughout the years
and the subsidiary declared dividends worth ¥15,000 on September 12, 2020 and none were declared during 2019.
How much is the cumulative translation adjustment for 2021?
Problem 1: The following are taken from the records of EIB Imports Company, a foreign subsidiary in new Zealand,
NZ Dollar
Total assets 12/31/20 146,000
Total liabilities 12/31/20 45,000
Common Stock 12/31/20 60,000
Retained earnings 01/01/20 29,000
Net Income 2020 15,000
Dividends declared 12/31/20 3,000
Exchange rates:
Current rate P10
Historical rate 11
Weighted Average 12
What amount of Cumulative Translation Adjustments is to be reported in the Consolidated Statement of Financial
Position on 12/31/20?
Problem 3: Abercrombie Co., a Phil firm, formed a foreign company in 2014 by purchasing the common stock of the
newly formed Dolce Inc. the functional currency of Dolce is the foreign currency (FC) During heir first three years.
Dolce experienced the following activity in retained earnings:
20x19 net loss 100,000 FCs
2020 net income 200,000 FCs
January 1 2021 Dividend 50,000 FCs
2021 net income 75,000 FCs
The following exchange rates were given:
Date 1FC equal to
12-31-19 P0.20
12-31-20 P0.22
Average 2020 P0.215
01-01-21 P0.245
Average 2020 P0.24
12-31-21 P0.26
Average 2021 P0.25
Using the current rate method, what is the translated 12-31-21 balance of the retained earnings for Dolce Inc?
Problem 4: A Phil l owned foreign subsidiary has the following beginning and ending stockholders equity for 2020:
January 1 December 31
Common Stock 120,000 FC 140,000 FC
Paid-in Capital in excess of par 30,000 40,000
Retained Earnings 60,000 100,000
210,000 280,000
The change in common stock resulted from a sale of stock to the parent firm on May 15. The changes in retained
earnings resulted from a July 1 dividend of 10,000 FC, and net income for 2020. Various exchange rates were as
follows:
Date 1FC equal to
January 1, 2020 P1.10
May 15, 2020 P1.12
July 1, 2020 P1.13
December 31, 2020 P1.15
2020 average P1.125
How much the 2020 translation adjustment for the foreign subsidiary?
Problem 5: XXX a Philippine company acquired 100% of the common stock of BB a Thailand company on January
1, 2020, for P402,000. BB subsidiary’s net income amounted to 300,000 baht on the date of acquisition. On the
same date, the book values of its identifiable assets and liabilities approximated their fair values. On December 31,
2020 BB company’s subsidiary adjusted trial balance, translated Phil. Pesos, contained P12,000 more debits than
credits. BB company reported net income of 25,000 baht for 2020 and paid a cash dividend of 5,000 baht on
November 30, 2020. Included in BB subsidiary’s income statement was depreciation expense of 2,500 baht. XXX
uses the basic equity method of accounting for its in the BB subsidiary and determined goodwill in the first year and
had an impairment loss of 10% of its initial amount. Exchange rate at various dates during 2020 follows:
January 1 1 baht = P1.20
November 30 1 baht = P1.30
December 31 1 baht = P1.32
Average for 2020 1 baht = P1.24
On the consolidated statement 0f the financial position of XXX company as of December 31, 2020, what amount
should be reported for the goodwill acquired on January 1, 2020?
Problem 6: M company is a subsidiary of N Company and is located in a foreign country, Chile where the currency is
the foreign currency (FC). Data on M Company’s inventory and purchases are as follows:
Inventory, January 1, 2020 500,000 FC
Purchases during 2020 1,000,000 FC
Inventory 400,000 FC
The beginning inventory was acquired during the fourth quarter of 2020, and the ending inventory was acquired
during the fourth quarter of 2020. Purchases were made evenly over the year. Exchange rates were as follows:
The translation of cost of goods sold for 2020, assuming that the currency of a third country is the functional currency
is
Problem 7: PPP CO. operates in a hyperinflationary economy. Its balance sheet at 12-31-2020 follows:
Assets Baht (‘000)
Property, plant and equipment 900
Inventory 2,700
Cash 350
Share Capital (issued 2007) 400
Retained Earnings 2 350
Non-current liabilities Current liabilities 500
700
operty plant and equipment was purchased on 12-31-18, and there is a six months’ inventory held. The no- current liabilities were a loan raised on march 31
ed:
uch is the total assets after adjusting for hyperinflation?
uch is the Retained Earnings on 12-31-20? Assuming the following exchange rates:
December 31
2016 1.20
2017 1.24
2018 1.27
2019 1.50
2020 1.75
Functional Currency
is NOT the Currency Functional
of Hyperinflationary Currency is the
Economy (PAS 21: Currency of a
20-40) Hyperinflationary
Economy
Currency of a Third
Country ( for
example Japanese
(2) Then Translate Yen)
(1) Remeasure first
V. EVALUATION
END OF CHAPTER 13