CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Lesson 3: PAS 16 – Property, Plant and Equipment

PAS 19 – Employee Benefits
PAS 20 - Accounting for Government Grants and Disclosure of Government
Assistance
PAS 21 - The Effects of Changes in Foreign Exchange Rates

Lesson Objectives:

1. State the recognition criteria, initial measurement, and subsequent measurement of PPE
and apply the principles of PAS 16 in basic computations of a PPE’s cost, depreciation,
carrying amount, and revaluation surplus as well as the gain or loss on its disposal.

2. Differentiate between the four classifications of employee benefits under PAS 19; state
the timing of the recognition of employee benefits; differentiate between a defined
contribution plan and a defined benefit plan.

3. Discuss the accounting and disclosure of government grants and government assistance.

4. Explain the recognition, measurement, and presentation of government grants.

5. To discuss the accounting for foreign exchange transactions, operations, and translation
including its measurement, presentation, and disclosure,

6. Differentiate foreign currency transactions and foreign operations

7. Understand the purpose and use of foreign translation in FS Preparation

PAS 16: Property, Plant and Equipment

This prescribes the accounting treatment as to the recognition as assets, measurement of
carrying amount and recognition of depreciation charges. The standard applies to all items of
property, plant and equipment except to the following:
1. Assets classified as held for sale
2. Biological assets other than bearer plants
3. Recognition and measurement of exploration and evaluation assets
4. Mineral rights and mineral reserves such as oil, natural gas, etc.
The standard gives the following definition:
Property, plant and equipment – tangible assets that are held for use in the production or
supply of goods and services, for rental for others or for administrative purposes and are
expected to be used during more than one period.
Cost – the amount of cash or cash equivalents paid or the fair valueof the other consideration
given to acquire an asset at the time of its acquisition or construction.
Residual value – the net amount which the entity expects to obtain for an asset at the end of
its useful life after deducting the expected costs of disposal.
Entity specific value – the present value of the cash flows an entity expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life or expects to incur
when settling a liability.
Fair value – 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.
Carrying amount – the amount at which an asset is recognized in the statement of financial
position after deducting any accumulated depreciation and accumulated impairment losses.
Impairment loss – the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Recognition criteria:

- It is probable that future economic benefits associated with the asset will flow to the
entity

- The cost of the asset to the entity can be measured reliably

o Major components or spare parts should be recognized as PPE.

o Smaller items like tools, dies and moulds are classified as inventory and
written off as expense
o Very specialized items like a single asset should be broken down into
composite parts if the different parts have different useful lives and different
depreciation rates like in the case of aircraft, where the body and engines are
separated as they have different useful lives.
o Safety and environmental equipment are recognized as PPE although they do
not directly increase the future economic benefits of other existing assets and
yet they are necessary in obtaining the future economic benefits from other
assets.
Initial Measurement:

- Purchase price, including import duties, non-refundable taxes less trade discounts and
rebates

- Direct costs of bringing the assets to working condition for its intended use like cost
of site preparation, initial delivery and handling costs, installation costs, testing,
professional fees (architects, engineers)

- Initial estimate of unavoidable cost of dismantling and removing the asset and
restoring the site on which it is located.

- In the case of self-constructed assets, the same principles are applied as for acquired
assets. Cost of the asset is the cost of its production but abnormal costs as well as
internal profits (savings on self-construction) are excluded.

- Bearer plant is a a living plant that is used in the production or supply of agricultural
produce or expected to bear produce for more than one period and has a remote
likelihood to be sold as agricultural produce except for incidental scrap sales.
 It is measured similar to self-constructed assets. “Construction costs” include
activities necessary to cultivate the bearer plants before they are in the location and
condition necessary to be capable of operating in the manner intended by the
management.

- In the case of exchange of assets, it is measured in the following order: at fair value
of the asset given up, fair value of asset received and carrying amount of asset given
up. However, if the exchange transaction lacks commercial substance, the PPE is
measured at carrying amount of the asset given up and therefore no gain or loss is to
be recognized.

- Trade-ins are accounted for similar to exchanges with commercial substance.

- Cost is measured at the cash price equivalent at the acquisition date. If by installment,
the excess of total payment and cash price is recognized as interest over the credit
period.
Subsequent Measurement: after the initial measurement, the entity chooses either of the
following –
1. Cost Model – It is based on the initial measurement discussed above, less
depreciation and any accumulated depreciation.
2. Revaluation Model – It is based at a revalued amount, being its fair value at the date
of revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. This model can only be used if the fair value of the
item can be measured reliably and valuation is carried out by professional and
qualified appraiser.
Frequency of revaluation depends on the significance of changes in fair values.
Assets whose values do not fluctuate significantly, can be revalued every 3 to 5 years.
Revaluations are applied to an entire class of PPE and not on selective basis. If
simultaneous revaluation is not possible, it can be carried out on a rolling basis (one
after another) within a period of one year.
An increase or decrease in the carrying amount of PPE resulting from revaluation is
recognized in other comprehensive income and accumulated in equity under the
“Revaluation Surplus” account except for:
o An increase that represents a reversal of a previous impairment loss is
recognized in profit or loss as impairment gain.
o A decrease in excess of the credit balance of “Revaluation Surplus” is
recognized in profit or loss as impairment loss.
Application:
The company has an item of land carried in its books at P130,000. Two years ago, a
slump in land values led the company to reduce the carrying value from P150,000. This
was taken as an expense in profit or loss. There has been a surge in land prices in the
current year, however, and the land is now worth P200,000. Account the revaluation in
the current year.
Analysis:
Any decrease should be recognized as an expense (P150,000 – P130,000 = P2,000),
except where it offsets a previous increase taken as a revaluation surplus in equity. Any
decrease greater than the previous upwards increase in value must be taken as an
expenses in the profit or loss. Increase in the asset should be taken at P70,000 (P200,000
- P20,000) while Revaluation surplus to be recognized in the current year is only
(P200,000 – 150,000 = P50,000).
Disclosures required:

- Measurement bases used

- Depreciation method used

- Useful life or depreciation rate used

- Gross carrying amount and the accumulated depreciation at the beginning and end of
the period.

- A reconciliation of the carrying amount at the beginning and end of the period
showing additions, disposals and other changes.

- Restrictions on the title and asset pledged as security for liabilities

- Expenditures to construct PPE during the period

- Contractual commitments for the acquisition of PPE

- Compensation for impairment losses

- Changes in estimates relating to PPE

- For revalued PPE:

o Date of revaluation

o Whether an independent valuer was involved

o Carrying amount of each revalued class of PPE if they had been measured
under the cost model
o Revaluation surplus, including changes during the period and any restrictions
on its distribution to shareholders.
Depreciation

- It is the systematic allocation of the depreciable amount of an asset over its estimated
useful life.

- Depreciation for the accounting period is charged to net profit or loss for the period
either directly or indirectly

- Depreciation starts when the asset is available for use in the manner intended by
management.

- Depreciation stops when the asset is:

o Derecognized (sold or disposed of)

o Classified as asset held for sale

 o Fully depreciated

- Depreciation does not cease when the asset becomes idle or is retired from active use.

- The standard does not prescribe any specific method, although it mentioned 3
examples: straight line, diminishing balance and units of production methods, the
choice depends on management’s judgment that best reflects the expected pattern of
consumption of the future economic benefits embodied in the asset.

- Depreciation method chosen should be applied consistently every period unless there
is a change in the expected pattern of consumption of those future benefits.

- The standard prohibits the use of depreciation method that is based on revenue and
requires annual review of such method and estimates of useful life and residual value.
Depreciable assets are assets which:

- Are expected to be used for more than one according period.

- Have a limited useful life

- Are held by an entity for use in the production or supply of goods and services, for
rental to others a amount of an item of property, plant and equipment should be
allocated on a or for administrative purposes
Useful life is either:

- The period over which a depreciable asset is expected to be used by the entity.

- The number of production or similar units expected to be obtained from the asset of
the entity.
Depreciable amount of a depreciable asset is the historical cost or other amount
substituted for cost in the financial statements, less estimated residual value.
Carrying amount is the amount at which an asset is recognized after deducting any
accumulated depreciation

PAS 19: Employee Benefits

- They are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment.
- It can be in the form of cash, goods or services, and may be provided to either
the employees or their dependents.
- Recognition:
o As expense when employees have rendered service except to the extent
that the employee benefits form part of the cost of another asset as in
salaries of factory workers are included in the cost of inventory.
o As liabilities when already earned by the employees but not yet paid
o May arise from contractual agreements, legislation or informal
practices that create constructive obligations.

- Categories:
 o Short-term benefits – due to be settled within 12 months. (Examples
are: salaries, wages, SSS/Philhealth/Pag-ibig contributions, sick and
vacation leave, profit sharing, non-monetary benefits). Short-term paid
absences may be:
 Accumulating – can be carried forward and used in future
periods, which can either be vesting (paid in cash) and non-
vesting (are not monetized)
 Non=accumulating – those that expire if not used in the current
period and not paid in the future.
o Post-employment benefits – due after the completion of employment.
Examples are: retirement benefits such as lump sum payment and
pensions and other post-employment benefits like post-employment
life insurance and medical care.

Contributory Non-contributory
Both employer and employees contribute Only the employer contributes to the
to the retirement benefit fund of the retirement benefit fund of the employees
employee
Funded Unfunded
Retirement fund is separated from the Employer manages any established fund
employer’s control (managed by a trustee and directly pays the retiring employees
Defined Contribution Plan Defined Benefit Plan
- Employer makes fixed contributions to - Employer commits to pay a definite
a fund; amount of retirement benefits using a
- Benefits to be received by the plan formula.
employees depends on the amount of - Amount of promised benefits is
contributions and with the income from independent of any fund balance.
the said fund. - Employer is obliged to make good for
- Employer has no obligation if benefits whatever is the deficiency.
is less than expected. - Risk rests upon the employer.
- Risk rests upon the employee.

o Other long-term benefits – due to be settled beyond 12 months after the

end of the period in which the employees have rendered the related
service. Examples are: long-term compensated absences like
sabbatical leave; long-term disability benefits.
o Termination benefits – are those which result in:
 The entity’s decision to terminate the employee before normal
retirement date
 The employee’s decision to accept the employer’s offer of
benefits in exchange for termination
Multi-employer plan – wherein various unrelated employers contribute to a common
fund that is managed by a trustee to provide post-employment benefits to the
employees of participating employers. Contribution and benefits are determined
without regard to the identities of the employers.
State plans – is established by law and operated by the government. Examples are the
GSIS for government employees and SSS for employees in the private sectors.

PAS 20: Accounting for Government Frants and Disclosure of Government Assistance
I. DEFINITION OF TERMS
Government assistance Action by the government is designed to provide an economic
benefit specific to an entity or range of entities qualifying under certain criteria. Government
assistance for the purpose of this Standard does not include benefits provided only indirectly
through actions affecting general trading conditions, such as the provision of infrastructure in
development areas or the imposition of trading constraints on competitors.

Government grants  Assistance by government in the form of transfers of resources to an

entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity. They exclude those forms of government assistance which cannot
reasonably have a value placed upon them and transactions with the government which
cannot be distinguished from the normal trading transactions of the entity.

Grants related to assets  Government grants whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long-term assets.
Subsidiary conditions may also be attached restricting the type or location of the assets or the
periods during which they are to be acquired or held.
Grants related to income  Government grants OTHER than those related to assets.

II. RECOGNITION
Government Grants, including non-monetary grants at fair value, shall not be recognized until
there is reasonable assurance that:
(1) The entity will comply with the conditions attaching to them; and
(2) The grants will be received.

III. TYPES OF SIGNIFICANT GOVERNMENT GRANTS

There are four types of significant government grants that will require the following
treatment:
1. Grants for the purpose of specific expenses – This should be deferred and recognized as
income in the same period as the relevant expense.
2. Grants related to depreciable assets are usually recognized as income over the periods and
in the proportions in which depreciation on those assets is charged. Either by deducting the
grant from the cost of the asset or as deferred income.
3. Grants related to non-depreciable assets may also require the fulfillment of certain
obligations and would then be recognized as income over the periods which bear the cost of
meeting the obligations. As an example, a grant of land may be conditional upon the erection
of a building on the site and it may be appropriate to recognize it as income over the life of
the building.
4. A government grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity with
no future related costs shall be recognized as income of the period in which it becomes
receivable.
III. PRESENTATION
A. Presentation of Grants Related to Assets
a. Government grants related to assets, including non-monetary grants at fair value, shall be
presented in the statement of financial position either by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying amount of the asset.
b. Two methods of presentation in financial statements of grants (or the appropriate portions
of grants) related to assets are regarded as acceptable alternatives.
c. One method sets up the grant as deferred income which is recognized as income on a
systematic and rational basis over the useful life of the asset.

d. The other method deducts the grant in arriving at the carrying amount of the asset. The
grant is recognized as income over the life of a depreciable asset by way of a reduced
depreciation charge.

e. The purchase of assets and the receipt of related grants can cause major movements in the
cash flow of an entity. For this reason and in order to show the gross investment in assets,
such movements are often disclosed as separate items in the cash flow statement regardless of
whether or not the grant is deducted from the related asset for the purpose of balance sheet
presentation.

B. Presentation of Grants Related to Income

a. Grants related to income are sometimes presented as a credit in the income statement, either
separately or under a general heading such as “Other income”; alternatively, they are
deducted in reporting the related expense.

b. Supporters of the first method claim that it is inappropriate to net income and expense
items and that separation of the grant from the expense facilitates comparison with other
expenses not affected by a grant. For the second method, it is argued that the expenses might
well not have been incurred by the entity if the grant had not been available and the
presentation of the expense without offsetting the grant may therefore be misleading.

c. Both methods are regarded as acceptable for the presentation of grants related to income.
Disclosure of the grant may be necessary for a proper understanding of the financial
statements. Disclosure of the effect of the grants on any item of income or expense, which is
required to be separately disclosed, is usually appropriate.

C. Repayment of Government Grant

a. If a grant becomes repayable, it should be treated as a change in estimate.
b. If the grant is recorded as a deferred income, the repayment should be applied first against
any related unamortized deferred income (the balance of the deferred income), and the
difference shall be recognized as expense.
c. Where the original grant is related to an asset, the repayment should be treated as
increasing the carrying amount of the asset or reducing the deferred income balance.
d. The cumulative depreciation which would have been charged had the grant not been
received should be charged as depreciation expense.

Adapted from CPA Reviewer – Valix/Valix, Practical Accounting 1 – Valix, and Intermediate
Accounting - Millan

Application:
The Chinese government awarded a grant of P30, 000,000 to a corporation for the purchase of
a vaccine facility with an estimated cost of P50, 000,000 and a 3-year useful life.
Depreciation is calculated using the straight-line approach.

Question: What are the appropriate journal entries to properly account for the transactions?

Answer: Grants for depreciable assets must be recognized as income over time and in
proportion to the asset's depreciation. Accordingly, P30, 000,000 is allocated as income over
5 years using straight-line depreciation.
Cash 30,000,000.00
Deferred Grant Income 30,000,000.00

Building 50,000,000.00
Building 50,000,000.00

Depreciation Expense 10,000,000.00

Accumulated Depreciation 10,000,000.00
(50M / 5 years)

Deferred Grant Income 6,000,000.00

Grant Income 6,000,000.00
(30M / 5 years)
PAS 21: The Effects of Changes in Foreign Exchange Rates
DEFINITION OF TERMS.

 Functional Currency - the currency of the primary economic environment in which

the entity operates. The primary economic environment in which an entity operates is
normally the one in which it primarily generates and expends cash.

 Presentation Currency - the currency in which financial statements are presented by

the reporting entity

 Exchange Rate - the ratio of exchange for two currencies

 Foreign Currency Transaction - the transaction that is denominated or requires

settlement in a foreign currency, including transactions arising when an entity:
o Buys or sells goods or services whose prices is denominated in a
foreign currency.
o Borrows or lends funds when the amounts of payable or receivable
are dominated in a foreign currency
o Acquires and disposes of assets, or incurs or settles liabilities,
denominated in a foreign currency

 Closing rate - the spot exchange rate at the balance sheet date

 Exchange difference - is the difference resulting from translating a given number of

units of one
 currency into another currency at different exchange rates

 Monetary items - units of currency held and assets and liabilities to be received and
paid in a fixed or determinable number of units of currency.

 Net investment in a foreign operation - the amount of the reporting entity's interest in
the net assets of that operation.

Foreign operation - an entity that is a subsidiary, associate, joint venture, or branch of

a reporting entity, whose activities are based in a country other than that of a
reporting entity.
DEFINITION OF TERMS.
FUNCTIONAL CURRENCY - THE CURRENCY OF THE PRIMARY ECONOMIC
ENVIRONMENT IN WHICH THE ENTITY
OPERATES. THE PRIMARY ECONOMIC ENVIRONMENT IN WHICH AN
ENTITY OPERATES IS NORMALLY THE ONE IN
WHICH IT PRIMARILY GENERATES AND EXPENDS CASH.
PRESENTATION CURRENCY - THE CURRENCY IN WHICH FINANCIAL
STATEMENTS ARE PRESENTED BY THE
REPORTING ENTITY
EXCHANGE RATE - THE RATIO OF EXCHANGE FOR TWO CURRENCIES
FOREIGN CURRENCY TRANSACTION - THE TRANSACTION THAT IS
DENOMINATED OR REQUIRES SETTLEMENT IN A
FOREIGN CURRENCY, INCLUDING TRANSACTIONS ARISING WHEN AN
ENTITY:

BUYS OR SELLS GOODS OR SERVICES WHOSE PRICES IS DENOMINATED IN

A FOREIGN CURRENCY
BORROWS OR LENDS FUNDS WHEN THE AMOUNTS OF PAYABLE OR
RECEIVABLE ARE DOMINATED IN A
FOREIGN CURRENCY
ACQUIRES AND DISPOSES OF ASSETS, OR INCURS OR SETTLES LIABILITIES,
DENOMINATED IN A FOREIGN
CURRENCY
CLOSING RATE - THE SPOT EXCHANGE RATE AT THE BALANCE SHEET
DATE
EXCHANGE DIFFERENCE - IS THE DIFFERENCE RESULTING FROM
TRANSLATING A GIVEN NUMBER OF UNITS OF ONE
CURRENCY INTO ANOTHER CURRENCY AT DIFFERENT EXCHANGE RATES
MONETARY ITEMS - UNITS OF CURRENCY HELD AND ASSETS AND
LIABILITIES TO BE RECEIVED AND PAID IN A
FIXED OR DETERINABLE NUMBER OF UNITS OF CURRENCY.
NET INVESTMENT IN A FOREIGN OPERATION - THE AMOUNT OF THE RE
PORTING ENTITY'S INTEREST IN THE NET
ASSETS OF THAT OPERATION.
FOREIGN OPERATION - AN ENTITY THAT IS A SUBSIDIARY, ASSOCIATE,
JOINT VENTURE OR BRANCH OF A
REPORTING ENTITY, WHOSE ACTIVITIES ARE BASED IN A COUNTRY
OTHER THAN THAT OF A REPORTING ENTITY,THE EFFECTS OF CHANGES IN
FOREIGN
EXCHANGE RATES
1. FOREIGN CURRENCY TRANSACTION-
IMPORT OR EXPORT TRANSACTIONS THAT ARE
TO BE SETTLED IN A FOREIGN CURRENCY.
THESE TRANSACTIONS NEED TO BE
TRANSLATED TO PHILIPPINE PESOS BEFORE
THEY CAN BE RECORDED IN THE BOOK OF
ACCOUNTS.
2. FOREIGN OPERATIONS- A BRANCH IN
ANOTHER COUNTRY. THE OVERSEAS BRANCH
WILL NORMALLY MAINTAIN ITS ACCOUNTING
RECORDS AND PREPARE ITS FINANCIAL
STATEMENTS IN A FOREIGN CURRENCY.
THOSE FINANCIAL STATEMENTS NEED TO
BE TRANSLATED TO PHILIPPINE PESOS
BEFORE THEY CAN BE COMBINED WITH
THE HOME OFFICE’S FINANCIAL
STATEMENTS.
TWO MAIN ACCOUNTING ISSUES:
EXCHANGE RATES ARE CONSTANTLY
CHANGING.
A. WHICH EXCHANGE RATE(S) TO USE; AND
B. HOW TO REPORT THE EFFECTS OF CHANGES
IN EXCHANGE RATES IN THE FINANCIAL
STATEMENTS.
FUNCTIONAL CURRENCY- THE CURRENCY OF THE
PRIMARY ECONOMIC ENVIRONMENT IN WHICH THE
ENTITY OPERATES.
- NOT NECESSARILY THE
CURRENCY OF THE
COUNTRY WHERE THE
ENTITY IS BASED.
FACTORS:
A. THE CURRENCY THAT MAINLY INFLUENCES
THE ENTITY’S SALES PRICES AND COST OF GOODS OR
SERVICES
B. THE CURRENCY IN WHICH CASH FLOWS
FROM FINANCING ACTIVITIES AND
OPERATING ARE USUALLY GENERATED AND
RETAINED.
FOREIGN CURRENCY TRANSACTIONS -A
TRANSACTION THAT IS DENOMINATED OR REQUIRES
SETTLEMENT IN A FOREIGN CURRENCY.
SPOT EXCHANGE RATE- THE EXCHANGE RATE FOR
IMMEDIATE DELIVERY.
- THE CURRENT EXCHANGE
RATE ON A GIVEN DATE.
DATE OF TRANSACTION- THE DATE ON WHICH THE
TRANSACTION FIRST QUALIFIES FOR RECOGNITION IN
ACCORDANCE WITH PFRSS.
A. MONETARY ITEMS > CLOSING RATE – THE
SPOT EXCHANGE RATE AT THE REPORTING
DATE.
B. NONMONETARY ITEMS > EXCHANGE RATE
AT THE DATE OF THE TRANSACTION
– MEASURED AT HISTORICAL COST
C. NONMONETARY ITEMS MEASURED AT FAIR
VALUE > EXCHANGE RATE AT THE FAIR
MONETARY ITEMS – FIXED OR DETERMINABLE
AMOUNT OF MONEY.
NONMONETARY ITEMS- DO NOT GIVE RISE TO
RECEIPT OR PAYMENT OF A FIXED OR
DETERMINABLE AMOUNT OF MONEY.
THE EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES
1. FOREIGN CURRENCY TRANSACTION-
IMPORT OR EXPORT TRANSACTIONS THAT ARE
TO BE SETTLED IN A FOREIGN CURRENCY.
THESE TRANSACTIONS NEED TO BE
TRANSLATED TO PHILIPPINE PESOS BEFORE
THEY CAN BE RECORDED IN THE BOOK OF
ACCOUNTS.
2. FOREIGN OPERATIONS- A BRANCH IN
ANOTHER COUNTRY. THE OVERSEAS BRANCH
WILL NORMALLY MAINTAIN ITS ACCOUNTING
RECORDS AND PREPARE ITS FINANCIAL
STATEMENTS IN A FOREIGN CURRENCY.
THOSE FINANCIAL STATEMENTS NEED TO
BE TRANSLATED TO PHILIPPINE PESOS
BEFORE THEY CAN BE COMBINED WITH
THE HOME OFFICE’S FINANCIAL
STATEMENTS.
TWO MAIN ACCOUNTING ISSUES:
EXCHANGE RATES ARE CONSTANTLY
CHANGING.
A. WHICH EXCHANGE RATE(S) TO USE; AND
B. HOW TO REPORT THE EFFECTS OF CHANGES
IN EXCHANGE RATES IN THE FINANCIAL
STATEMENTS.
FUNCTIONAL CURRENCY- THE CURRENCY OF THE
PRIMARY ECONOMIC ENVIRONMENT IN WHICH THE
ENTITY OPERATES.
- NOT NECESSARILY THE
CURRENCY OF THE
COUNTRY WHERE THE
ENTITY IS BASED.
FACTORS:
A. THE CURRENCY THAT MAINLY INFLUENCES
THE ENTITY’S SALES PRICES AND COST OF GOODS OR
SERVICES
B. THE CURRENCY IN WHICH CASH FLOWS
FROM FINANCING ACTIVITIES AND
OPERATING ARE USUALLY GENERATED AND
RETAINED.
FOREIGN CURRENCY TRANSACTIONS -A
TRANSACTION THAT IS DENOMINATED OR REQUIRES
SETTLEMENT IN A FOREIGN CURRENCY.
SPOT EXCHANGE RATE- THE EXCHANGE RATE FOR
IMMEDIATE DELIVERY.
- THE CURRENT EXCHANGE
RATE ON A GIVEN DATE.
DATE OF TRANSACTION- THE DATE ON WHICH THE
TRANSACTION FIRST QUALIFIES FOR RECOGNITION IN
ACCORDANCE WITH PFRSS.
A. MONETARY ITEMS > CLOSING RATE – THE
SPOT EXCHANGE RATE AT THE REPORTING
DATE.
B. NONMONETARY ITEMS > EXCHANGE RATE
AT THE DATE OF THE TRANSACTION
– MEASURED AT HISTORICAL COST
C. NONMONETARY ITEMS MEASURED AT FAIR
VALUE > EXCHANGE RATE AT THE FAIR
MONETARY ITEMS – FIXED OR DETERMINABLE
AMOUNT OF MONEY.
NONMONETARY ITEMS- DO NOT GIVE RISE TO
RECEIPT OR PAYMENT OF A FIXED OR
DETERMINABLE AMOUNT OF MONEY.
THE EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES
1. FOREIGN CURRENCY TRANSACTION-
IMPORT OR EXPORT TRANSACTIONS THAT ARE
TO BE SETTLED IN A FOREIGN CURRENCY.
THESE TRANSACTIONS NEED TO BE
TRANSLATED TO PHILIPPINE PESOS BEFORE
THEY CAN BE RECORDED IN THE BOOK OF
ACCOUNTS.
2. FOREIGN OPERATIONS- A BRANCH IN
ANOTHER COUNTRY. THE OVERSEAS BRANCH
WILL NORMALLY MAINTAIN ITS ACCOUNTING
RECORDS AND PREPARE ITS FINANCIAL
STATEMENTS IN A FOREIGN CURRENCY.
THOSE FINANCIAL STATEMENTS NEED TO
BE TRANSLATED TO PHILIPPINE PESOS
BEFORE THEY CAN BE COMBINED WITH
THE HOME OFFICE’S FINANCIAL
STATEMENTS.
TWO MAIN ACCOUNTING ISSUES:
EXCHANGE RATES ARE CONSTANTLY
CHANGING.
A. WHICH EXCHANGE RATE(S) TO USE; AND
B. HOW TO REPORT THE EFFECTS OF CHANGES
IN EXCHANGE RATES IN THE FINANCIAL
STATEMENTS.
FUNCTIONAL CURRENCY- THE CURRENCY OF THE
PRIMARY ECONOMIC ENVIRONMENT IN WHICH THE
ENTITY OPERATES.
- NOT NECESSARILY THE
CURRENCY OF THE
COUNTRY WHERE THE
ENTITY IS BASED.
FACTORS:
A. THE CURRENCY THAT MAINLY INFLUENCES
THE ENTITY’S SALES PRICES AND COST OF GOODS OR
SERVICES
B. THE CURRENCY IN WHICH CASH FLOWS
FROM FINANCING ACTIVITIES AND
OPERATING ARE USUALLY GENERATED AND
RETAINED.
FOREIGN CURRENCY TRANSACTIONS -A
TRANSACTION THAT IS DENOMINATED OR REQUIRES
SETTLEMENT IN A FOREIGN CURRENCY.
SPOT EXCHANGE RATE- THE EXCHANGE RATE FOR
IMMEDIATE DELIVERY.
- THE CURRENT EXCHANGE
RATE ON A GIVEN DATE.
DATE OF TRANSACTION- THE DATE ON WHICH THE
TRANSACTION FIRST QUALIFIES FOR RECOGNITION IN
ACCORDANCE WITH PFRSS.
A. MONETARY ITEMS > CLOSING RATE – THE
SPOT EXCHANGE RATE AT THE REPORTING
DATE.
B. NONMONETARY ITEMS > EXCHANGE RATE
AT THE DATE OF THE TRANSACTION
– MEASURED AT HISTORICAL COST
C. NONMONETARY ITEMS MEASURED AT FAIR
VALUE > EXCHANGE RATE AT THE FAIR
MONETARY ITEMS – FIXED OR DETERMINABLE
AMOUNT OF MONEY.
NONMONETARY ITEMS- DO NOT GIVE RISE TO
RECEIPT OR PAYMENT OF A FIXED OR
DETERMINABLE AMOUNT OF MONEY.
THE EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES
1. FOREIGN CURRENCY TRANSACTION-
IMPORT OR EXPORT TRANSACTIONS THAT ARE
TO BE SETTLED IN A FOREIGN CURRENCY.
THESE TRANSACTIONS NEED TO BE
TRANSLATED TO PHILIPPINE PESOS BEFORE
THEY CAN BE RECORDED IN THE BOOK OF
ACCOUNTS.
2. FOREIGN OPERATIONS- A BRANCH IN
ANOTHER COUNTRY. THE OVERSEAS BRANCH
WILL NORMALLY MAINTAIN ITS ACCOUNTING
RECORDS AND PREPARE ITS FINANCIAL
STATEMENTS IN A FOREIGN CURRENCY.
THOSE FINANCIAL STATEMENTS NEED TO
BE TRANSLATED TO PHILIPPINE PESOS
BEFORE THEY CAN BE COMBINED WITH
THE HOME OFFICE’S FINANCIAL
STATEMENTS.
TWO MAIN ACCOUNTING ISSUES:
EXCHANGE RATES ARE CONSTANTLY
CHANGING.
A. WHICH EXCHANGE RATE(S) TO USE; AND
B. HOW TO REPORT THE EFFECTS OF CHANGES
IN EXCHANGE RATES IN THE FINANCIAL
STATEMENTS.
FUNCTIONAL CURRENCY- THE CURRENCY OF THE
PRIMARY ECONOMIC ENVIRONMENT IN WHICH THE
ENTITY OPERATES.
- NOT NECESSARILY THE
CURRENCY OF THE
COUNTRY WHERE THE
ENTITY IS BASED.
FACTORS:
A. THE CURRENCY THAT MAINLY INFLUENCES
THE ENTITY’S SALES PRICES AND COST OF GOODS OR
SERVICES
B. THE CURRENCY IN WHICH CASH FLOWS
FROM FINANCING ACTIVITIES AND
OPERATING ARE USUALLY GENERATED AND
RETAINED.
FOREIGN CURRENCY TRANSACTIONS -A
TRANSACTION THAT IS DENOMINATED OR REQUIRES
SETTLEMENT IN A FOREIGN CURRENCY.
SPOT EXCHANGE RATE- THE EXCHANGE RATE FOR
IMMEDIATE DELIVERY.
- THE CURRENT EXCHANGE
RATE ON A GIVEN DATE.
DATE OF TRANSACTION- THE DATE ON WHICH THE
TRANSACTION FIRST QUALIFIES FOR RECOGNITION IN
ACCORDANCE WITH PFRSS.
A. MONETARY ITEMS > CLOSING RATE – THE
SPOT EXCHANGE RATE AT THE REPORTING
DATE.
B. NONMONETARY ITEMS > EXCHANGE RATE
AT THE DATE OF THE TRANSACTION
– MEASURED AT HISTORICAL COST
C. NONMONETARY ITEMS MEASURED AT FAIR
VALUE > EXCHANGE RATE AT THE FAIR
MONETARY ITEMS – FIXED OR DETERMINABLE
AMOUNT OF MONEY.
NONMONETARY ITEMS- DO NOT GIVE RISE TO
RECEIPT OR PAYMENT OF A FIXED OR
DETERMINABLE AMOUNT OF MONEY.
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
1. Foreign Currency Transaction- import or export transactions that are to be settled in a
foreign currency. These transactions need to be translated to Philippine pesos before they can
be recorded in the book of accounts.
2. Foreign Operations- a branch in another country. The overseas branch will normally
maintain its accounting records and prepare its financial statements in a foreign currency.
Those financial statements need to be translated to Philippine pesos before they can be
combined with the home office’s financial statements.
TWO MAIN ACCOUNTING ISSUES:
Exchange rates are constantly changing.
a. Which exchange rate(s) to use; and
b. How to report the effects of changes in exchange rates in the financial statements.

Functional Currency- the currency of the primary economic environment in which the entity
operates. Not necessarily the currency of the country where the entity is based.
Factors:
a. the currency that mainly influences the entity’s sales prices and cost of goods or services
b. The currency in which cash flows from financing activities and operating are usually
generated and retained.

Foreign Currency Transactions -a transaction that is denominated or requires settlement in a

foreign currency.

Spot Exchange Rate- the exchange rate for immediate delivery. The current exchange rate on
a given date.

Exchange Differences-the difference resulting from translating a given number of units of one
currency into another currency at different exchange rates.

a. Monetary items- P/L  fixed or determinable amount of money.

b. Nonmonetary items- OCI  do not give rise to receipt or payment of a fixed or
determinable amount of money.

Foreign Operation – a subsidiary, associate, joint venture, or branch that is based in a foreign
country and is using a foreign currency.
Presentation Currency
a. Assets and liabilities > closing rate
b. Income and Expenses > exchange rates (both OCI)
Adapted from Practical Acctg 2 Reviewer – Dayag Practical Accounting 2 – Guerrero, and
Accounting for Business Combinations - Millan
Additional Note for Computation
Important Dates
a. Date of Transaction
b. Balance Sheet Date
c. Payment or Settlement Date

Quotations
a. Direct Quotation  1 Foreign Currency=? Peso (Multiply)
(Notional Amount *? Peso)

b. Indirect Quotation  1 Peso Currency=? Foreign Currency (Divide)

(Notional Amount/? F.C.)

What rate to use? Spot Rate using direct quotation

a. Selling Merchandise or Exportation (use buying spot rate or bidding rate)

Spot Rate ForEx

Gain

Loss

A/R XX A/R XX Forex Loss XX

Sales XX Forex Gain XX A/R XX

a. Buying Merchandise or Importation (use Selling spot rate or asking rate)

Spot Rate ForEx

Loss

Gain

Purchases XX Forex Loss XX A/P XX

 A/P XX A/P XX Forex Gain XX

Presentation in FS
 Any difference will go to Profit or Loss.

Example
Given: Notional Amount : 1 FC Importing (Exposed Liability Position w/o hedging)
Transaction Date: P56/FC
BS Date: P60/FC Exporting (Exposed Asset Position w/o hedging)
Settlement Date: P58/FC

Date Buyer Seller

Transaction Date Inventory 56 A/R 56
A/P 56 Sales 56
Balance Sheet Date Forex Loss 4 A/R 4
A/P 4 Forex Gain 4
Settlement Date A/P 60 Cash 58
Forex Gain 2 Forex Loss 2
Cash 58 A/R 60
OR OR
A/P 2 Forex Loss 2
Forex Gain 2 A/R 2
A/P 58 Cash 58
Cash 58 A/R 58

FOREIGN CURRENCY TRANSLATIONS

I. Definition
 Converting the FS of subsidiaries/associates/joint ventures/branch to the
entity’s reporting currency.

II. OCI Components (FERRER)

Reclassification
 Foreign Exchange Translations (IAS 21) P/L
 Effective portion of Cash Flow Hedge (IFRS 7, 9) P/L
 Revaluation Surplus (IAS 16) R/E
 Remeasurement Gain or Loss on DBO (IAS 19R) R/E
 Estimated UG/UL on F.A. at FVOCI (IFRS 7, 9) R/E
 Risk – G/L on Credit Risk in F.L at FVPL (IFRS 7, 9) R/E

III. Applicable Rates

Accounts Rate to Use

Revenues and Expenses If Problem: Average (Beg+End)/2
If Theory : Spot Rate
Assets and Liabilities Closing Rate
Shareholders’ Equity Historical Rate
Retained Earnings, Beginning Roll Forward
Net Income Weighted Average
Dividends Spot Rate