Advanced Accounting 2

Prof. Ma. Rona Corda-Prado

UP in the Visayas
 Philippine Accounting Standards (PAS) 21: “Accounting
for the Effects of Changes in Foreign Exchange Rate
1. Transactions which gives
rise to receivables and
payables denominated in
foreign currencies
2. Foreign currency hedging
3. Translation of foreign
currency statements
 Countries use currencies for internal
economic transactions.
 To make transactions with another country,
units of that country’s currency may need to
be acquired.
 The price at which a currency can be
acquired is known as the “exchange rate.”
As the relative strength of a
country’s economy changes
...

. . . the exchange rate of

the local currency relative
to other currencies also
fluctuates.
?$=P?
 Year Equivalent value
of $1.00
1903-1960’s P2.00
April 1960 3.20
1965 3.90
1970 5.63
1983 14.00
1985 18.40
1990 24.25
2000 44.14
2004
11/24/2014
56.04
45.32
?$=P?
4/13/2016 45.98
4/15/2017 49.48
 Spot Rate
 The exchange rate that is available
today (rate for immediate delivery)
 The actual spot rate at the future date
may differ from today’s forward rate.
▪ Change in global inflation rates
▪ Money market variations
▪ Capital Investment Levels
▪ Monetary actions of Central Banks
Forward Rate
 The exchange rate that can be locked in
today for an expected future exchange
transaction.
9-8

 Exchange rates are published daily in

the newspapers.
▪ These are “end-of-day” rates.
 Remember – Rates change constantly.
 The difference between the rates at
which a bank is willing to buy and sell
currency is known as the “spread.”
 When the rate is
expressed as the
peso (domestic)
equivalent of 1 unit
of foreign currency,
the rate is called a
“DIRECT QUOTE”.

Source: Yahoo Currency Converter

 When the rate is
expressed as the
number of foreign
currency units that
1 PHP (domestic
currency ) will buy,
the rate is called an
“INDIRECT
QUOTE”.

Source: Yahoo Currency Converter

 Selling (Offer) Price what
a currency broker is
willing to accept to sell
a currency
Buying (Bid) Price
what a currency broker
is willing to pay to
acquire a currency;
usually lower than the
selling spot rate
Spread
difference between the
offered and bid price
 As of April 12, 2017 closing date (Source: BPI, 4/15/2017)
• A floating exchange rate is a regime where the currency
price is set by the forex market based on supply and
demand compared with other currencies.
• This is in contrast to a fixed exchange rate, in which the
government entirely or predominantly determines the
rate.
• At present, the country's exchange rate policy supports a
freely floating exchange rate system whereby the Bangko
Sentral ng Pilipinas (BSP) leaves the determination of the
exchange rate to market forces
• Countries with fixed exchange rate system could be
retrieved thru this site (mostly Middle Eastern and African
countries): https://www.investmentfrontier.com/2013/02/19/investors-list-
countries-with-fixed-currency-exchange-rates/
9-13

 A Filipino company buys or The major accounting

sells goods or services to a issue:
party in another country. This How do we account
is often called “foreign trade.” for the changes in the
 The foreign currency
value of the foreign
transaction is often currency?
denominated in or requires
settlement in the currency of
the foreign party...
 ...but it must be measured in
peso for financial reporting
purposes.
9-14

PAS No. 21
Requires a two-transaction
perspective.

(1) Account for the original

sale in Philippine peso.
(2) Account for gains/losses
from exchange rate
fluctuations.
 When a transaction
occurs on one date 11/24/2014 1 US$ = 45.32 PHP

(for example a credit 12/31/2014 1 US$ = 45.50 PHP

sale) . . .
. . . but the cash flow is at a
later date . . .
?
. . . fluctuating exchange
rates can result in exchange
rate gains or losses.
1. Importing and exporting goods on credit with
the receivable or payable denoted in foreign
currency
2. Borrowing or lending denominated in foreign
currency
3. Entering into a forward exchange contract to
buy or sell foreign currency
1. Transaction Date: Transaction is measured and
recorded in LCU as: Amount in LC = Amount in FC x
spot rate in effect
2. Balance Sheet Date (between transaction and
settlement date): Foreign currency denominated
transactions are adjusted to reflect the closing
exchange rate at balance sheet date.
Forex gain or loss =
Amount in FC x (Spot rate @ Transaction date -
Spot rate @ B/S date)
3. Settlement Date:
Foreign exchange gain
or loss is recognized
if: Amount of pesos
paid or received upon
conversion  Carrying
value of the related
payable or receivable
 Contractual agreement between the bank (issuing bank),
on behalf of one of its customer (buyer), authorizing
another bank (advising or conforming bank), to make
payment to the beneficiary (seller) upon presentation of
specified documents representing the supply of goods.
 The issuing bank makes a commitment to honor the
drawings made under the credit.
 Pays Examines
issuing documents
bank
Delivers
goods to
Open LC buyer
ISSUING BANK
Pays seller
BUYER Send via Gives
documents advising
documents to
to issuing bankconforming
bank bank
Places
order
with
seller
Pays seller

ADVISING or
CONFORMING BANK SELLER
On June 17, 2014, Chocoholics Anonymous ordered
chocolate molds and baking equipment from
Candyland Manufacturing (a US firm) for US$18,000.
To cover the importation, Chocoholic Anonymous
opened a letter of credit with PNB and incurred bank
charges amounting to P3,000. The company received
the goods on July 20, 2014, a few days before their
fiscal year-end of July 31. Importation documents
were received and the letter of credit was paid with
PNB on August 12, 2014. Assume periodic inventory
system. The selling spot rates given by the bank are as
follows:
Spot rates:
June 17, 2014 P 45.20
July 20, 2014 45.35
July 31, 2014 45.25
August 12, 2014 45.30

Req 1: Provide related accounting entries.

Req 2: Assuming that the rate on August 12 would be
P45.18, what would be the corresponding amount of net
foreign exchange gain/loss? Illustrate with an accounting
entry.
Assume that PNB would require Chocoholics
Anonymous to deposit 20% of the US$18,000 LC.
Provide the entry to record this transaction:

Jun 17 Marginal deposit on LC 162,720

Cash 162,720
To record marginal deposit in LC
(US$18,000 * 20% * 45.20)
 Change in B/S Acct Effect on I/S Effect
Exchange Affected Carrying
Rate Value
Increase Payable Increase Loss
Decrease Payable Decrease Gain
On September 5, 2014, Chocoholics Anonymous received
a purchase order, worth S$8,000 of chocolate lollipops
from NTUC, a Singaporean retailer. On September 10,
BPI (CA’s bank) received a confirmation of LC from DBS
(NTUC’s bank) to support the purchase order. On
September 18, Chocoholics Anonymous availed of a
Packing Credit line of P125,000 with BPI to fund his
exportation against the LC. The goods, worth P148,000,
were shipped on September 29 (assume perpetual
inventory system). The fiscal year-end of the company is
September 30 and NTUC settled their payable to
Chocoholics Anonymous on October 18, 2014. The
buying spot rates of BPI are as follows:
Spot rates:
September 5, 2014 P36.20
September 10, 2014 36.18
September 18, 2014 36.15
September 29, 2014 36.19
September 30, 2014 36.20
October 18, 2014 36.12

Req 1: Provide the necessary accounting entries.

Req 2: Assuming that the exchange rate on October 18 is
P36.25, what would be the corresponding net foreign
exchange gain or loss? Illustrate with an accounting entry.
 Change in B/S Acct Effect on I/S Effect
Exchange Affected Carrying
Rate Value
Increase Receivable Increase Gain
Decrease Receivable Decrease Loss
Problem 19-1
Case 3: All dates should be December 31, 2013
Problem 19-2
#1 Correction: June 30 20 1 yen = P0.45
 On June 17, 2014, Chocoholic Anonymous
ordered chocolate molds and baking equipment from
Candyland Manufacturing (a US firm) for US$18,000.
The company received the goods on July 20. Instead
of getting an LC, the company decided to borrow a 30-
day US$ notes payable with 18% interest and paid the
supplier with the proceeds. Chocoholic Anonymous
paid the notes payable on August 19. The company
has a calendar year-end. The existing exchange rates
as advised by the company’s bank are as follows:
Spot rates:
June 17, 2014 P45.20
July 20, 2014 45.35
July 31, 2014 45.28
August 19, 2014 45.40

Req 1: Provide the related accounting entries. Interest is

calculated based on 360 days.
Req 2: Assuming that the company has a fiscal year-end of
July 31, what entries should be made on year-end and on
August 19?
On August 31, 2014, Chocoholic Anonymous sold S$1,000
worth of chocolate lollipops to a Singaporean customer. The
lollipops has an inventory value of P15,000 (assume
perpetual). The customer issued a 90-day, 10% promissory
note in Singaporean dollars. The fiscal year-end of the
company is September 30. The exchange rates advised by the
company’s bank are as follows:
Spot rates:
August 31, 2014 P 36.20
September 30, 2014 36.25
November 29, 2014 36.12
Provide the related accounting entries.
 THANK YOU AND LET’S GO TO DERIVATIVES &
HEDGING!

HOBA - Special Problems 32