FOREIGN CURRENCY FINANCIAL STATEMENT TRANSLATION

 An entity may present its financial statements in any currency.

 If the presentation currency differs from the entity’s functional currency, it translates its financial position
into presentation currency.
 Local currency – This is the currency in which the foreign operation measures and records its transactions.
 Functional currency – Defines this as the currency of the primary economic environment in which the entity
operates. It is this currency that affects the economic wealth of the entity.
 Presentation currency – Defines this as the currency in which the financial statements of the entity are
presented.

IF FUNCTIONAL CURRENCY INTO PRESENTATION - USE CURRENT RATE METHOD

 Foreign operation operates independently in economic and financial matters and not integral to the
operations of the parent.
 Functional currency is the local currency of the country in which the entity operates.
 Functional currency is not the currency of hyper inflationary economy.

SUMMARY CLOSING RATE METHOD

ACCOUNT MEASURED AT
Assets and liabilities ( monetary or not monetary) Closing rate/Current rate
Shareholders’ equity Historical rate
 Beginning balance RE Equal from the previous period
 Dividend Rate on declaration
Revenue and expense Average rate (transaction date but for practical reason use average)
Translation adjustment OCI - ITEM

Problem 1 - CURRENT RATE METHOD

On January 4, 2022, Prosperity Company, based in the Philippines, acquired 80% interest of Sensation Company
in the United State of America for USD1,200,000.

As a parent, Prosperity Company will prepare consolidated financial statements for the year just ended. Sensation
Company submitted the following accounts (in USD) on December 31, 2022

Sales 1,812,000
Cost of sales 1,110,000
Depreciation 60,000
Other expense 393,000
Income tax expense 49,200
Retained earnings, beginning 288,000
Dividend declared, 9/1 180,000
Cash 558,000
Accounts receivable 364,800
Inventory 498,000
Land 300,000
Building(net) 390,000
Equipment(net) 258,000
Accounts payable 384,000
Notes payable due in 9 months 381,000
Bonds payable 540,000
Share capital 576,000
Share premium 180,000

Below are the relevant exchange rates for the period:

January 4, 2022 48.000
September 1, 2022 48.120
December 31, 2022 48.300
Average 4th quarter 48.264
Average for the year 48.240

It is assumed that revenues and expenses were generated and incurred evenly throughout the year. The ending
inventory was acquired during the last quarter of the year.

Requirement: Translate the trial balance submitted by the subsidiary using the closing rate method
IF FUNCTIONAL CURRENCY IS THE PRESENTATION - USE TEMPORAL METHOD
 The foreign operation operates dependently in economic and financial matters and integrated to the operation
of the parent
 The functional currency is the presentation or reporting currency of the parent

SUMMARY TEMPORAL METHOD

ACCOUNT MEASURED AT
Monetary asset and liabilities Current closing rate
Non-monetary item @historical rate Historical rate
Non-monetary item @fair value Rate at date pf revaluation or fair value re measurement
Shareholders’ equity Historical
Beginning RE Equal from the previous period
Dividends Declaration date
Income Statement account are accounted for as follows
Related non-monetary item Historical rate
Not related non-monetary item Average rate

Resulting difference (re-measurement gain or loss) should be reported as profit or loss for the period. Re-
measurement gains or loss arising from the revaluation of a non-monetary item is taken to OCI if the revaluation
gain or loss are taken to the other comprehensive income

Assume that on January 4, 2022, Prosperity Company, based in the Philippines acquired 80% interest of Sensation
Company in the United State of America for USD 1,200,000. On the date of purchase the inventory in the book of
sensation amounts to USD456,000. Also during the year Sensation made a purchase with a total amount of
P1,152,000.

As a parent, Prosperity Company will prepare consolidated Financial Statement for the year just ended. Sensation
Company submitted the following account (in USD) on December 31, 2022.

Sales 1,812,000
Cost of sales 1,110,000
Depreciation 60,000
Other expense 393,000
Income tax expense 49,200
Retained earnings, beginning 288,000
Dividend declared, 9/1 180,000
Cash 558,000
Accounts receivable 364,800
Inventory 498,000
Land 300,000
Building(net) 390,000
Equipment(net) 258,000
Accounts payable 384,000
Notes payable due in 9 months 381,000
Bonds payable 540,000
Share capital 576,000
Share premium 180,000

Below are the relevant exchange rates for the period:

January 4, 2022 48.000
September 1, 2022 48.120
December 31, 2022 48.300
Average 4th quarter 48.264
Average for the year 48.240

It is assumed that revenues and expenses were generated and incurred evenly throughout the year. The ending
inventory was acquired during the last quarter of the year (FIFO basis)

Required: Translate the trial balance submitted by the subsidiary using the temporal method/re-measurement
method.
 DERIVATIVES
Problem 1:
GREAT Corporation purchased goods from COMRADE Company of India for 600,000 INR. The
merchandise was received on November 1, 2022, with payment due on January 30, 2023. Also on November
1, 2022, GREAT Corporation entered into a forward contract with Land Bank to purchase the necessary
600,000 Indian Rupees for delivery on January 30, 2023 to hedge the purchase transaction. The following
direct exchange rates were provided:

11/1/2022 12/31/2022 1/30/2023

Spot rate – selling 0.82 0.83 0.85
Spot rate – buying 0.80 0.81 0.81
90-day forward – buying 0.81 0.82 0.83
90-day forward – selling 0.823 0.82 0.83
60-day forward – buying 0.826 0.821 0.822
60-day forward – selling 0.84 0.845 0.843
30-day forward – buying 0.83 0.831 0.832
30-day forward – selling 0.844 0.845 0.846

1. What is the foreign exchange gain (loss) to be recognized with respect to the hedged item for the
years ended December 31, 2022 and 2023, respectively?
A. 6,000 and 12,000, respectively
B. (6,000) and (12,000), respectively
C. (6,000) and 0, respectively
D. 6,000 and 0, respectively

2. What is the foreign exchange gain (loss) to be recognized with respect to the hedging instrument
for the years ended December 31, 2022 and 2023, respectively?
A. 12,600 and (12,600), respectively
B. (12,600) and 12,600, respectively
C. 13,200 and 3,000, respectively
D. (13,200) and (3,000), respectively

Problem 2:
On November 1, 2022, SHOWMAN Corporation sold merchandise to GREATEST Corporation on
November 1, 2022 for US$50,000. Payment will be received on February 1, 2023. SHOWMAN Corporation
entered into forward exchange contracts to hedge the transaction on November 1, 2022. The fiscal year-end
for SHOWMAN Corporation is December 31. The exchange rates available on various dates are as follows:

November 1, 2022 December 31, 2022 February 1, 2023

Spot rate P40.00 P40.25 P40.50
30-day forward rate 40.10 40.35 40.55
60-day forward rate 40.20 40.40 40.65
90-day forward rate 40.30 40.45 40.60

1. How much is the foreign exchange gain or (loss) on December 31, 2022 with respect to accounts
receivable?
A. 2,500 C. 12,500
B. (2,500) D. (12,500)

2. How much is the gain or (loss) on December 31, 2022 with respect to the forward contract?
A. 2,500 C. 12,500
B. (2,500) D. (12,500)

3. How much is the forward contract fair value as of December 31, 2022?
A. 2,500 C. 12,500
B. (2,500) D. (12,500)
 4. How much is the forward contract fair value as of February 1, 2023?
A. 2,500 C. (7,500)
B. (2,500) D. (10,000)

5. How much is the net foreign exchange gain or (loss) on February 1, 2023?
A. 5,000 C. 7,500
B. (5,000) D. (7,500)

6. How much is the outstanding accounts receivable as of December 31, 2022?

A. 2,012,500 C. 2,017,500
B. 2,015,000 D. 2,025,000

7. How much is the outstanding peso receivable as of December 31, 2022?

A. 2,012,500 C. 2,017,500
B. 2,015,000 D. 2,025,000

8. How much is the outstanding FC payable as of December 31, 2022?

A. 2,012,500 C. 2,017,500
B. 2,015,000 D. 2,025,000

Problem 3:
On September 30, 2022, BRIGADIER ordered machinery from a Japanese firm. The purchase order is non-
cancelable. The purchase price is 5,000,000 yens with delivery and payment to be on March 31, 2023. On
September 30, 2022, BRIGADIER entered into forward contract to buy 5,000,000 yens on March 31, 2023.
On March 31, 2023, the machinery was delivered.

9/30/2022 12/31/2022 3/31/2023

Spot rate P0.38 P0.42 P0.46
Forward rate 0.39 0.44 -

1. On the December 31, 2022 profit or loss statement, net foreign exchange gain or (loss) is
A. Zero C. 100,000
B. 50,000 D. 250,000

2. The March 31, 2023 profit or (loss), foreign exchange gain or (loss) on forward contract is
A. Zero C. 100,000
B. 50,000 D. (100,000)

3. The March 31, 2023, foreign exchange gain or (loss) on firm commitment, to be presented in OCI?
A. Zero C. 100,000
B. 50,000 D. (100,000)

4. What is the firm commitment account balance as of September 30, 2022?

A. Zero C. 100,000
B. 50,000 D. (100,000)

5. What is the firm commitment account balance as of December 31, 2022?

A. 250,000 asset C. 350,000 asset
B. (250,000) liability D. (350,000) liability

6. What is the fair value of the forward contract on September 30, 2022?
A. Zero C. (250,000)
B. 250,000 D. (350,000)

7. The fair value of the forward contract on December 31, 2022?

A. Zero C. (250,000)
B. 250,000 D. (350,000)

8. What is the value of the equipment on September 30, 2022?

 A. Zero C. 1,950,000
B. 1,900,000 D. 2,300,000

9. What is the value of the equipment on March 31, 2023?

A. Zero C. 1,950,000
B. 1,900,000 D. 2,300,000

Problem 4:
On November 1, 2022, Friend Co. entered into a firm commitment with Trix Company for the export of dried
mangoes with a contract price of 10,000 Yen. The goods will be delivered by Friend Co. on January 30,
2023. On the same day, in order to protect itself from the risk of changes in fair value of the firm
commitment due to changes in underlying foreign currency, Friend Co. entered into a forward contract with
BDO for the sale of 10,000 Yen at the forward rate on Nov. 1, 2022. Friend Co. elected to account for the
hedge of the firm commitment using fair value hedge. The following direct exchange rates are provided:

Nov. 1, 2022 Dec. 31, 2022 Jan. 30, 2023

Buying spot rate P10 P13 P12
Selling spot rate 13 15 16
Forward buying 90-days 11 14 15
Forward selling 90-days 13 16 17
Forward buying 60-days 14 17 16
Forward selling 60-days 15 18 14
Forward buying 30-days 11 15 12
Forward selling 30-days 13 11 14

1. What is the foreign currency gain/(loss) due to hedge item for the year ended December 31, 2022?
A. 40,000 gain C. 30,000 gain
B. 20,000 loss D. 10,000 loss

2. What is the foreign currency gain/(loss) due to hedging instrument for the year ended December
31, 2023, respectively in profit or loss?
A. 30,000 gain C. 20,000 loss
B. 50,000 loss D. 20,000 gain

Problem 5:
On Dec. 1, 2022, a Philippine firm estimate at least 5,000 units if inventory will be purchased from the US
company during January 31, 2023 for 1,500,000 dollars. The transaction is probable, and it is to be
denominated in dollar. Sales of the inventory are expected to occur six months following the purchase. The
company enters into a forward contract to purchase 1,500,000 dollars on January 31, 2023 for P1.01.

Spot Rate Forward rate for Jan. 31, 2023

Dec 1, 2022 P1.03 P1.01
Dec 31, 2022 1.00 0.99
Dec 31, 2023 0.98 -

The Dec. 31, 2022, foreign exchange loss on forward contract amounted to:
A. P90,000 separate component of equity
B. P30,000 separate component of equity
C. P30,000 current earnings
D. P90,000 current earnings

END!