FOREIGN CURRENCY TRANSACTION Forward Rate In Forward Exchange
MODULE 01 Contract
Foreign Currency Transaction Vs. Foreign Before currencies are exchanged in a forward
Currency Translation exchange contract, the spot rate may move
above or below the contracted forward
Foreign Currency Transactions are
exchange rate, but this has no effect on the
transactions to be settled in a foreign forward exchange rate established when the
currency and financial statements of an forward exchange contract was negotiated.
affiliate maintained in a foreign currency
are translated (converted) into pesos by Bid Rate Vs. Offer Rate
multiplying the numbers of units of the
BID RATE – also referred to as buying
foreign currency by a direct exchange
rate is the maximum rate in the market
rate
that buyers of stock are willing to pay in
Foreign Currency Translation is the
order to purchase any stock or the other
process of expressing monetary amount
security demanded by them
that are stated in terms in a foreign
OFFER RATE – also referred to as
currency into the currency of the
selling rate is the offer rate is the
reporting entity by using an appropriate
minimum rate in the market at which
exchange rate.
sellers are willing to sell any stock or the
Foreign Exchange Rate other security which they are currently
holding.
It is the price of a currency expressed in terms
of another currency. Floating Rates
Two types of Quotation: The relationship between major currencies is
determined by supply and demand factors
Direct Quotation
called floating rates.
One in which the exchange rate is
quoted in terms of how many units of Floating rates increase the risk to companies
the domestic currency can be converted doing business with a foreign company
into one unit of foreign currency because after a rate change occurs, all
Indirect Quotation transactions are conducted at the new rate
An exchange rate is often stated in until the next change occurs.
terms of converting one unit of domestic
Measured Vs. Denominated
currency into units of foreign currency.
Transactions are normally measured and
Spot Rate Vs. Forward Rate
recorded in terms of the currency in which the
Spot rate is the rate for the immediate reporting entity prepares its financial
delivery of currencies exchanged. statements. This currency is usually the
Forward rate is the rate at which domestic currency of the country in which the
currencies can be exchanged at some company is domiciled and is also referred to as
future date. It is an exchange rate the reporting currency.
established at the time a forward Assets and liabilities are denominated in a
exchange contract is negotiated. A currency if their amounts are fixed in terms of
forward exchange contract is a contract that currency.
to exchange at specified rate currencies
of different countries on a specified
future date
Transactions Types Of Accounting Exposure
A transaction between two Philippine firm
companies requiring payment of a fixed
number of pesos is both measured and
denominated in pesos
In a transaction between a Philippine company
and a foreign company, the two parties usually
negotiate whether the settlement be made
A. In Pesos (not a foreign currency)
B. In the domestic currency of the
foreign company (a foreign currency)
The transaction is to be settled by the payment Functional Currency
of a fixed amount of foreign currency, the
Philippine company measures the receivable Functional Currency is the currency of the
or payable in pesos, but the transaction is “primary economic environment in which the
denominated in specified foreign currency. entity operates”.
Types Of Foreign Exchange Rate Exposure PAS 21 – The Effects of Changes in Foreign
Exchange Rate – emphasizes that the
Foreign Exchange rate exposure can be functional currency of a firm should be the
broadly categorized into two main types: currency that influences the sales prices of
Accounting Exposure goods and services.
Is the exposure to changes in exchange rates Functional Currency should also be the
as a result of the entity: currency in which a firm receives most of its
cash receipts and expends cash outlays.
Entering into foreign currency transactions that
result to contractual rights and obligations, Factors: Functional Currency
such as receivables or payable denominated in Primary Indicators
foreign currencies
The currency that mainly influences the sales
Having to translate the foreign currency prices of goods and services
financial statements of foreign operations from
local currency to the group’s reporting currency The currency of the country where competitive
for the purpose of preparing consolidated forces and regulations determine the sales
financial statements prices of goods and services
Economic Exposure (Operating The currency that mainly influences labor,
Exposure) material, and other costs of goods and services
Supporting Evidence
The currency in which financing is obtained
The currency in which receipts from operating
activities are usually retained
Foreign Currency Transactions
A transaction that requires payment or receipt The key feature that distinguishes a monetary
in a foreign currency. item from a non-monetary item is the right to
receive (or an obligation to deliver) a fixed or
In particular:
determinable number of units of currency.
A. A transaction with a foreign company
Examples Of Monetary and Non-Monetary
that is to be settled in pesos is not a
Items
foreign currency transaction
B. A transaction with a foreign company
which is settled in foreign currency is a
foreign currency transaction. This leads
to the Philippine company being
exposed to the risk of unfavorable
changes in the exchange rate that may
occur between dates the transaction
entered into and the date the account is
Reporting At Subsequent Balance Sheet
Date
settled. At each balance sheet dates:
1. Foreign currency monetary items have
PAS 21 requires that a foreign currency to be adjusted (or remeasured) for
transaction be recorded (and measured) by exchange rate changes using the
applying the foreign currency using the spot current/closing rate on balance sheet
exchange rate, referred to as the actual rate date.
existing of the transaction date. 2. Non monetary items that are measured
in terms of historical cost in a foreign
currency are translated using the
Monetary Vs. Non-Monetary exchange rate on the date of the
transaction
3. Non monetary items that are measured
at fair value in a foreign currency are
translated using the exchange rates on
the date when the fair value was
determined. Usually this date is the
balance sheet date, hence, the
current/closing rate is used.
Transaction Exposure
Foreign currency monetary and non-monetary
items carried at fair value have to be
remeasured for changes in foreign exchange
rates. They are said to be exposed to foreign
exchange risk.
Transaction exposure is used to refer to items
Stages And Appropriate Exchange Rate
in the financial statements that are exposed to
foreign exchange rates as a result of foreign
currency transactions. As a result of the
exposure, an exchange gain or loss takes
place when the foreign exchange rates change
between two dates.
The resulting gains or losses depends on the
direction of the foreign exchange rate
movement and whether item is an asset or a
liability.
Treatment Of Transaction Gain/Loss
Exchange gains and losses on monetary items
are recognized in the profit and loss of the Summary Of Forex Gains and Losses
entity as they arise. Commonly recognized in:
1. On balance sheet date. Foreign
currency monetary items are translated
at the current/closing rate that is
different from the spot rate at which they
were initially received during the period
or reported in financial statements of the
previous period. In this case the
exchange gain or loss is recognized as
unrealized gain or loss.
2. On the date of settlement of foreign
currency monetary items. The exchange
rate on the date of settlement of a
foreign currency monetary item differs
from the spot rate at which it is
recorded, thus resulting to a realized
exchange gain or loss.
Foreign currency exchange differences
on non-monetary items are recognized
in the same way as the gain or loss on
the item is recognized. Gain or loss on
anon-monetary item recognized in profit
or loss, any exchange in the gain or loss
is also recognized in profit or loss
statement.
Gain or Loss on a non-monetary item
that is measured at fair value is
recognized in OCI
