Accounting for Foreign Currency

Transactions
Foreign Exchange Transaction Defined

• A foreign currency transaction is a transaction that is to be

settled by the receipt or payment of a foreign currency (a
currency other than the reporting currency of an entity).
SOME COMMON FOREIGN CURRENCY TRANSACTIONS
1. Importing and exporting goods on credit with the receivable
or payable denominated in foreign currency.
2. Borrowing or lending denominated in foreign currency.
3. Entering into a forward exchange contract to buy or sell
foreign currency
Key Terms
• Denominated vs. Measured
Financial statement items are denominated in one
currency if their amount is fixed in terms of that currency. For
financial reporting purposes, the financial statement items
must be measured in the entity’s reporting currency.

• Conversion and Translation

Conversion is the term used to describe the process of
exchanging one currency to another currency, while
translation is the term used to describe the process of
changing the presentation of a foreign operation’s
financial statements from its reporting currency to the
parent’s reporting currency.
Exchange Rate
• is a measure of how much of one currency may be exchan
ged for another currency and several terms are used to d
escribe exchange rates.
• Spot rate indicates the number of units of a currenc
y that would be exchanged for one unit of another c
urrency ON A GIVEN DATE.
• Selling spot rate is the amount charged by the bank for c
urrent sales of the foreign currency.
• Buying spot rate is the amount at which the bank pays f
or the current purchases of the foreign currency that is us
ually lower than the selling spot rate.
• Current rate is the spot rate on the entity’s balance
sheet date, which normally pertains to the closing
spot rate.
Foreign Exchange Rate Quotations
 Direct Quotations
 this indicates the number of units of the home currency re
quired to buy one unit of the foreign currency.

Example:
1 US Dollar = Php42.616
1 Euro = Php56.074
1 UK Pound = Php68.752
Foreign Exchange Rate Quotations
 Indirect Quotations
 this indicates the number of units of foreign currency
that can be bought for one unit of home currency.

Example:
Php1.00 = 0.0235 (in US Dollars)
Php1.00 = 0.0178 (in Euros)
Php1.00 = 0.0145 (in UK Pounds)
Exchange Rate
• FORWARD RATE
• establishes, at one point in time, the number of units of one currency to be ex
changed for one unit of another currency AT A SPECIFIED FUTURE DATES.
On a given date, different forward rate may exist for the same currency, depe
nding on how far in the future an exchange rate is to take place.
• The agreement to exchange currencies at a future date is called FORWARD
CONTRACT.
• A premium or discount refers to when the forward rate is greater than or less
than the spot rate respectively.
FOREX Transactions
Dates to be considered:
• Transaction Date
• Balance Sheet Date
• Settlement Date
Approaches in Recording FOREX
• Two-transaction perspective.
• Under this approach the foreign currency transaction is regard
ed as two separate transactions: one is the purchase/sale of a
n item and the other is the purchase/sale of foreign currency.

• One-transaction perspective.
• Under this approach the foreign currency transaction is regard
ed as one transaction, in which the total forex loss and gain is t
reated as an adjustment to the total purchase price (increase)
and sales price (decrease), respectively.
Credit instruments available to an importer
or exporter in a FC transaction.

A letter of credit is a document issued by a bank, which gu

arantees the payment of a customer’s drafts for a specified
period and up to a specified amount.
Packing credit is a type of short-term financing available to
exporters who may use it to buy raw materials for productio
n of goods or preparation of finished goods to be exported.
Packing credit can help to enhance liquidity for exporters wh
o can request for it in Philippine Pesos or in other foreign cu
rrencies.
Example:
• On December 1, 2017, Import Computers, Inc. purchased
10 personal computers from a Japanese firm for 200,000
Japanese yen. The exchange rate for the Japanese yen
is P1 = Y2.22 on December 1 and P1 = Y2.70 on Decemb
er 31. On its December income statement, Import Com
puters should report a foreign exchange gain (loss) of?
Another Example:
• On December 1, 2017, the Pinoy Company sells construct
ion materials to a Japanese importer for 1,500,000 Yen.
The relevant exchange rates are:

December 1, 2017 1 Yen = P .45

December 31, 2017 1 Yen = P .47
January 30, 2018 1 Yen = P .40

On the statement of comprehensive income for the year

ended December 31, 2017, Pinoy Company should report
a foreign exchange gain (loss) of?
Foreign Exchange Gains and Losses

Statement Effect on
Statement
of FP accou balance re
of CI effect
nt affected ported
Increase in exchange rate:
Importing transaction Payable Increase Loss
Exporting transaction Receivable Increase Gain

Decrease in exchange rate:

Importing transaction Payable Decrease Gain

Exporting transaction Receivable Decrease Loss
Try this!

Laser Company sold merchandise to a US

customer for $20, 000. On June 1, 2007 after
confirmation of a letter of credit, Laser Company ship
the goods to US when the direct exchange rate is
P56.50. on December 31, 2007, the balance sheet of
Laser Company shows a receivable from US customer
in the amount of P1,148,000. On January 28, 2008
Laser Company collected the amount of the LC from
the bank, when the exchange rate is P56.80. What
adjusting entry was made on December 31, 2007?
Another one!
Laser Company sold merchandise to a US custome
r for $20, 000. On June 1, 2007 after confirmation of
a letter of credit, Laser Company ship the goods to
US when the direct exchange rate is P56.50. on De
cember 31, 2007, the balance sheet of Laser Comp
any shows a receivable from US customer in the am
ount of P1,148,000. On January 28, 2008 Laser Co
mpany collected the amount of the LC from the ban
k, when the exchange rate is P56.80. What is the a
mount of gain or loss on January 10, 2008?
Last na jud!
• Scroll, a Philippine Corporation, bought inventory ite
ms from a supplier in Germany on November 5, 201
1 for 100,000 marks, when the spot rate was P21. A
t Scroll's December 31, 2011, year end, the spot rat
e was P20.5. On January 15, 2012, Scroll bought 1
00,000 marks at the spot rate of P20.90 and paid th
e invoice. How much should Scroll report in its inco
me statement for 2011 and 2012 as foreign exchan
ge transaction gain or (loss)?