338282974 Adfianp Forex Quizzer 2016 n PDF

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Accountancy DepartmentADVANCED FINANCIAL ACCOUNTING II QUIZZERNotesObjective The objective of PAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. Th...

Description

Accountancy Department ADVANCED FINANCIAL ACCOUNTING II

QUIZZER

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Notes

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Objective The objective of PAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. Key definitions Functional currency: the currency of the primary economic environment in which the entity operates. (The term 'functional currency' was used in the 2003 revision of PAS 21 in place of 'measurement currency' but with essentially the same meaning.)

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Presentation currency: the currency in which financial statements are presented. Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. 25

Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity.

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Basic steps for translating foreign currency amounts into the functional currency Steps apply to a stand-alone entity, an entity with foreign operations (such as a parent with foreign subsidiaries), or a foreign operation (such as a foreign subsidiary or branch). 1. the reporting entity determines its functional currency 2. the entity translates all foreign currency items into its functional currency

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3. the entity reports the effects of such translation in accordance with paragraphs 20-37 [reporting foreign currency transactions in the functional currency] and 50 [reporting the tax effects of exchange differences]. Foreign currency transactions A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction (use of averages is permitted if they are a reasonable approximation of actual). At each subsequent balance sheet date: foreign currency monetary amounts should be reported using the closing rate

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non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction

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non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined Exchange differences arising when monetary items are settled or when monetary items 5

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are translated at rates different from those at which they were translated when initially recognised or in previous financial statements are reported in profit or loss in the period, with one exception. The exception is that exchange differences arising on monetary items that form part of the reporting entity's net investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in other comprehensive income; they will be recognised in profit or loss on disposal of the net investment. As regards a monetary item that forms part of an entity's investment in a foreign operation, the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item. Also, the accounting should not depend on which entity within the group conducts a transaction with the foreign operation. If a gain or loss on a non-monetary item is recognised in other comprehensive income (for example, a property revaluation under PAS 16), any foreign exchange component of that gain or loss is also recognised in other comprehensive income.

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Translation from the functional currency to the presentation currency The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy are translated into a different presentation currency using the following procedures: 25

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assets and liabilities for each balance sheet presented (including comparatives) are translated at the closing rate at the date of that balance sheet. This would include any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets and liabilities of the foreign operation; income and expenses for each income statement (including comparatives) are translated at exchange rates at the dates of the transactions; and all resulting exchange differences are recognised in other comprehensive income.

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Special rules apply for translating the results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy into a different presentation currency.

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Where the foreign entity reports in the currency of a hyperinflationary economy, the financial statements of the foreign entity should be restated as required by PAS 2 9 Financial Reporting in Hyperinflationary Economies, before translation into the reporting currency.

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The requirements of PAS 21 regarding transactions and translation of financial statements should be strictly applied in the changeover of the national currencies of participating Member States of the European Union to the Euro – monetary assets and 2nd Semester Admission YearPage 2016 - 2017 2 of 8

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liabilities should continue to be translated the closing rate, cumulative exchange differences should remain in equity and exchange differences resulting from the translation of liabilities denominated in participating currencies should not be included in the carrying amount of related assets. 5

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Disposal of a foreign operation When a foreign operation is disposed of, the cumulative amount of the exchange differences recognised in other comprehensive income and accumulated in the separate component of equity relating to that foreign operation shall be recognised in profit or loss when the gain or loss on disposal is recognised. Convenience translations Sometimes, an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation is that the resulting financial information does not comply with all IFRS, particularly PAS 21. In this case, the following disclosures are required: [PAS 21.57] Clearly identify the information as supplementary information to distinguish it from the information that complies with IFRS Disclose the currency in which the supplementary information is displayed Disclose the entity's functional currency and the method of translation used to determine the supplementary information.

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Problems

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Problem 1. On November 10, 2015, DBM Company, a Philippine Company ordered merchandise from UK Company for 79,500 pounds. The merchandise was delivered on December 20, 2015. The invoice was dated December 6, 2015, the shipping date (FOB shipping point). DBM Company paid the invoice on January 30, 2016. 2nd Semester Admission YearPage 2016 - 2017 3 of 8

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The spot rates for a pound on the respective dates were:

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November 10, 2015 December 6, 2015 December 20, 2015 December 31, 2015 January 30, 2016

P66.90 P66.15 P65.75 P62.35 P63.15

What amount will affect profit or loss in 2015? A. P302,100 gain B. P63,600 loss C. P270,300 gain D. P361,725 gain

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Problem 2. On October 9, 2015, GBC Company sold goods on account to Britain Corporation for 125,800 pounds. The date of invoice is October 29, 2015 and payment is due on January 30, 2016. 20

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Exchange rates were as follows: Buying rate October 09, 2015 P67.50 October 29,2015 P68.70 December 31, 2015 P64.10 January 30, 2016 P62.40

Selling rate P69.20 P66.80 P63.40 P65.50

What amount will affect profit or loss in 2016? A. P427,720 loss B. P578,680 loss C. P213,860 loss D. P264,180 gain

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Problem 3. X Trading purchase goods from Y, a company based in US for 1,200,000 dollar ($). The exchange rate at this time is P1 = $12.5. X pays 30 days later when the Prevailing exchange rate is P1 = $16. 40

How much is the foreign currency gain/loss on the books of X and Y respective? A. P21,000 gain; P21,000 loss B. P21,000 gain; 0 C. P4,2000,000 loss; 0 D. P4,200,000 loss; P4,200,000 gain

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Problem 4. Manila company purchased merchandise for 300,000 pounds from a vendor in London on November 30, 2022. Payment in British pounds was due on January 30, 2023. The exchange rates for the British pounds were as follows: 50

Sports rate 30-day rate 60-day rate

November 30, 2022 $1.65 1.64 1.63

December 31, 2022 $1.62 1.59 1.56

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