PAS 21: THE
EFFECTS OF
CHANGES IN
FOREIGN
EXCHANGE RATES
Lorenzo Dominic M. Salazar
LEARNING
OUTCOMES
1. Understand the provisions of PAS 21.
2. Apply the accounting for the effects of
changes in forex rates.
3. Understand the nature of foreign currency
transactions & operations.
4. Identify and apply the basic steps in
translating foreign currency amounts into
functional currency/ functional currency to
presentation currency
PAS 21
PAS 21
• 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
PRESENTATION TITLE
FUNCTIONAL
CURRENCY
The primary economic environment in which an entity
operates is normally the one in which it primarily generates
and expends cash.
Factors in determining functional currency:
a. The currency that mainly influences sales prices for
goods and services (often the currency in which sales
prices for its goods and services are dominated and
settled)
b. The currency of the country whose competitive forces
and regulations mainly determine the sales prices of its
goods and services
c. The currency that mainly influences labor, material
and other costs of providing goods or services (this
will often be the currency in which such costs are
denominated and settled)
INITIAL RECOGNITION
A FOREIGN CURRENCY TRNASACTION SHALL BE
RECORDED IN THE FUNCTIONAL CURRENCY, BY
APPLYING TO THE FOREIGN CURRENCY AMOUNT THE
SPOT EXCHANGE RATE BETWEEN THE FUNCTIONAL
CURRENCY AND FOREIGN CURRENCY AT THE DATE OF
THE TRANSACTION.
PRESENTATION TITLE
SUBSEQUENT TO INITIAL RECOGNITION
EXCHANGE DIFFERENCES- SHALL BE RECOGNIZED IN
PROFIT OR LOSS IN THE PERIOD IN WHICH THEY ARISE.
PRESENTATION TITLE
FOREX RATES
DIRECT QUOTE -THE EXCHANGE RATE IS STATED
AS A NUMBER OR UNITS OF LOCAL CURRENCY IN
EXCHANGE FOR ONE UNIT OF FOREIGN
CURRENCY($1= P50)
INDIRECT QUOTE- THE EXCHANGE RATE IS STATED
AS A NUMBER OR UNITS OF FOREIGN CURRENCY IN
EXCHANGE FOR ONE UNIT OF LOCAL
CURRENCY(P1=$0.02)
SELLING SPOT RATE (OFFER RATE)= IMPORTATION
BUYING SPOT RATE (BID RATE)= EXPORTATION
PRESENTATION TITLE
FOREIGN CURRENCY FINANCIAL
STATEMENTS TRANSLATION
PRESENTATION TITLE
-ASSETS,LIABILITIES= CLOSING RATE AT THE DATE OF
THE STATEMENT OF [Link].
-INCOME &EXPENSES= EXCHANGE RATE AT THE DATE
OF THE TRANSACTION, AVERAGE RATE
-ALL RESULTING EXCHANGE DIFFERENCES= OCI
PRESENTATION TITLE
CLOSING RATE METHOD (CURRENT RATE METHOD)
ASSETS,LIABILITIES (MONETARY/NONMONETARY ITEMS)=
CURRENT RATE (CLOSING RATE)
SHE ACCOUNTS= HISTORICAL RATE,
BEG BAL OF RETAINED EARNINGS= MUST BE SET TO THE
AMOUNT EQUAL THE BALANCE OF THE PREVIOUS PERIODS
DIVIDENDS= RATE ON THE DATE OF DECLARATION
REVENUES,EXPENSES= EXCHANGE RATE AT THE DATE OF
TRANSACTION (HISTORICAL RATE), AVERAGE RATE FOR THE
PERIOD
TRANSLATION ADJUSTMENT GAIN/LOSS= OCI
PRESENTATION TITLE
TEMPORAL METHOD
MONETARY ASSETS & LIABILITIES (CASH, DEPOSITS, RECEIVABLES, PAYABLES,AND
MOST OF THE LIAB)= CURRENT RATE/CLOSING RATE
NONMONETARY ITEMS AT HISTORICAL COST (FIXED ASSETS CARRIED AT COST,
INVESTMENTS AT AMORTIZED COST, PREPAYMENTS, INVENTORIES, INTANGIBLES)=
TRANSACTION DATE(HISTORICAL RATE)
NONMONETARY ITEMS AT FAIR VALUE (FIXED ASSETS AT REVALUATION MODEL,
INVESTMENTS AT FAIR VALUE, INVENTORIES CARRIED AT REPLACEMENT COSTS)=
EXCHANGE RATE AT THE DATE OF REVALUATION /FAIR VALUE REMEASUREMENT
SHE= HISTORICAL RATES, EXCEPTIONS:
BEG BAL RETAINED EARNINGS= MUST BE SET TO THE AMOUNT EQUAL THE BALANCE OF
THE PREVIOUS PERIOD
DIVIDENDS= RATE ON THE DATE OF DECLARATION
INCOME
INCOME STATEMENT
NON MONETARY ITEMS (COST OF SALES, DEPRECIATION,AMORTIZATION,AND OTHER
ALLOCATION OF NONMONETARY ITEMS)= HISTORICAL RATE
MONETARY(SALES, PURCJASES,EXPENSES &INCOME ITEMS THAT RESULT IN
INFLOW/OUTFLOW OF MONETARY ITEMS= ACTUAL RATE/HISTORICAL RATE, FOR
PRACTICAL REASONS= AVERAGE RATE
ANY RESULTING DIFFERENCES (REMEASUREMENT GAIN OR LOSS)= REPORTED AS
PROFIT OR LOSS FOR THE PERIOD
PRESENTATION TITLE
