ssh ’ easy shia Conk ReSA wt eal The Review Schoo! of Accountancy . Papa Cor. S. H. Loyola Sts, Sampaloc, Manila ‘Tel Nos, 734-39-89 & 735-98-07 ADVANCED FINANCIAL ACCOUNTING Forei¢ gn Currency Transactions © REPORTING with and without Hedging Instruments : ae I - Importing Transaction haber 0) Ue On December 1, 2014, petra Corporation, MOBEM equipment FOB shippinporu/adl Point from an American Company for US $10,000. The equipment was Shipped and invoiced to Petra on December 16, 2014. Petra paid the invoice on 2018. Relevant spot rates for Us dollars on the Fespective dates are as follows: Buying ling Spot ee | Spot Bate Rate Deceaber 1, 201 par a P45.50 F400] dye > ny Decenber 16, 2018 "sua dt fra] 48.90. 50,00 “ne Decenber 21,20 as a 49.50 51,00 3 January 15, 2015 FAG 50.00 30.50, _ ; Required: ap 1. brapare 21d entries on Petra comperation’s books to record the above, | transactions. } 2. Determine the following: ent a. Foreign exchange gain or on: 4 a.l. December 16, 2014/0 os. 212) pecember 32, 2014| (()}x10,0% + Ceodn ple a.3. January 15,'2015 |} i ow + 5, bon becemee a abit” 1g Se Sa ae b.1. Accounts payable § a itu, . Bl2. Bquipnent SB? doy we md Me tpt whe II - Exporting Tran’action Conrada Exports corporation, @UMQUNMGEGMENGES® - metal crafts to a Canadian Corporation for a 10,000 Canadian dollars. Pertinent information on exchange conversion rates related to this transaction e as follows: Buying | Selling spot | Spot Rate Rate Noveaber 16, 2014 - receipt of order | P s1.20 352.00 [December 16, 2014 — date of shipment 52.50 = 53.00 wy [December 31, 2014 - balance sheet date 53.50 53.75 sO [Ganuary 15, 2015- date of collection 53,00 54.00 Required: 1. Prepare al] entries on Petra Corporation's books to record the above transactions. 2, Determine the following: a. Foreign exchange gain or loss on: gu Capa a.1. December 16, 2014 0 Ale 5.8 (not mgr’) 2.2. December 31, 2014 | Sole, 2.3. January 15,2015 59) a t b. On December 31, 2014: Kon ( a. Accounts receivable? 53.50 b. Sales#'$7.90 III - Import Ashar, a Philippine Corporation, inventory items from a foreign hos SUPPLier_in US on November 5, 2014 for US $QQMM899, when the spot rate 4 was MUDD. at nshar’s Decenber 31, 2014, "Yestrens, the SPORORSEE ot es + On Faue, 2015, Ashar bought at the spot rate se of Reg and paid the invoice. How much should Ashar report in its incone “statements for 2014 and 2015 as foreign exchange transaction gain or (loss}? 2014 2015 2004 201s 2015 - P(50,000) P 40,000 c. P P “30,000 (&,) 50,000 ( 49,000) d. 10,000 -o-ADVANCED FreaNcraL, ACCOUNTING & REPORTING page 2 IV - Importing and Borrowing n had the following foreign currency transactions runt Merchandise was Qypensse8Perom a foreign supplier on SA, 2014 for the Philippine peso equivalent at alle invoice was pate on REFGHUBOWNBDIA, at the Philippine fy B45: 000- ° oan ” 28. Bon-Bon Corpo: ratios during 2014 Bon-Bon WONBBUBS fron foreign ‘Corporation with a evidenced by a noge that was Decenber le in the lender's lo currency on On BS BW, 2014, the philippines peso equivalents o principal amount and accrued interest vere BBORUUe and @ANAUOW respectively: Interest on the note is In Bon-Bon’s 2014 income statement, what amount should be included as foreign exchange loss? cof V5 aro. c. P21,000 a b. 6,000 @& 27/000 Sat as V - Export tr ( september 1, 2014, Rosen Corporation received an order for equipment front foreign’ custoner for 300/000 local. currency units (LCU) when the Philippine peso equivelent. Was 96,000, Rosan MMMBBR the equipment on yond billed the custoner” for AOMGQODLCU when the chippine pese equivalent gAUEUOURUDOY Rosan received the customer's Ftaittance in full on Novenser 16, 2014, and sold the 300,000 L6U for Ta its incone statement for the year ended December 31, 2014, Rosan should report a foreign exchange transaction gain of: 5,000 9,000 VI - Lending On SPANO vir Company lent SUOMI to a foreign supplier, evidenced by an interest-bearing note due on July 1, 2015. The note is denominated in the f the borrower and was equivalent to QMNEDED local currency SetMenTict) on the loan date. The note Principal was appropriately included at SWOWOOF in the receivable section of Vir's DRCRBEFSPYPSZOMMalance sheet. The note principal was repaid to Vir on the July 1, 2015 due date when the exchange rate was to BHR In its incone statement for the year ended, Decenber 31, 2018, what amount should Vir include as a foreign currency transaction gain or loss? a. P -0- €. P18, 000 gain b. 15,000 loss © 35,000 loss VII - Import and Export During July 2014, Petron Corperation had the following transactions with foreign businesses: Billing Exchange Rate Date Nature of Transaction Currency (Direct) FA 7/1/14 Imported merchandise costing 100,000 Rupees fron Pakistan wholesaler Rupee P.82 7/19/14 Paid 408 of anount owed 283 1/31/14 Paid remaining anount owed 8 Customer Ay . T/15/14 Sold merchandise for 50,000 pound to Syrian wholesaler pound 1/20/14. Received 204 paynent ae 1/30/14 Received remaining amount owed Tor “Syrian pound. 7 1, What is the capitalized uholeciers S#Pitalized cost of inventory purchase from the Pakistan aro A eabe Fata 782,000 spot ra AFAR-122 ow ACCOUNTING § REPORTING page 3 + What he transact Qkeign exchange gain of oss on July 10, 2014 8 P1000 ToeeteiRG from the Paklett an rages, i Aote one ©. PA00 gain * gain © 400 loss 3. Wh trangacl®, the foreign exchange Gain or loss on duly 31, 2014 a. Pe Oop etteing from the Pakistan wholesaler? + P4,000 gain c. P2,400 loss + 4,000 loss © 2,400 gain 4. What 46 the reportable sales anount in the income statement in 20147 2. P38, 0 Gx P45, 500 b. 45,000 47,500 5. What is the foreign exchange”sain or loss on July 20, 2014 transaction arising from the Syrian wholesaler? a. P500 gain . 2,500 gain 500 loss a. 2,500 loss 6. What is the g from the Syrian wholesaler? P1,600 loss c. P2,000 gain 1,600 gain a. 2,000 loss foreign exchange gain or loss on July 30, 2014 gar arising @ Derivatives and Hedging Activities The Four Cornerstone Decisions of IAS (PAS) No. 39 rs (PAS) No. 39 is based on the following cornerstone decisions made by the TASB Cornerstone Decision No. 1: tights and obligations liabilities (thus balance sheet — not Derivatives are contracts that create that meet the definitions of assets and these rights and obligations are reported in the in an “off-balance-sheet’ manner) . Sornerstone Decision No. 2: Fair value is the only relevant measure for sheet ae ees tzivatives, thus derivatives are reported in the balance sheet at their fair values - whether or nut they hedga an item, Cornerstone Decision No. 3: only items be detemaple on the balance sheet (thus losses on derivatives canner be (deferred and reported as assets, likewise, gains on derivatives cannot be deferred and reported as Liabilitie: that are assets and liabilities Cornerstone Decision No. 4: ses must be initial section. Furthermore, in certain specified sit Sarrently, the eeesing tFansaction must be reported in earniage thet the of cammal, accounting for the hedged item must be alrecea ae Guerentiy wguatting oss or gain on the hedged iten is elo tepertey Sertetn spent ggrmings. ‘The accounting treatment for both types of choos seTeaag cecified situations comprises what is collectively referred to as “hedge accounting”. 'Y reported in the equity ‘uations in which the gain Types of Derivatives Derivatives can be generall: Y categorized into one of the following categories: 3+ Gption-based derivatives (examples are option contracts, interest 2 none rycnd interest rate floors). Under these contracts, it hes faverumitet sxposure” wherein the party can potentially haves favorable outcome for which it pays a premium’ at inception; the choek Party can potentially have only an unfavorable cotcons for which it is paid the premium at inception. Consequently, only the downside risk on the hedged item is counterbalanced.SPVANCED FINANCIAL ACCOUNTING & REPORTING page 4 ; are forvards, futures, | 80e Forward-based wed derivatives (examples res Beaper ane’ dartuncives (OT hee 9 nes sided SPOT in the each party has a favorable or unfavorable Ovrceny Consequently, domside ‘rier and the upside potential on the hedged item axe counterbalanced. Jing” and “Hedge Accounting” cK , ¥ pros gener". ns of NG: are in is a and 1 terms it ce a eee ie Me a G'S 8 Mere nedgo. (8 when a enterPs vou foreign currency loan to finance 2 foreign eulereney Oe atone tt tne foreign currency 1009 26 orarrtnen ee He OE ce any gains OF burden of the liability will ‘increase by the seme amount. Tosses will be cancelled out. 5 44 - ricaniy the offesteing effects o” cogntzes, symnat ricoh og of the hedging, teeta inne, Felt adgging instrument will noensi}Y Distinguishing between “i profit or loss of changes and the related item being be a derivative. cing ( (ees [P53 vas 39 ideneition enreo eypes of heave: [CAQS Hotty Sto am unrecognized i, Fair value ° iis hedges against the ri value hedge Ggnizes asset oF labilie Foir velve of @ resomnized 859° Soy asset, iebility, OF ty mre uputabie to a particular risk Such as the fair some me eee -¢ debt will change as a result of changes in value of fixed rat interest rates. 2. cash flow hedge ~ this hedge against the risk of changes in expected cach flaws, Te te a hedge of the expostre ‘to variability in cash cash “nat is attributable to a particular tisk associated with t or Liability such as future interest payments a. A recognized asse or variable-interest debt oF e forecasted transaction such as & forecasted bo A mighty probabl oor Pe reported profit or Bale or purchase that will affect future loss 3, medge of a net investment in foreign operations. Forward Contracts A forvard contract is an agreement betwoon a buyer and a seller ERs 2 sme ine delivery of sone commodity at a specified future dete 8¢ EepstSgreed to today (the exercise price). A typical example of cre eerd contracts is FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forvard contract is an agreement to buy or sell a foreign currency 4! (a) a specified future date (usually within 12 months), and (2) 2 specified exchange rate. This rate is called the forward rate. ‘At the inception of the contract, the forverd rate normally varies from the spot rate. The difference between the two rates is referred to as a Giscount (preaium) if the forward rate is less than (greater than) the spot ra ‘The use of forward contracts includes the following: 1. Hedges a. Forvard contracts used as a hedge of a foreign currency transsctica, ‘These include importing and exporting transactions gene sated ip foreign curren These hedges do not qualify for hedge ing under PAS 39 because the foreign exchange gains sses are already reported at market value on the balance AFAR-12ADVANCED FINI ANCIAL ACCOUNTING & REPORTING page 5 ». Forward CORTES contoncte used aa a nadge of an unrecoonted tim an nin “type ce Yuae tec how ectnvad age fais vein hedowe ‘ther the"cash fice" nedueas” However, TAS” 38Pae™ 1 Cee That hedge of the "Eotevin “Suveancy ‘tien oc") ttn Sommitnene ‘can te "teticea an esther a, casv" Slow hese of fate Yelue hedge) Wadgesessunélng® rules ‘apply. fovh, the change in the ealae "oé the hedge andthe" vue’ a rhe hedged Teen" are Eevorted” in sarninge Thefore the contsact ts feporeed in the An example of an unrecognized fem commitment would ba when the fora ‘Tined amwunt of foreign cursency. c.Forward contract used az a hedge of a foreign-currency-denominated “forecasted” transaction (a cash flow hedge). Initially foreign exchange, gains and losses on the hedging instrument are Tecognized in equity, while no offsetting amount is reported on the hedged item. Eventually, the exchange gains and losses will be reported in earnings in the period the hedged items affect item hedged ig a forecasted purchase of earnings (i.e., if the {Rentory, the gains and losses on the hedge will be reclassified Gaventory is sold, or when a forecasted into earnings when purchase of equipment, reclassified into earn. ‘the gains and losses on the hedge will be ings as the equipment is depreciated.) a situation where the to occur in the near An example of a forecasted transaction is a means to hedge the firm has planned sales receipts (expected future) and uses the forward contract a5 cash flow risk. @. Forward contracts as a hedge of a net investment in foreign operations. A foreign currency transaction is considered a hedge Sf a net investment in a foreign entity if the forward contract ts designated as, and is effective as, a hedge of the net Investment. The gain or loss on the hedging instrument is reported in the equity the same manner as the translation adjustment. Forward contracts used to speculate changes in foreign currency, Forward rate should be used because 4 firm speculating in foreign currency changes is exposed to the risk of movements in the forward rate. Foreign exchange gains and losses are reported currently in the income statement. 2. Speculation. Hedge Accounting: Summary Fair Value Hedge | Cash Flow Hedge Hedging instrument (Forward / On balance sheet | On balance Contract) carried at FAIR| sheet carried VALUE at_FAIR VALUE Gain or loss on HEDGING | Recognized To the extent, INSTRUMENT immediately in |the hedge is PEL effective, recognized as other comprehensive income. The ineffective portion of the gain or loss will be reported immediately in Pe AFAR-12Fair Value Hedge | Cash Flow Hedge Galn or loss “on the ‘applicable 17% oh the WEDGES | Recoani red PP TH due to hedged risk immediately in P forecasted ol cttona “Tosa inthe other | Wot applicable iter | hedged isa ive See te | transferred to P & L songeustes ; | |Saeentory, the gene and iiasoe 168) the hewge, will ‘be | | Peciosei tied into earnings when inventory | is sold, oF purchase of equipment, the gains and losses on the will be lassified earnings as the equipment is depreciated J Ll Futures Contract A futures contract is the same thing with forward contracts except that instead of being negotiated between two parties, the contract is a standard one that is sponsored by an organized exchange. With a futures contract, the exchange handles the cash settlements between the two parties to the contract. Accordingly, with a futures contract, the two Parties to the agreement almost never directly contact one another This is not true with forward contracts because they are directly negotiated between the two parties. Assessing Hedge Effectiveness 1. A hedge is highly effective (effectiveness) if there will be an approximate offset, ight ‘Changes in fair oeteek Changes in the value of the cash \, (aot co (fair value risk flows of the 1258) of the hedging hedged item snetrument 2. Initial expectation must be that they “almost fully offset” 3. Actual offsetting within a range of 80% to 125% is acceptable 4. Method of assessing hedge effectiveness depends on the documented risk management strategy No single method for assessing hedge effectives is prescribed, but time value of money should be considered (refer to discussion of Split Accounting) Split Accounting in Assessing/Measuring Hedge Effectiveness PAS 39 requires all derivatives to be valued at their fair values. Thus, both the time value element and the intrinsic value element are valued fair value. Accordingly, the need to determine the breakdown of the total fair value occurs only if split accounting is used.Intrings, NANCIAL AccounriNG & REPORTING page 7 Ume value Ue BAY be viewed as being conceptually different from the © value, it theoretically can be sacounted for separately from the OE Yoag Se Satving out the tine. vaise aleone end reporting its gain slenone’s geintely from the manner of reporting the intrinsic value joss is referred to as split accounting. Intrinsic value i, # the incremental preniua paid (difference between the pootepiice and the exercise prices to te placed in this favorable Enalect): , 78 eutize, preniom de called the. Cine vaine ‘eine Corte analogous to @ Prepaid insurance that could be amortized over the life Of the option period) - cea yeeemits (but does nor require) an entity to exclude all or part Thal, WEvative’s time value element in assessing hedge effectivences Thus, split accounting (accounting for the time value elasent in a separate manner from the intrinsic value eleneit) ie permitted. For forvard contracts purposes, tine value element applies to premium and discounts on forward rates. TE hedge effectiveness were assessed by excluding time value element, the Presumed change in fair value of the foreign currency commitment would be based on the change in the spot rate - not the change in the forvard rate. Thus, one compares: 2, Only the foreign currency forward’s (attributable to the change in the spot rate) with, 2. The change in the foreign currency conmitment’s fair value using the change in the spot rate. Vill- Forward Contracts - Exposed Liabilly/Asset (“Undesignated Hedges” or Hedges does not require Hedge Accounting) intrinsic value change |. Given the following information f 9- tract: % a ven ng information for a SO-day contact: a FE value fon, Value Today $,000 Interest Rate... . 7% 3 months interest 87.50 Value in 3 months . ae The spot rate today is 1 FC = 7 What will be the forward raie® a. IFC =.75 pesos b. IFC =.57 pesos Use the following information for questions 2 to 11: Valley Enterprises purchases inventory of (0001009 foret foreign supplier on ABGRINB with payment due on November 1. Management of Valley Enterprises immediately enters into a forward contrac! t to hedge this transaction. Valley Prepares quarterly financial statements with a Dec ember 31 year-end, The relevant ‘exchange rates and forward contract fair values are os follows: ign curency units (FCUs) from a — Now. 1 (dy, Forward Contract Gyo rN qbslg, — Spolate fomardRate kvunt Fob Vous jas BY wey Aug. 13 PING P1120 Poo Sept. 30 PLAQ9 PHI26 P 6,000 Stk Nov. PLI38 © PIL136 vabegt &xpicatiqn 18,000 2. What is the balance in the ‘accounts payabie account on August 132 @ P1,116,000 c — P1,129,000 P1,138,000 a 1,130,000 3. What is the balance in the ‘accounts payable account on September 30¢ @.PI.116,000 © 1,129,000 b. -P1,138,000 1,130,000 4 What is the amount of the exchange loss recognized with respect to the accounts Payable account on Sepiember 308 P13,000 P9,000 B. P22.000 dP4.000 AFAR-12TNANCIAL ACCOUNTING & REPORTING page 8 5. What ist Ie balance: Ieee count on November 1, immediately coro gIaNC® nthe accounts payable cecount a ‘ 21-138.000 ©. P13,900 » 1,116,000 4. 1,129,000 & What is the amount of the exchange lost recognized with respect to the accounts Payable account on November 1# 3. P13,000 ©) F900 b. P22,/000 (@ pa000 7. What is the balance in the forward contract account on August 13% None ©. 712000 ose! P6000 assot 3. 718000 oxtet 8. What is the balance in the forward contract account on September 30? 2. None 6,000 asset P2000 ost b. 6,000 fiabity ‘he 9. What is the amount of the exchange loss or gain recognized with respect to forward contract on September 208 a. POO " a P12,000 loss a. P600d oss (8) P6,000 gain d. P12000geIn 10. What is the balance in the forward contract account on November 1? 2." None P1800 as b. — P6,000 asset P18,000 liability 11. What is the amount of the exchange loss or gain recognized with respect to the forward contract on November 1? @. P18,000 loss cc. P12,000 loss b, P18,000 gain @ _P12.000 gain 12. Whol is the net increase or decreaje Th cash tlow from having entered into this forward contract hedge? ard 3g. lero @ _P18,000 increase 13, What is the amount of premium or discount on forward contract? . Zero ¢. P4000 premium revenue 6 4,000 premium expense d. —P 4,000 discount expense Use the following information for questions 14 to 17: Taste Bits Inc. purchased chocolates from Thailand for 200,000 bahts on December 1, 2015. Payment is due on January 30, 2016. On December 1, 2015, the company also entered info a 60-day forward contract to purchase 200,000 bahits. The forward contract _ is not designated os a hedge. The rates were as follows: cc. — P'18,000 decrease d. — P 4,000 decrease Spot Raie Forward Rate December 1, 2015 P08? PO.90 (60 days) | December 31, 2015 POST 0.93 (30 days) January 30, 2016 PO.I2 14, The entries on December 31, 2015, include a: <2. Credit to Foreign Currency Payable to Exchange Broker, P4000. ©oebit to Foreign Currency Receivable from Exchange Broker, P6000. €. Debit fo Foreign Currency Receivable from Exchange Broker, P186,000. d. Debit to Foreign Currency Transaction Gain, P4,000. 15. The entries on January 30, 2016, include a: )Debit to Pesos Payable to Exchange Broker, P180,000. b. Credit to Cash, P184,000. © Credit to Premium on Forward Contract, P4000 — DNE ¢: Credit to Foreign Curency Receivable from Exchange Broker, P180,000, 16.The erat of January 30, 2016, include a: Credit #8 Foreign Currency Units (Bahts), P184,000, \Crecit to Cash, P180,000. ©. Debit to Foreign Currency Transaction Loss, P4,000 4. Debit to Pesos Payable to Exchange Broker, P184,000, AFAR-12neers ADVANCED FINanc: ‘IAL ACCOUNTING & REPORTING page 9 17. The @.0sere £0 January 30, 2016, include a: . Credit to prs Payable to Exchange Broker, 184,000. ©. Credit to. oe Currency Transaction Gain, P4,000. Dott ie horton Currency Receivable trom Exchange Broker, P180,000. Uae re no Forian Currency Unis (Bah), P104000. following Information for, 18 to 23: ihe Poeed an wrasP MSP Rtoey corting £00000 foreign curency (FC) wih @ Stark magi the v Stork entered into (on WBSIIBIES! when the spot rate was WRGISIROIBE7. Also on May te of HEC DORIS. ny a bt the spot rate was entrar! fo purchase SOOGOOIEE ct a fooyatd i Payment wen ace a AES ae RREPAIStork has nthe ce. he spo! rte rs RABAT '@ forward rate on the contract was (gAiGasiRO%257 Changes in the current valve of the forward contract are measured as the present valve of the changes in the forward rates Over jime. The relevant discount rate i BB 18. The foreign exchange gain on hedging instrument (foward contract] on June 30 ‘amounted to: a. P2,000 & 995 . P1,000 d. Zero 19. The nominal value of the forward contract on June 30 amounted to: 2,000 ©.P995 Be oe 20-The fair valve of the foward contract on June 30 amounted to: «@. P2,000 @P 99s b. 1,000 di. Zero. 21. The net decrease on Stork Corp.'s net income on June 30 income statement ‘amounted to: «a. P2,000 @&pP1.005 b. P1,000 dP 995 22. The foreign exchange gain due to hedging instrument {forward contract) on August 1 amounted to: 1a. P2,500 . P1,500 @P 505 b. P2,000 23, MNC Corp. (a Philippine-based company} sold parts to a foreign customer on December 1, 2015, with payment of 10 million foreign currencies to be received on March 31, 2016. The following exchange rates apply: Forward rate Dates Spot Rate {for 3/31/2016) December 1, 2015 P.0035, P.0034 (4 months) December 31, 2015 .0033 .0032 (3 month} .0038 N/A March 31, 2016 MNC's incremental borrowing rate is 12 percent. The present value factor for three months at an annual rate of interest of 12 percent (1 percent per month) is 0.9706. Assuming that MNC entered into no forward contract, how much foreign exchange gain or loss should it report on its 2015 income statement with regard to this transaction? «2. P5,000 gain 2,000 f P1,000 loss . P3,000 gain 24, Using the same information in No. 23 and assuming that MNC entered into a forward contract to sell 10 million foreign currencies on December 1, 2015, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2015 resulting from a fluctuation in the value of the foreign currencies? @. No impact on net income. 5) P58.80 decrease in net income. AFAR-12 “E. P2,000 decrease in net income. d. P1,94.20 increase in net income.ADVANCED FINANC: i 1% - Forwarg Cikacy ACCOUNTING & REPORTING page 10 eine “Unrecognized Foreign Currency Firm Commitment (Hedge through 10 ‘Accounting appiies) {are based on the following Information: On Oct jober 2, am we porch Ast [ne ordered « Custom-bull passenger van ftom o Jopanese ‘or is qonscanceiabie. ce _ purchase price is 1, Sthor ard royrntighatenaes trits Go Scene Sond pee 2016, the od Contract to uy 1,000,000 yens on March 31, 2014 far P.53. On Mar 6. the custom-built passenger van was delivered. Mtoe Fs8: on March 3h lois I2aiais sau: Spot rate (rupee). P50 P56 ae 53 58 a7 Forward rate (rupes| ‘Accounted for as Fa Valve Hedge ~ The December 31, 2015 profit andi los statement, net foreign exchange gain or loss {forward contract and commitment): lero 2. P10,000 net gain 'b. P10,000 net loss {Not applicable since hedge accounting does apply 2. The Fim Commitment account balance as shown in the December 31, 2015 balance sheet amounted to: ‘,P 50.000 asset @P 501000 hobitty 'b. P.60,000 lability d. None, since it sa fairvalue hedge 3. What is the fak value of the forward contract on December 31, 2015? P 50,000 receivable €. P60,000 receivable 50,000 payable d. P60,000 payable 4, What is the fair value of the forward contract on March 31, 20168 ‘a. P 50,000 receivable (640,000 receivable bb. P 50,000 payable 40,000 payable 5. The Firm Commitment aecount balance on March 31, 2016 amounted to: 2. P 10,000 asset c. P40,000 asset 'b. P.50,000 liability P.40,000 liability 4. The value of the equipment on March 31, 2016 if the fim commitment account will be adjusted to asset acquired: «a. P.500,000 cc. 560,000 Oo 530,000 d. P570,000 7. The valve of the equipment on March 31. 2016 if the fim commitment account will be will be a separate adjustment to net income:: c. PS60,000 «a. P 500,000 b, P 530,000 (2) P570.000 g Accounted for as Cash Flow Hedge - PAS No. 39 par. 87 & The December 31, 2015 profit and loss statement, foreign exchange gain or loss on hedged item/commitment amounted to: «2. P50,000 loss . P 60,000 loss Not applicable, since it isa cash flow b. P 50,000 gain hedge 9. The December 31, 2015 foreign exchange gain or loss on the hedging instrument {forward contract) amounted to: 50,000 gain, other comprehensive income 50000 gain, curtent earnings ¢, P60,000 loss, other comprehensive income G. P60,000 gain, current earings balance en March 31, 2016 amounted to: 10. The Fim Commitment account aP 10,000 asset cc. P 40,000 liabolty b. 50,000 liability None, since it is a cash flow hedge 11. The valve of the equipment on March 31, 2016 assuming that AST, inc. has elected to apply PAS 39 par. 98 (b). and adjust the cost of non-financial items aqui ‘a. P 500,000 <. P 560,000 dP 570,000 ome AFAR-12 erADVANCED FInane: Note: |f foro incremental borrowing rate is given the nominal value of the "ele ae ct Is not the same with the fair value (which is the present he nominal value) of the forward contract |. Happ, inc. agreed to purchase merchandise trom a foreign vendor on November 30, * The goods will arrive on January 31, 20x4 and payment of 100,000 foreign Currency units [FCU) due February 28, 20x4, On November 30, 20x, Happ signed an Qateement with a foreign exchange broker to buy 100,000 FCUs on February 28, 20x4. hangs rates to purchase | FCU pound ore as follows: ‘TAL ACCOUNTING & REPORTING page 11 Nov.90.203 Dec.31.203 Jan.31.20x4 Feb. 28, 20x4 Spot PIs P62 P59 PLS? 30 day Plea PIS? 1.60 P1.59 60 day P13 P1.56 F158 F158 90 day PLS P1683 Plea e62 Because of this commitment hedge. Happ, Inc. will record the merchandise at what valve when it cvs in Jonuaryé a P165000 . P160,000 &) 164,000 d.P159,000 X- Forward Contracts - Cash Flow Hedge: Forecasted Sale Transaction Word Enterprises sells aircraft seat cushions to most major airplane manufacturers. The company has made sales to a foreign customer for several years and management believes that sales to this customer will continue. On November 30, management Initiates a forward contract for 300,000 foreign curency units [FCUs) to hedge the forecasted sales to foreign customer. Historically the sale has occurred around February 1 and payment Is received by March 15. The spot and March 15 forward exchange rates on November 30 are P1.139 and P1.138, respectively. Ward prepares quarterly financial statements with a December 31 year-end. The relevant exchange rates and forward contract fair values are as follows: Mar. 15 Forward Contract Date SpotRate Forward Rate Fair Valve Dec. 31 P1141 P1140 (P600) Feb.1 1.136 1137 300 Mar. 15 1.133, 1.133) 1,500 1. What is the value recognized in the financial accounting records on November 30 for the forward contract? a. (P600) Po BPM Zw 2. What is the value of the forward contract at December 31? (P600) cP 900 b. P300 d. P1500 3. What is the gain (loss) on the forward contract included in other comprehensive income at December 31? 2. P300gain & P600gain b. P30 loss 600 loss 4. What is the value of the forward contract at February 12 a. (P6900) c PO > 300 4 P1500 5. What isthe gain (loss) on the forward contract ineluded in oth hens income at February 12 Teens 2. P300 gain ) 900 goin P30 loss 900 loss X1- Forward Contracts - Speculation ((“Undesignated Hedges” or Hedges does not Tequire Hedge Accounting) On November 1, 2015, Creomiine Dai , ty Corp. concluded that the Thailand baht w SFkeN cin the next sx months because of he coup tha ranspkes recentyin Moves Ing ¢ goin. Creamine entered into « foreign exchange Forward for soc on November I 2015 10 61,000,000 baht on Apri 30, 2016 a! the forword aioe AFAR-12‘ADVANCED FINANCIAL ACCOUNTING & REPORTING page 12 2015 12/31 ALONG Pot ale (bah... eiAe0 rao. P1210 ‘Srward rate (baht). 1199 1.187 1210 1. The December 31, 2015 profit and loss statement, foreign exchange gain or loss. on forward contract amounted to: 2. P10,000 gain c. P12,000 gain ©. 10,000 loss d. 12,000 loss 2. On April 30, 2016, foreign exchange gains or loss on forward contract amounted fo (ignoring any discount reversal): @. P23,000 gain & b. P23,000 loss 4 Foreign Currency Financial Statements Translation Key Definitions 2 "Exchange ditference: The difference resulting from translating a glven number of units of one currency into another currency at different exchange rates «Foreign operation: & subsidiary, associat, joint venture, of branch whose activities ore based ina country other than that of the reporting enterprise. Basic Steps for Translating Foreign Curency Amounts into the Functional Currency ‘environment in which an entity operates is normally the one in (pends cash. An entity considers the following factors 30,000 gain 30,000 loss The primary economic which it primarily generates and ex in determining its functional curency: «a. the curency: les prices for goods and services (this will often be the ‘* that mainly influences sab Gurency in which sales price for iis goods and services are denominated and settied}; and ; ; «of the country whose competitive forces and regulations mainly determine the sales prices of the goods and services. b. the currency that mainly influences labor, ‘goods or services this will offen be the currency in which sales services are denominated and settled) Steps apply fo a stand-alone entity, an entity with foreign operations such as parent \with foreign subsidiaries), or a foreign operation such as a foreign subsidiary or branch). «The reporting entity determines its functional currency «The entity translates all foreign currency items into its functional curency + The entity reports the effects of such translation in accordance with paragraphs 20-37 and 50 of PAS 21. Functlonal Currency versus Presentation Currency Functional cumency is the currency of the primary economic environment in which an entity operates. On the other hand, presentation currency is the currency in which the financial statements are presented. In most cases, a stand-alone entity's presentation currency is alo its functional currency, PAS 21 specifies two approaches to translation and the approach to be used depends ‘on whether the functional currency (Is not the currency of a hyperinflationary economy) of the foreign subsidiary is the same as the presentation currency and whether the books are kept in the functional currency: : ‘Method 1: Translation from the Functional Currency Into the Presentation Currency (Closing/Current Rate Method / Net Investment Method / Translated Method). This method is used on the following basis: ‘* Foreign operations operates independently in economic and financial matters (or not Integral to the operations of the parent) . oe sey {is not the presentation currency) should be the LCU (local ncy unit - the currency of the country ir i comer unt cy ity in which the subsidiary operates) or a third * The functional currency is not the currency of a is fees 'y of a hyperinflationary economy, otherwise: *+ The main features of the closing / current rate method are summarized as follows: AFAR-12 materials, and other costs of providing price for its goods andi FINANCIAL ACCOUNTING 6 REPORTING page 13 set and fiabiute # both monetary and non-monetary ore translated at current Tale on the date of the balance shoot ” he bolance sheet HOcKholder's equity accounts are rarslated ving historical ates in eltect at the sees cUilles were fist recognized (date of investment) in the foreign entity's Occounting records, except: & Beginning retained eamings is set equal to the ending balance of last year © Dividends - historical rate on date of declaration, otherwise date of payment Revenue and expense of the foreign operation are translated at the dates of transactions, Le. actual or spot rates (historical rates). For practical reasons, the ‘average rate Is usually used for Items whose transactions are numerous and occur evenly throughout the year, for example. sales. purchases and operating ‘expenses, but, if exchange rates fluctuate significantly, the use of the average for © Period is inappropriate. All resulting difference (translation gains or losses) shall be recognized in other ‘comprehensive income until the disposal of the foreign operation, when they are included in profit or loss. ‘Method 2: Translation into the Functtonal Currency / Remeasurement of Foreign Currency Financial Statements to the Functional Currency (Temporal Method / Remeasurement Method). This method is used on the following basis; * Foreign operation is integrated with parent's operation. ‘+ Functional currency should be the parent’s currency / presentation ot reporting currency. The main features of the temporal or remeasurement method ore summarized as follows: > Monetary assets and llabiliies (2.9. cash and fixed deposits, receivables, Payables and most liabilities) shall be translated (remeasured) using the closing rate > Non-monetary items at historical cost or carried at past exchange price (e.g. fixed assets, investments at cost, prepaid items except prepaid interest, inventories and intangible assets) shall be translated (remeasured) using the exchange rate at the date of the transaction (historical rate) > Non-monetary items at fair value or at current of future exchange prices (e.g., trading securities, inventories camied at replacement cost and revalued fixed assets) shall be translated (remeasured) using the exchange rate at the date of the revaluation or fair value determination > Stockholders’ equity accounts - are translated (or remeasured) using the Historical rates in effect at the time equities were fist recognized (date of investment) in the foreign entity's accounting records, except: © Beginning retained eamings is set equal to the ending balance of last year © Dividends - tistorical rate on date of declaration, otherwise date of payment > Income statement items: Related to non-monetary items such as cost of sales, assets, amortization of intangible assets, amortization of deferred charges or credits and other allocation of non-monetary items shall be translated (or remeasured) using historical rate (either at the date of purchase for historical Cost tems or the date of valuation for items carried at fair value) * Not related fo non-monetary items (or related fe monetary items) such as sales, purchases, expenses and income items that result in inflow /outfiow of monetary items shall be transiated (remneasured) using actual rate (historical rate); however for practical reasons, an average rate may be used. > Resulting difference (remeasurement gain of loss) should be reported as Profit or loss for the period: remeasurement gain or loss arising from the revaluation of a non-monet A ary item is taken to other comprehensive income if the revaluation gains or losses are faken fo other comprehensive income. AFAR-12 depreciation of plantpage 14 ‘Functional Currency s no! the Cunency of a ‘Functional Cureney it the Currency Hyperinfationary Economy ‘f @ Hyperinfetionary Economy (PAS 21: 20-42) (PAS 21: 42-43/PAS 29) Hof F/S, then ‘omtoldale Foreign operation 's Integral with parent's operations romeo denty @as21:20-26) | Where: omecnre at (raszie-a}) XG ~ exchange gal: XL-exchange loss Cunency of 0 tied ‘county (or ‘example Yen) XII - Translation of Foreign Subsidiary’s Financial Statements Assume that on January 2, 20x4, P Company, a Philippine based company, acquired for US$2,400,000 an 80% interest in $ Company maintains its books in U.S. dollars and they are in conformity with GAAP in the. Philippines (parent's functional and presentation currency is the peso}. $ Company's financial statements are prepared in the local currency unit (the foreign currency unit - dollars. The translation process will be illustrated under two different assumptions: (1) the U.S. dollars is the functional curency, and (2] the Philippine peso is the functional currency. Exchange rates for the US dollars for the 20x4 fiscal year are as follows: Date January 2, 20x4 (date of acquisition) . .. September 1, 20x4. KG Lame December 31, 20x4........ Average for the fourth quarter . Average for the year . 40.00 'n translating the income statement accounts, it is assumed that revenues were generated and expenses were incumed evenly during the year. It is also assumed that the company uses the FIFO cost flow assumption, and that the ending inventory was acquired during the last quarter. The following accounts based on the adjusted trial balance are given as follows:ADVANCED TaN: FINANCIAL, ACCOUNTING & REPORTING page 15 Sok Solan aah eon guar 3,624,000, Cos! of goods sold 2, a 2,220,000 Depreciation expense | 126000 Other expenses aie 786000 Income tax expense. +... +. 78.400 Retained eorings,1/1/30e4 $78,000 OWvidends declared 9/1/2014... 8 340.000 Cash : 1.116000 Accountsrecelvatie (nel) 723.60 Inventory (FFO) : 996,000 Lond... ek sgaao Buldings (nel) ves ees evese eee Y Equipment (nel)... 516000 Accounts poyatle. ss esesvsvsevee 768,000 Short-term notes payabie 2 742,000 Bonds payable sua in 1,080,000, Commen stock, PIO par...» 7 000 Poidvin capital in excess of por... 360,000 Required: ss Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiany’s functional curtency is the US dollars. ((Functional Currency Is the local Currency Unit - Translation Into the Presentation Cumency {Curent/Closing Rate Method)] 2 Prepare a schedule to compute the translation gain or loss, assuming the subsidiory's functional curency is the peso. (Functional Currency Is Philippine Peso = Translation info the Functional Cuency (Remeasurement or Temporal Method) 3. Translate the financial statements using the trial balance approach, under: ©. Curent Rate Method Temporal Method Solution 1. Functional Currency Is the Local Currency Unit ~ Translation Info the Presentation Currency (Current/Closing Rate Method) Finetional Cureney !s toca Curency Unt US Doers {ronson into the Presentation Cureney (Cureni/Coxing Rete Method) ceitietsiement Poeeees |] pe | maa TelcnedEoringt foe” | Poul Soe ssc Tinl_[ ~“anz0 [Yast | [Cost ofaoedr a zemee0 | wl] — a0 244.000 Depreciation experi ao fa) apa 4.824.000 7asen0 | a) | —ao9 397200 6.00 a) | aap 35 —seao0 | Te068.920 0 i Zoe. a0 9.108900 ies ia coca TTS somo | | sss Reloned earings. 1/81 Boonco Tea? asa PPE [tence Show Conn : nist er as aa Accosts ecsvabie ne] Zeca 1c) | was 2.366.400, [iment 6, s96 000 Te) | as #0065, 000 [Ec ous | fc) | as 24150000, Sis rom [et ans 31395000 qumen e 14000 | ic) ans reece Tota | ——aaare [Resor parade. = Tea | | Tae wiz ‘orem noes patie egq00 1 16) | age 0.70.00 [Hone pov Tasoato | i¢| | —wozs 0000 [eemmonsteccPid pa iszo00 tay | wen 45080000 [fotcincaptalinexcen of par 9.000 {py | 4000 eacno00 | | Reiones ears Faticboue ~aiseo0 ~2i8e7 20 | “ai Ta Tazo Fon Cues RSan Reeve Gan OOF t seinen a i To AST Tan AFAR-12heken CED FINANC: Tate consent a ACCOUNTING & REPORTING page 16 eto n! of other comprehensive incorne A Average conn £2303 on Jamory? ote of cceutiion) {1 Historical excionee role ved Pha ‘ed o-opproxmate the rate one date Iheseelemenls were recognized. {C) Curent exchorrae fol? (5) 67 ange rae B/A- balancing moves ‘erification of the ‘Translation Adjustment ~ Current/Cloting Rate Method (functional Currency = US. Tronslation | Reporting EI. ust | Rate “pesca 1/2 Exposed net assei posiion. tessees *2,088,000 40.00 83,520,000 ‘Adjustments for chonges in nel asset Position [—duting yeor ag |. Nel income fo yeu os. 16063900 Ovidends declared. 2.10 Tis.436.0001 | et anet positon tonscied ving ale fect ol date of each Forsacton.n 95.147720 12/31 Exposed net asset postion. —Blzntoo | 40.25 35.005908 | ‘Change in cumualve tronslaion aajstinen? during yeor—net increase... 487,980 1/2 Curative haniaton adusinen™, i _s 12/31 Cumslofve Fansaton odutiment arena | “A.condensediboionce shee for § Comper on Janay 2, BA wos 6 OFow ra my Manele axes 1.320080 | Monetary Lobos 7.160.506 Nonmenetay asel Common stoct 1.182000 inven T1RB06 | Paitin captslin oxen Spar 340.00 Fued evel Retained earnings 526000 | Tota 4.248.000 | Total 246.00 | 1/1 Nel assets = $448,000 -$2 166,000 = 2,088,000 “the beginning boiance is 2010 since ths was the fist yeor the investment was held. 2. Translation into the Functional Currency (Remeasurement or Temporal Method) Functional Currency |s Philippine Peso jfersstin nf he funconal Cureney (Hemecsureman or Temporal Method) T Reneanrerert | Adiied a Actos coe | ee Balance Sheet Balance ($) Rate iPesos) _| aia See ee ra ee eet raao |e ae Bisa a se Seas —| — oases a enjow | pt a MoE nT Sao tht — es Sao eM Sioa || — asp mo oat at oleae a | Te] — as Sra Satie sabe razon ta e705 See ; Toston [tet | Sane Ce See Tsao |e ‘isbn Poid-in capital in excess of par 360,000 |" (H) 40.00 14,400,000 Retained eamings £15,500 {8/A) 24.652.020 Total 737.500 —190.184.520 | Contnad Telomere icone rd aa 3 ame a) a aa SS cigar Te Sheds —} Sa Dopeciion seer ‘moo | | — “ats atom oe 7a f+ ae fee bea 000 fa | om Ranson blo oeouTeaT or eae ferecratnlt ease 3 net ino tacos pegs ie Tae ie Sion Th a ae Sa ine De Soloed aa ian Teco] [Retcined earrings. 12/81 fom belance Heat 615.400 24652020 | “Include os a component of other comprehensive come (A) arated earings n pesos on Janvay?2 (date of acquit) tore eae Tole used fo oppvoximate the ale on the dale these elernenks were 1H) Hatoncal exchange rate Ssoonted, eer AFAR-12page 17 ~34.480,009 | 72,100,000, 40.957.120 | ‘Method (Fonellonal Currency ~ Translation | Reporting Exchange | Cureney th Late __} JPesos|_ _| 1 rd net monetary liability position. | "840,000 {40.00 33,600,000 ‘Adistmens or chonges in net monetary posion during year. Less: Increase In cash and receivables from sales. = 19,624,000) 40.20 145,684,800 | ‘Adc: Decroare in monetary exte's of ncreate In menetory bile Purchases zac | 2070 TESTO B00. Oter expenses 7ag.000_| 4020 31,597,200. income toxes —[99.400-| — 40.20 21955,680 Dividends declared 7 aug | — 40.10 4.436.000 Net monetary Babity porion frensated wang rl inoffoc!af date of each nonsocti 2024.00 Tis 12/81 Exposed net monetary Raby pasion =r | 2035 “30747.100 | Remeaswrement gai fos] as —Laazaa | “the Januaty 2, 20e4 condensed bolonce sheaili given in Figure 193: use Monetary fables 2.160500 Less: Monetary oxeis “L.az0.000 | “see above: 7] | Monetary habilties (768,000 + 762,000 + 1,080,000) 2,810,000 Less: Monetary aise (1,116,000 + 729,600), _ 1.845.400 ‘Net monet Fabilly poston... 764.400 3. Translation Using a Trial Balance Approach Translation into the Presentation Cunency (Current/Closing Rate Method) Funetional Currency - Is Local Currency Unit- US Dollars Translation info the Presaniation Currency (Current/Closing Rate Method) Adjusted Trial Balance: Adjusted Trial Balance Accounls __| change Pesos) Bol “Debi | “creat | Soler 3424005 | [ay a0 20 45,664,600 Cost of goods vad TPO “a. —40 20 | “ao 0a Depreciation expense 120,000, (a) 40.20, 4524000 ‘Oiher expensor 786,000 (aj| 40.0] “31,597,200 income fox expense 98.400 (al | 4020 395,680 Retoined eomings, 171 TES ti) Da 000 Dividends declared, $/1 30000, | —w.10 | tae 000 Cash. 7.116.000 (cy [4025 | 44'919,000 Accounls receivable inal 729,500 “ig 40.25 — 29.266. 400 inventory (FIFO), 12/3 $96,000 (cy [4025 | 40,089,000 “and. = 0,000 (C)_ [40.25 | 24,150,000 Buicing: (nei) 780,000 (| 40.25 | 9,395,000 Equipment (net) 516,000 {C) 40.25 20,769,000 ‘Accounts payable (| 035 30,910,000 ‘Short-term notes payable_ {ch 40.25 30,670,500. (c_| «035 43,470,000 fH) 40.00 46,080,000 Pain copitalin excess of por (| 40.00 —14.400,000"| [Subtotals Baz 00 354745200 | 334,257 200 Foreign Curency Translation Reserve Gain OCI) ~ credit Totals gazzo00 | 322.000 54245200 | ‘include as a component of olher comprehensive income (1) Retained earnings in pesos on January 2 (date of acquisition) (A) Average exchange rate used fo approximate the rate on the date these elements were recognized, (H) Historical exchange rate (C} Curent exchange rate Note: In the pre-closing trial balance approach. the following should be observed: 1. The retained earnings should be of beginning balance AFAR-12ADVANCED a nme eINANCIAL ACCOUNTING & REPORTING page 18 Ie ever hot hae oe ata ona component oo! 9008 0K MENA Ting be Tonle ving trap oer snows ee oo pearnng parce wore 68 renee tle eng! he doe otro Oca Functional 1@ Functional Currency (Remeasurement or Té | Method) Cunene Ieilpine Peo Ttarulation nt the Functional Curency(Remeasement or arper| Method) “Adjusted Trio! Balance “Adjusted Trial Balance: [Debit AP cea eae | ant | Saat Sales 3,624,000 | {AD 40.20 145,684,800 Purchases 30400 A 40.20 PS B00, Depreciation expense 120,000 fH) 4000 4,800,000 _ Other expenses 7360 ft} —fo.20 [31,597,200 Income tax expense 78.00 Tia 2020 39.0001 [Retained eorings. 7 wee | Bi DWigendt decired, 9/1 ORO moa aoe Cosh. a T116.00 fer s02s | —44919,000 Aceovnis receivable (el). 7,400 fe 025 | 29,366 400 Thvenfor/ (FF), (7 foswmned) | 912000 fri [4.00 | 36,480,000 trem nls 00.00 jaf ro Buiding nel 70,000 ie Equipment (net) $14,000 1c) 40.00 20,640,000 Sara ‘Aecounl poyoble nan Fapeo | te) | 1025 a Sharer notes poysble 752000 | Ic] | 10.28 07000 Bonde payable Tpooo00 | 16 | 40.28 “sa7000 | ‘Common stock P10 po. sgt | oan 46,080; Fagin coptalin excess ofa" Soot. TDS | B20 SSaaTE | 354287200 Femeasurerent bt -obH RIA | | [tows __t eau | ssaaszano | a: Tenalelion of Con of Goods Sold Temeasvement ‘xchange esa als i _| ale ington ome Loa a] 0 ‘eae Purchases (osumed) Zancoon | 1A) 1020 —szezo000 | ola. i 3216000 129,100.00 Toss: Ending vent. 00 | TAL wn 220.000 | fer o schedule below), and the Cost of gods 01d fe way it was presented under the ‘Aleralively. the cost of goods sold wil be Ie fending balance will be the amount presented i imp info one cmount (ref in the til Balance Gureni/cloiing role method ‘Adj Wal Balonee ‘Adjiled Wal Balance fs exchenge e903) Aeon “Debit | “Great | Bole | pest [Credit | Toes sezeooo | ja) | «020 145, 684800 Coe of goods ld 7,0 Schecule | 600780 Depreciation expense 12000 Taf 1000 | — 4.800.000 Other expenses 786000 ia ]t020 [31.597 200 Income lox xperse 38.00 fal [1020 | 3.955.480 Refoined earings. 17 Bi ia 340,500 ‘Dividends declred 9/1 aD [0.10 | e000 [ Cott satan T.g000 Te [025 | 49,000 Accounts ecevable (rel 79,500 fe} ans [79 346.400 [nvenfoy (FO), 1/1 ossumed] | — 996.000 {hl [40.00 | 40.089, 10 and : 0,000 (| «000 | 74,000;000 Balcngs ie) 720,60 (4000 | 31,200,000 Equipment (nll 516000 icon | “29.540 000 Accounts PayODT a Taaome | (C| [0025 WPT ‘Shortie notes payable vazam | {Cl | #025 30570,500 Bonds payable Toeo.so0-| fe] 4025 3.470000 ‘Common sock PID pos. 1.152.000 | {H)| 40.00 74680000 Pon copialn exces of par —go.000 |) | — 400 —feoo.000 | Sublotos Taio | “Bszz000 prs eo | 34757200 Bemecsurernont lo = 6H 202.200 Toto RTT isa 1s0 | 228342150 | ‘Schedule - Translation of Cost of Goods Sold Accounts inventor (assumed Purchates [asus Tota. Ts Cost of goods sol. AFAR-12‘ADVANCED FY NANCIAL ACCOUNTING & REPORTING page 19 A forei, XIII m \ Accounts ope tesidiary of decker corporation has certain balance sheet in Philiprr vecember 31, 2014, Information relating to these accounts Appine pesos as follows: Current Rates | Historical Rates Marketable securities at cost P 65,000 P75, 000 Inventories, at average cost 500, 000. 550, 000 patents 80,000 85, 000 Totals What total amount should be included in Decker’s December 31, 2014 Consolidated balance sheet for the above accounts if subsidiary’s ‘Gisepanastt ty in econonic and financial foreign operations operates matters (or BOBMIRESGMA to the operations of the parent): A. P710,000 . 660, 000 B. P700, 000 (B) P65, 000 xxv Certain balance sheet accounts of a foreign (US) subsidiary of Kanchengjunga Company at December 31, 2014, have been remeasured into Philippine pesos as follows: Current Rates | Historical Rates \ [Recounts receivable, current P_200, 000 P 220, 000 wi [Accounts receivable, long-term 100, 000 110, 000 W| Prepaid Insurance 50,000 55, 000 Ws | GoodwitT 80, 000 85, 000 Totals F430, 000 P470,,000 What total amount should be inéluded in Kanchengjunga’s Decenber 31, 2014 consolidated balance sheet for the above accounts if subsidiary’s foreign operation is jimtegual to parent’s operations? A. 430,000 @) FAe0, 000 B. P435,000 D. P450, 000 x Certain balance sheet accounts of a foreign subsidiary of Fuji Company at Decenber 31, 2014, have been converted into Philippine pesos as follows: Garrent Rates | Historical Rates Notes receivable, long term. 240, 000 B 200, 000 Prepaid interest 10, 000 8,000, Prepaid rent = 85, 000 80, 000 Patent 150, 000 170,000 Marketable securities, at cost 2120, 000, 130, 000 ‘Trademarks 50,000 55,000 ‘Goodwill 200,000, 210,000 Marketable securities, at narket_value 110, 000 90, 000 Tnventories ‘90,000 35,000 Deferred charges 88,000 85, 000 ‘Accounts receivable 15,000 20, 000 ‘Cash 100,000 710, 000 Customer list 60,000 70,000 Buildings (net) 00, 000, 420, 000 Totals PL718,.000 Pi 743,000 Assume that the LCU (local currency unit) is the subsidiary’s functional currency. What balances does a consolidated balance sheet report as of December 31, 2014? A. 1,790,000 C. Pl, 743,000 B. 1,770,000 D. P1,716,000 2. Assume that the Philippine peso is the subsidiary’s functional currency. What balances does a consclidated balance sheet report as of December 31, 20147 A. P1,790,000 Cc. P1,743,000 B. P1,770,000 D. P1,718,000 AFAR-12ADVANCED ANCIAL ACCOUNTING & REPORTING A whol), XVI for the (LCU)_as page 20 + has certain expense accounts Stated in local currency units Depreciation of equil ; n of equipment (related assets were purchased 1/1/2012) “ Provision f Rent The exchange rates at var December 31, 2014 [Average for the year ended 17/31/7014 | = January 1, <——t Ts the subsidi 1 The ‘approximately evenly during Assume that th charges of the expense accounts occurred E the year. What total peso amount should in Mary's 2014 consolidated income statement to reflect these « A. P160, 000 ©) P76, © bias; 00 B. P168, 000 XVII ‘ompany had selected expense A wotty omed subsidiary of a Philippine ¢ : stated in local currency units (LCUs) for the fiscal year incl penses? accounts Sed hevenber 30,2014 a follows: “Riad dence expense 60,000 uct qimortization of patent (patent was acquired on Decenber 1, 2011) 40,000 Trent expense 100,000 Tae ee eens for Lcus at various dates are as follows: Tecenber 1, 2011 7 as Revenber 30,2014 “20 wat ered T17S07 2 Be) Average for fiscal T£ the subsidiary’s functional currency is the BSUYSBEREMBEsey what is the peso amount to be included in the translated ‘icone statenent 2 the Philippine Company's foreign subsidiary for the fiscal year ended November 30, 2014 for the foregoing expense accounts? ¢. P42, 000 A. P44,000 @) P45, 200 B. 740,000 XVIII ‘he subsidiary in Japan of Manila Company, a Philippine enterprise has plant assets with a cost of 3,600,000 yen on December 31, 2014. Of this Znount, plant assets with a cost of 2,400,000 yen were acquired in 2012 wnen the exchange rate was 1 yen = P0.625; and plant assets with a cost Sf 1,200,000 yen were acquired in 2013 when the exchange rate was 1 yen 2" po.55€. The exchange rate on December 31, 2014 was 1 yen = P0.500, and the weighted average rate for 2014 was 1 yen = P0.S21. The Japanese Subsidiary depreciates plant assets by the straight-line method over a 10 years economic life with no residual value. If the subsidiary’s foreign operation is integrated with parent's operation, what is the 2014 depreciation expense for the Japanese subsidiary in Philippine peso for the translated income statement? A. 207,820 c. P150, 000 B. P216,720 D. P 66,720 Goodwill Arising from the Acquisition of Foreign Subsidiaries When the acquirers interest in the fair value of identifiable net assets of the acquired company acquires a controlling equity interest In another company, the excess of the purchase price company is recognized as goodwill on consolidation. In the context of the acquiiion of a foreign company, the issue arises as to whether goodwill is an asset of the acquired company or an asset in the acquirer's books. If it is an asset of the acquired subsidiary, the goodwill is a foreign asset which should be translated in the same manner as any other asset of the acquired subsidiary, which may give rise to a translation difference. However, if itis treated as an asset in the acquirer's Books, there is no need for translation . AFAR-12‘approximat pany at the a Defored pa gthek fai values excep! for cban acquisition by Espeniia Corporation ered ax Hoty on he undue bt ing that was undervalued by 100,000 yen. December 31, 204 wos Ser eae ulna was 0000 yen he exchange rate on The resulting owners ; locaton g eemettip stuation can be viewed in the scheciue of determination ond . Goodwil in pesos on the date of acquisition Is computed a5 folows: Date of Acquisition - December 31, 204 Fair value of Subsidiary (100%) — Consideration transfered Cash ganvasingaeeces 2000000 Less: Book valve of stockholder’ equity. ‘Common stock [3,000,000 yen x P.50 x 100%) 1,590,000 Retained earings (500,000 yen x P.50 x 100%) . 250000 1.750.000 250,000 Allocated excess (excess of cos! over book valve] Les: Over/under valuation of assets and Habilties: Increase in building [100.000 yen x P.50x 100%) Increase In deferred tax llabiity on building [20,000 yen x P.50x 100%)...» i (10.000) 10.009 Positive excess: Goodwill (excess of cost over fir valve) ners sae cP Goodwil in yen [P210,000x | yen JP.S0}..- Yen 420.000) It should be noted that on the date of acquision (Le., December 31. 20x4) “goodwill Grsing on the acquisition of aforeign operation and any falr valve ‘adjustments to fhe conying amounts of assets and labiities arling on the acquisition of that foreign operation shall be treated a assets and labilties of the foreign ‘operation.” Thus. they Spares expressed in the “functional eumency of the foreign operation (meaning their froltioncl coreney isthe LCU), and shall be translated at the curent/closing rate." xIx ‘An entity acquired all the share capital of a Be Sijeration of 9 million baht on June 30, 2014. The Fair value of the cers secoes of the foreign entity at that date was 6 million baht. The net iieeal currency of the entity is the peso. The financial year-end functiomentity is December 31, 2014. The exchange rotes ot June 30, Sede and Decenber 31, 2014, were 1.5 baht = Pl and 2 baht = PL respectively. what figure for goodwill should for the year ended December 31, 20147 A, P2 million c. PL.5 million B, 3 million baht D. P3 million porting in Hyperintlationary Economies (PAS 29) foreign entity at @ be included in the financial statements Financial Re| Restatement of Financial Statements The basic principle in PAS 29 is that the financial state curency of a hyperinfiationary economy should be stated in terms ‘of the measuring unit Curent ct the balance sheet date. Comparative figures for Prior period(s) should be restated into the same current measuring unit. AFAR-12 ments of an entity that reports in theADI ANCED FINANCIAL, yo Historic, COUNT: ‘Al Cost Financial Stote © REPoRD ING Restatements gr 4 ‘ments Page 22 Monetary le by applyin, '9.o genera} balan, re not restateg ‘al price index, 2 Assels ond iene nol estan, 7 ECAY sated o the meos xing unt at the nie . 3 aon pence with ogee omen! 0 changes in prices should be coment astets and abies adjusted in ablities are restated, they are not restated. All other non-monetary assets and 4. All items in t : he Curent at the peel statement are expressed in terms of the measuring unit OBRIVIng the eh ec® sheet date. Therefore, all amounts need fo be restated by incomeraned es one 9 the general price index fom the dates when the items of & x gain oF ‘Penses were initially recorded in the financial statements. loss on the net monetary postion is included in net income. It should be disclosed separately, The Standard does not establish an absolute rate at which hyperinfiation is deemed to arise - but allows judgment as to when restatement of financial statements becomes necessary. Characteristics of the economic environment of a country which indicate the existence of hyperinflation include: 1. the general population prefers to keep its w relatively stable foreign curency. Amounts of loc immediately invested to maintain purchasing power: 2. the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency; 3. sales and purchases on credit take place at prices that compensate for the ‘expected loss of purchasing power during the credit period, even if the period is short 4, interest rates, wages and prices are linked fo a price index: and 5. the cumulative inflation rate over three years approaches, or exceeds, 100%. ealth in non-monetary assets or in a al _curency held ore PAS 29 describes characteristics that may indicate that an economy is hyperinfiationary. However, it concludes that it is a matter of judgment when restatement of financial statements becomes necessary. When an economy ceases to be hyperinflationary and an enterprise discontinues the preparation and presentation of financial statements in accordance with PAS 29, it should treat the amounts expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements. Functional Currency is the Currency of a Hyperintlationary Economy For an entity whose functional currency is the currency of a hyperinflationary economy, ‘and for which the comparatives amounts are translated into the curency of a different hyperinflationary shall be translated into a different presentation currency using the following procedures: a. All amounts {i.e., assets, liabilities, equity items, income and expenses, including comparatives) shall be translated at the closing rate at the date of the most recent balance sheet (i.e., last year's comparatives, as adjusted for subsequent changes in the price level, are translated at this year's closing rate). except that b. when amounts are translated into the curtency of a non-hyperinflationary economy, comparative amounts shall be those that were presented in the prior year financial statements (Le., not adjusted for subsequent changes in the price level or subsequent changes in exchange rates). AFAR-12FINANCIAL, ING & REPORTING Tinflati: a ‘onary Economy) hyper i followe; sf ltionary eco Pinoy Cony x sheet at ten’, operate: Decenber 31, >, Propert Ye Inventory.» Cash, : Share capital (issued 201 al Retained earnings tO Noncurrent Liabilities, urrent liabilities... lant and equipment this way: page 23 mony. Its balance Baht _(*000) 900 2,700 350 400 2,350 500 700 December 31 100 130 150 240 300 ed on The property, plant and equipment were purchas and there is a six months’ inventory held. The none were a loan raised on March 31, 2014 pecember 31, 2012, urrent liebilities Determine the following: \ Tithe total assets iter adjusting for hyperinflation should be: (*000) A, 1,550 cr 5,850 B. 5,150 D: 11,880 2. The Retained Earnings on Decenber 31, 2014: (+000) A. 2,350 ¢. 2,937 B. 2,750 5. 7,080 3. he‘Reenined Rarnings on Décenber 31, 2014 [in ‘odd's) assuaing the following exchange rates: Decenber_31 2010 a P 1.20 2011 1124 2012 1.27 2013. = 1150 2014 = 1.75 AL PA, 812.50 G. 3,525.00 B. P4,125.00 D. P2, 780.00 (For Reference: Not Included in the Syllabus) ‘option Contracts An option contract between two parties gives the buyer (option holder) the right, purchase or sell something to the option seller date in the future a is exchanged. A foreign currency opti the holder the right to specified price (the exercise or strike price) a point in time. option Terminologies ‘call is an option to buy but not - the buyer and the seller (option writer) a price agreed to at the time the option contract the obligation, to at a on contract is a contractual agreement giving buy or sell a given amount of currency at a for a period of time or a 2. Put is an option to sell 3] Holder is the party having the right to buy or sell @_ Prom the perspective of the holder, the option contract is referred to as a Purchased Option. 5. Weiter is the party that grants the holder this contractual right. e. Prom the perspective of the writer, the option contract is referred to as a Written option. Foreign Currency Option Situations ‘Spot Market Price is | Spot Market Price spot Market Price More Than the is Less Than the | equals the Exercise | Exercise strike exercise Strike | strike Price Price Price option _| (5 = 5) (6 > P5) i (eS < 76) ‘call fay) ‘tthe money Ta the money Out of the money ‘At the money Gat of the Ta the jvorable to the bolder [Bue feel) Im the money the holder would exercise the option since It Gut ef the money - the holder would not exercise the option si holder e it is unfavorable to AFAR-12a i # #7 i- ‘ADVANCED een ACCOUNTING & REPORTING page 24 ‘Tike Valus fee Currency Option Premiums nt. If at the inception of the foreign currency option, the oj tion is either out of the money or at the money, the entire Galue ie analogous to & premiun is called the time value. The tine prepaid insurance premium that could be anortize to income ov xe Life of the option period. : ‘ : on of the foreign if at the inceptl tion holder will Intrinsic Value. On the other hand, Ing the currency option, the option is in the money: have peid a higher premium - the increnente) difference between apot market price and the sxerc! at strike Pr be placed in this favorable position. This noremental premium pal XxI- Call Option Contract: Fit (On June 18, Loma Corporation entered into a frm equipment from the Okazaki Trading Company exchange rate on June 18 is ¥100 = PI. To reduce Ine exchange rate risk that could Increase the cost of the equipment In pesos, Lorna pays 712,000 for a call option Contact. This contract gives Lorna the option to purchase ¥80,000.000 ot 4” ‘exchange cen at ¥100 = Pl on August 20. On August 20. he pufchange rate is ¥73 = Pl. How much Bd Loma save by purchasing the call option (answoe nan died 10 the nearest Peso) # the op amount equal im Commitment "commitment to purchase specialized “orr40,000,000 on August 20. a. 12,000 b. P4g.215 cc. P60.215 toma would have been better off not 10 have purchased the call option. xxll- Call Option Contract: Forecasted Transaction to order goods from o foreign Wookey Corporation, a Philippine Company. expects wrorte” af a pce of 250000 forelgn currencies ih Cpivery and payment to be made On July 24, Woolsey purchased ¢ ‘inree-month call option for 250, low hedge of a forecasted ‘on October 24. Rheign cumencies and designated this option cash fk (ofeign currency ransaction. The folowing exchange rates appl: Option stnke price. ctsussusssanuecene PRAT Oplion cost... 4,000 July 24 spot rate... P2.17 (October 24 spot rate. 2.13 What mount wil Woolsey include as an option expense in net income during the period July 24 to October 248 ia enone . P4,000 <.P10,000 bb. P5.000 .P12,000 _Waste no more time arguing what a good man should be. Be one.— A man is not finished when he is defeated. He is finished when he quits.- ~A great man is always willing to be ‘itt