Foreign Currency Transactions

Overview

Welcome! In this session, we’re diving deep into the accounting for foreign currency transactions, focusing on how companies recognize, measure, and report these activities under PFRS 9 (the Philippine Financial Reporting Standard similar to IFRS 9). By the end, you’ll confidently distinguish between monetary and non-monetary items, apply the correct exchange rates at every stage, and understand the effects of exchange rate changes on financial statements—key skills for acing both exams and real-world accounting tasks.

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Concept-by-Concept Deep Dive

Monetary vs. Non-Monetary Items

What It Is:
A crucial distinction in foreign currency accounting is between monetary and non-monetary items. Monetary items are assets and liabilities to be received or paid in fixed or determinable amounts of money, while non-monetary items are not.

Components:

• Monetary Items: Cash, accounts receivable, accounts payable, loans, and bonds payable.
• Non-Monetary Items: Inventory, property, plant and equipment, intangible assets, and equity investments.

Reasoning Recipe:

1. Ask: Does this item represent a right/obligation to receive/pay a fixed or determinable sum of money?
2. If yes, it's monetary. If not, it's non-monetary.
3. Under PFRS 9, monetary items are remeasured at the closing rate at each reporting date; non-monetary items are not, unless measured at fair value in a foreign currency.

Common Misconceptions:

• Thinking all balance sheet items are monetary—inventory and PPE are non-monetary!
• Believing all non-monetary items are measured at historical rates—some use the fair value rate.

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Exchange Rates: Initial Recognition, Subsequent Measurement, and Settlement

What It Is:
Foreign currency transactions must be recorded and reported using the appropriate exchange rates at each stage: when the transaction occurs, at reporting date, and at settlement.

Components:

• Spot Rate: The exchange rate for immediate delivery.
• Forward Rate: The rate agreed upon now for delivery at a future date.

Calculation Recipe:

1. At Initial Recognition: Use the spot rate on the transaction date.
2. At Reporting Date: Remeasure monetary items at the closing rate (spot rate at reporting date).
3. At Settlement: Use the spot rate on the settlement date.
4. For Forward Contracts: Use the forward rate for the remaining contract term when measuring derivatives.

Common Misconceptions:

• Using average rates for monetary items—this is only acceptable for income/expense items if rates don’t fluctuate significantly.
• Applying the closing rate to non-monetary historic cost items.

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Foreign Exchange Gains and Losses: Recognition and Presentation

What It Is:
When exchange rates change, they create gains or losses. The area in which these are recognized depends on the nature of the item and its measurement category.

Components:

• Amortized Cost: Changes in exchange rates affect profit or loss.
• Fair Value (FVOCI or FVTPL): FX differences may go to profit or loss or other comprehensive income, depending on classification.

Step-by-Step:

1. For monetary items, compute the difference between initial recognition and reporting/settlement using updated rates.