Date; Nov.

2, 2020
Manganaan Frank Inigo (BSAC 1B)

SELF REFLECTION

Based from your readings of the above notes, readings from other materials and the videos you watched, answer
the following as best as you can.

1. Define the following:

 Functional currency
The currency of the primary economic environment in which the entity operates. This is deemed to be
where the entity usually generates and spends cash.
 Presentation currency
It is the currency in which the financial statements are presented.
 Foreign currency
Foreign currency is a currency other than the functional currency of the entity.
2. What are the factors that are considered in determining the functional currency?
Factors in determining the functional currency;

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 The currency that mainly influences the entity’s sales prices and cost of goods or services.

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 The currency in which cash flows from financing activities and operating activities are usually

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generated and retained.

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3. What are the two ways in which a reporting entity may be engaged in a foreign activity?
Two ways that entity may conduct/engage foreign activities;

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1.) Foreign currency transactions - import or export transactions that are to be settled in a
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foreign currency.
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2.) Foreign operations - The overseas branch will normally maintain its accounting records and
prepare its financial statements in foreign currency.
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4. Give examples of foreign currency transactions.

Examples of foreign currency transaction are;
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Import and Export transaction. These transactions need to be settled in a foreign currency, and need to be
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translated to Philippine pesos.

5. Explain the initial recognition of a foreign currency transaction.

Initial Recognition
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A foreign currency transaction is initially recognized by translating the foreign currency amount into
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the functional currency using the spot exchange rate at the date of the transaction.
6. Explain the reporting of foreign currency transactions at subsequent reporting dates.
Subsequently at the end of the reporting period we shall translate transactions according to their nature,
example monetary units like cash or bank accounts in a foreign currency or receivable or payable are
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translated using the “closing rate” at the reporting date. Additionally, all non-monetary items at historical cost
are reported using the “exchange rate at the date of the transaction”. And in terms of non-monetary items
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measured at fair value are reported at the “exchange rate at the date when the fair value was determined or
was measured”.
7. Explain the treatment of exchange differences arising from foreign currency transactions.
Exchange differences was elaborated under pas 21.8 as the result of translating a given number of units of one
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currency to other currency at different exchange rates, but upon settling or translating there are two exchange
differences may arise, the first one is monetary items and the other one is the non-monetary items.
Monetary items are recognized in profit or loss in the period they arise or happen. Where under non-monetary
items if the gain or loss is recognized in OCI, the exchange component of the gain or loss is also recognized in
OCI. Conversely, if the gain or loss is recognized in profit or loss, the exchange component is also recognized
in profit or loss.

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 8. What is a foreign operation?
Foreign Operation
 A foreign operation is a subsidiary, associate, joint venture or branch that is based in a
foreign country and is using a foreign currency.
9. Explain the translation of the financial statements of a foreign operation into the presentation currency of
the reporting entity.
It is stated that an entity is required to present its financial statements using its functional currency which is
peso here in the Philippines. However, the entity may translate its financial statement into any presentation
currency like Japanese yen, US dollar etcetera. But things are depending on what items are you translating.
All assets and liabilities (including goodwill) are translated using “closing rate” at the date of the statement of
financial position. While income and expenses are translated using the “exchange rates” at the dates of the
transactions.
10. Explain the disposal of a foreign operation.
When a foreign operation is disposed of, the cumulative amount of exchange differences recognized
in other comprehensive income and accumulated equity is reclassified as profit or loss as a
reclassification adjustment.

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ACTIVITY
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CONCEPT MAPPING: PAS 21

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1. Make a concept map regarding PAS 21. You can use any art materials as you opt to choose.
2. Use a short bond paper with a normal margin.
3. Effect portfolio
Submit it on LMS or compile it to your learning of Changes in
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Foreign Exchange

Foreign Activities Functional Currency

= Currency in which the entity Presentation Currency
generated are normally denominated. = Currency in which the financial
statements are presented
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 Foreign Foreign
Currency Operation
Entity may consider the following
Transactions
factors when determining its How to Translate Foreign Operation
functional currency. Financial Statement to the Presentation
Currency?
a. Currency that mainly affect
the sales prices, cost of
Two main Accounting Issues goods or services.
b. Currency in which cash
flows from financing
activities and operating
activities are usually Assets and
generated and retained. Income and
Liabilities Expenses

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a. Which exchange rate(s) to use; Are translated
Are translated
and using “closing
using “exchange

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rate at the date
b. How to report the effect of rates at the dates

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of the statement
changes rates in the financial of the
of financial
statements How to Report Foreign Transaction in the transaction”.

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position”.
Functional Currency?

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Subsequent
Initial Measurement
Recognition All monetary items
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are “translated
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All transaction is using closing rate”,

translated using
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non-monetary
the “spot exchange items measured at
rate and the date historical cost are
of transaction”. “translated using
exchange rate at
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the date of
transaction”, and
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non-monetary
items measured at
fair value are
“translated using
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the exchange rate

at the date when
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the fair value was

determined”.
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