Accounting for Foreign currency Transactions part 2

Main ideas / concepts conveyed

• The video explains how to account for foreign currency transactions when the entity has:
  • Exposed liabilities (e.g., accounts payable / notes payable in foreign currency)
  • Exposed assets (e.g., accounts receivable in foreign currency)
• It assumes:
  • The foreign currency transaction is recorded initially at the historical (spot) rate on the transaction date.
  • At each balance sheet date (e.g., Dec 31), monetary items are revalued using the closing spot rate.
  • At settlement, the foreign currency amount is converted at the spot rate on the settlement date.
• The video emphasizes recognizing foreign currency transaction gains or losses:
  • Liability revaluation:
    • If the foreign currency rate increases, the peso value of the liability increases → loss
    • If the foreign currency rate decreases, the peso value of the liability decreases → gain
  • Asset revaluation:
    • If the foreign currency rate increases, the peso value of the asset increases → gain
    • If the foreign currency rate decreases, the peso value of the asset decreases → loss

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Methodology / step-by-step instructions shown (with implied formulas)

A) Import transaction (Exposed Liability): purchases on credit

Facts in illustration

• Nov 1, 2014: Contract/order placed (not the transaction date for recognition)
• Dec 1, 2014: Inventory shipped and invoiced → treated as the transaction date
• Mar 1, 2015: Settlement date
• Dec 31, 2014: Balance sheet date
• No hedging

Exchange rates used

• The video references “direct buying/selling spot rates.” Since this is an import, the Philippine firm is effectively the buying party and the US firm the selling party; the intent is that the appropriate spot rate type is applied.
• Dec 1, 2014 (transaction date) selling spot rate: 40.55
• Dec 31, 2014 (closing spot rate): 40.80
• Mar 1, 2015 (settlement spot rate): 40.65

Accounting steps (as described)

1. Initial recognition (Dec 1, 2014)

   • Record at historical spot rate:
     • Debit Inventory/Purchases (peso value)
     • Credit Accounts payable (peso value)
   • Peso computation shown:
     • 20,000 (USD) × 40.55 = 811,000

2. Revalue at balance sheet date (Dec 31, 2014)

   • Accounts payable is a monetary item → revalue using closing rate.
   • Peso value at Dec 31:
     • 20,000 × 40.80 = 816,000
   • Difference:
     • 816,000 − 811,000 = 5,000 loss
   • Conceptual entry:
     • Debit Foreign currency transaction loss
     • Credit Accounts payable (or adjust payable to revalued amount)

3. Revalue / settle at settlement date (Mar 1, 2015)

   • Settlement at actual rate:
     • 20,000 × 40.65 = 813,000
   • The video indicates an additional gain/loss based on the movement from the Dec 31 revalued amount to the settlement amount (described as a 3,000 gain from closing to settlement).
   • Inventory valuation note:
     • If inventory is still held at the reporting date, it remains at historical cost (while monetary items are remeasured).

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B) Export transaction (Exposed Asset): sales for foreign currency

Facts in illustration

• Nov 1, 2014: Order received (not treated as transaction date)
• Dec 1, 2014: Inventory shipped and customer receives → treated as transaction date
• Mar 1, 2015: Customer remits in full (settlement)
• Dec 31, 2014: Balance sheet date
• No hedging

Exchange rates used

• Since this is an export, the US customer is the buying firm; the video uses the corresponding buying spot rate conceptually.
• Dec 1, 2014 (transaction date) buying spot rate: 40.0
• Dec 31, 2014 (closing rate): 40.7
• Mar 1, 2015 (settlement rate): 40.6

Accounting steps (as described)

1. Initial recognition (Dec 1, 2014)

   • Record:
     • Debit Accounts receivable
     • Credit Sales
   • Peso computation shown:
     • 50,000 (USD) × 40.0 = 2,000,000

2. Revalue at balance sheet date (Dec 31, 2014)

   • Accounts receivable is revalued using the closing rate:
     • 50,000 × 40.7 = 2,035,000
   • Difference:
     • 2,035,000 − 2,000,000 = 35,000 gain
   • Conceptual entry:
     • Debit Accounts receivable
     • Credit Foreign currency transaction gain

3. Settlement (Mar 1, 2015)

   • Settlement at actual rate:
     • 50,000 × 40.6 = 2,030,000
   • Compared to Dec 31 revalued amount (2,035,000) → 5,000 loss
   • Recognize foreign currency transaction loss based on the change from closing to settlement.

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C) Foreign currency debt: promissory note (principal + interest remeasurement)

Core concept

• Exchange differences are recognized not only for the principal, but also during the accounting period for interest payable.
• Monetary items are remeasured at the balance sheet date; settlement remeasurement occurs at the settlement date.

Facts in illustration (Melrose)

• Dec 1, 2016: Melrose issues a foreign-currency promissory note for purchase from Italian suppliers
  • Principal: 108,000 (Italian lira)
  • Interest: 18%, term stated as 60 days
  • Initial exchange rate: 1 lira = 74.2 pesos
• Dec 30, 2016: Balance sheet date with spot rate 74.85
• Jan 30, 2017: Settlement date with spot rate 75.75

Accounting steps (as described)

1. Initial recording at transaction date (Dec 1, 2016)

   • Debit Purchases
   • Credit Notes payable
   • Peso value:
     • 108,000 × 74.2 = 8,013,600

2. Revalue principal at balance sheet date (Dec 30, 2016)

   • Notes payable is a monetary item → revalue using closing rate.
   • Because the rate increased, the video records a foreign currency transaction loss.
   • Loss stated (as presented):
     • (74.85 − 74.2) × 108,000 ≈ 70,200 loss

3. Recognize interest payable as of Dec 30

   • Record interest expense and interest payable for the accrued period.
   • The video uses a formula structure like:
     • 108,000 × 18% × (1/12) × 74.85
   • Peso interest expense/payable stated:
     • about 121,257

4. Settlement (Jan 30, 2017)

   • Payment includes:
     • Principal converted at settlement spot rate
     • Interest accrued through the settlement timing (described as additional months with recognition extending into 2017)
   • Settlement translated total stated:
     • approximately 8,426,430
   • The video indicates:
     • Remove notes payable at its remeasured value
     • Recognize remaining 2017 interest expense for the period until settlement
     • Recognize foreign currency gain/loss based on the movement from Dec 30 closing rate to Jan 30 settlement rate

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Overall lessons / takeaways

• Transaction date matters: initial recognition occurs when goods are shipped/invoiced (not merely when an order is placed).
• Use the appropriate spot rate concept for import vs export (selling vs buying rate concept).
• Balance sheet date remeasurement applies to monetary items only (e.g., accounts receivable/payable, notes payable, interest payable).
• Non-monetary items like inventory remain at historical cost, while foreign currency gain/loss is recognized through remeasurement of monetary balances.
• Exchange differences affect:
  • Income statement (foreign currency transaction gain/loss)
  • Carrying amounts of monetary items on the balance sheet
  • Interest expense and interest payable in foreign currency debt cases

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Speakers / sources featured

• No named speakers or external sources are identified in the provided subtitles.
• The content appears to be delivered by an instructor/lecturer, but the individual is not named.