How to Record Foreign Currency Denominated Transactions in the Philippines?

By: Charlyn Beric

In the Philippines, most businesses compete not only locally, but also globally, where they have a great deal of potential and opportunity for expansion and growth. They usually engage in transactions such as buying or selling goods or services, as well as borrowing or lending money in foreign countries. So, when the company transacts in a foreign currency, how do you account for those transactions as an accountant, and what are the tax implications? 

What is foreign currency transaction?

Foreign currency transactions occur when a company’s transactions are denominated in a currency other than the primary currency, also known as functional currency. Philippines Accounting Standards 21 The Effects of Changes in Foreign Exchange Rates defines functional currency as the currency of the primary economic environment in which the entity operates and reports its financial statements in one currency. Presentation currency on the other hand is the currency in which the financial statements are presented. Most of the companies in the Philippines for example use Philippine Peso (Php) as their functional and presentation currency. Foreign currencies must be converted into its functional currency to properly account the transaction for reporting purposes.

How to account for foreign denominated transactions?

When the company enters a foreign-denominated transaction, we record the asset, liability, revenue, expense, gain, or loss arising from the transaction in the functional currency using the exchange rate at the time, or the spot rate; otherwise, a weighted average rate may be used if it is not practical.

Let’s have a sample scenario:

The AXY Corporation is an entity that operates in the Philippines which its functional currency is in Philippine pesos (Php or ₱). The AXY Corporation purchased a product dated September 22, 2021, from DBY International Inc, a foreign company, whose funcional currency is the US dollar (USD). The cost of the product is 5,000 USD Dollars.

• The exchange rates were as follows, based on the BSP rates:
  • ₱50.133 on September  22, 2021
  • ₱50.361 on December 15, 2021
  • ₱50.774 on December 31, 2021
  • ₱50.272 on February 22, 2022 (Not a BSP Rate, for sample purposes only)

To record the payable on the date of transactions using the the exchange rate, at Php 50.133.

Debit: Purchases        ₱ 250,665

Credit: Accounts Payable ₱ 250,665

If the payable was settled:

• Before year end dated December 15, 2021 @₱ 50.361, AXY Corporation shall record:

Debit: Accounts Payable   ₱ 250,665

Debit: Realized Foreign Exchange Loss          ₱ 1,140

  Credit:Cash ₱ 251,805

• After year end AXY Corporation shall:
  • Make a revaluation on the payable for the closing year end, December 31, 2021, @50.774 (an adjustment to the payable if it will increase or decrease).

Debit: Unrealized Foreign Exchange Loss          ₱ 3,205

Credit: Accounts Payable ₱ 3,205

(Note: At year end the Unrealized Foreign Exchange Loss will be automatically closed to the Retained Earnings)

• To record on the settlement date February 22, 2022, @ ₱50.272 .

Debit: Accounts Payable                                       ₱ 253,870

Credit: Cash ₱ 251,360

Credit: Realized Foreign Exchange Gain                   ₱ 2,510

• What if the exchange rate for February 22, 2022, is @ ₱51.39 for 1 USD Dollar? 

Debit: Accounts Payable                                         ₱ 253,870

Debit:Realized Foreign Exchange Loss     ₱ 3,080

   Credit:Cash ₱ 256,950

• What if the company closes its books monthly and settles the payable before year end? 
  • Transaction date: September 15, 2021 @₱50.133

Debit: Purchases                   ₱ 250,665

Credit: Accounts Payable         ₱ 250,665

• Closing Month: September 30, 2021 @₱50.9590

Debit: Unrealized Foreign Exchange Loss          ₱ 4,130

Credit: Accounts Payable ₱ 4,130

• Settlement date: October 20, 2022 @₱50.7550

Debit: Accounts Payable                                   ₱ 254,795

Debit:Realized Foreign Exchange Loss             ₱3,110

   Credit:Cash ₱ 253,775

Credit:Unrealized Foreign Exchange Loss             ₱ 4,130

What is the tax treatment  for Unrealized Gain/ Loss and Realized Gain/Loss arising from a foreign currency transactions?

Unrealized gain/loss is treated as a temporary difference in the computation of the income tax.  A deduction for the unrealized gain and addition for unrealized loss. The Unrealized Gain/Loss is reversed depending on the date of settlement and on the policy of the company. If the company closes its books monthly and the transaction is settled the following month, the unrealized gain/loss is reversed and recognize realized gain/loss, accordingly. The realized gain is recognized as an ordinary income and the realized loss as an allowable deduction to the income tax.

Tricky Facts: 

Some banks reflect the interest income on the first day of the month. What rate will be used if it is in foreign denominated currency? 

It is practical to use the average rate of the previous month , since the interest income is for the previous month’s transactions.

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About the author:

Charlyn is part of the Financial Reporting team in GPP CPAs, an affiliate full-arm accounting firm of TaxAcctg Center. She is working with several global clients in car manufacturing, retail and Philippine Representative Office of a global chemical manufacturing.