Question & AnswerQ&A (SEC MEMORANDUM CIRCULAR NO. 14, S. 2003)
The primary purpose is to provide guidelines for companies whose transactions are substantially denominated in a currency other than the Philippine peso to prepare their financial statements using their functional currency to avoid distortions due to foreign exchange gains or losses.
Functional currency is defined as the currency of the primary economic environment in which the entity operates, usually the currency in which the entity primarily generates and expends cash, and is equivalent to the measurement currency used for financial statement items.
A qualified entity is a corporation or entity whose revenues and cost and expenses denominated in its functional currency represent at least 70% of their respective total amounts.
The primary factors include the currency that mainly influences sales prices for goods and services, and the currency that mainly influences labor, material, and other costs of providing goods or services.
No, the functional currency should not be changed unless there is a substantial change in the underlying transactions, events, and circumstances.
The company must submit an assessment supporting the determination of its functional currency covering at least two years, signed by its CEO and CFO, accompanied by an external auditor's report as per the formats in Annexes A and B.
It should restate prior year financial statements as if transactions had been booked in the functional currency and treat the Philippine Peso and other currencies as foreign currencies for reporting purposes, using appropriate translation methods for monetary and non-monetary items.
Foreign currency monetary assets and liabilities are translated using the closing spot exchange rate as of the balance sheet date.
Disclosures must include exchange differences included in profit or loss, net exchange differences charged to equity, translation rates used, reasons for using a different currency, changes in reporting currency, and encouraged disclosure of foreign currency risk management policy.
The provisions of the Circular may be applied for annual financial statements covering periods ending on or after October 31, 2003.