Functional Currency Ficial Statements Guidelines

Functional Currency: The primary currency of the economic environment where the entity operates, typically where it generates and spends cash.
Foreign Currency: Any currency other than the functional currency; here, Philippine peso is foreign if not the functional currency.
Commission: The Securities and Exchange Commission.
BIR: The Bureau of Internal Revenue.
Qualified Entity: Corporations/entities that meet criteria under Section 3.

Primarily applies to entities whose revenues, costs, and expenses in the functional currency are at least 70% of total.
Entities dropping below 70% may retain qualification with Commission justification.

Primary factors:
1. Currency influencing sales prices.
2. Currency influencing costs (labor, materials, other expenses).
Supporting factors:
1. Currency of financing activities.
2. Currency of receipts retention.
Foreign operations are considered based on autonomy, transaction proportion with reporting entity, cash flow effects, and debt servicing ability.
Management judgment used when indicators conflict to identify dominant economic currency.
Functional currency remains constant unless substantial change in economic environment.
Companies must submit a two-year assessment justifying functional currency, signed by CEO and CFO with external auditor report (Annexes A and B).

Prior year financials must be restated as if functional currency was used.
Philippine peso and other currencies treated as foreign currencies for functional currency reporting.
Entities may keep multi-currency books.
For transition, translation to functional currency:
1. Carry over items already in functional currency without translation.
2. Translate foreign currency monetary items at closing spot rate.
3. Translate non-monetary items at historical cost or fair value exchange rates.
4. Inventory and impairment-related items are translated considering cost and net realizable values.
5. Income and expense items translated at transaction-date rates or average rates if fluctuations are minimal.
6. Capital contributions translated at contribution date rates, with details for non-functional currency contributions.
7. Exchange differences upon first functional currency presentation charged or credited to retained earnings.
8. Comparative financial statements must be submitted.

Disclose amount of exchange differences in net profit or loss.
Reconcile exchange differences charged or credited to equity.
State translation rates used for major accounts.
Explain the reason for using the functional currency instead of Philippine peso and for any subsequent changes.
Disclosure of the company's foreign currency risk management policies is encouraged.

Qualified entities may apply this Circular for annual financial statements ending on or after October 31, 2003.