THE weakening of the Philippine peso against the US dollar has become a concern for many Filipinos.
When the peso loses value, the prices of imported goods, fuel and other products become more expensive. For businesses, however, the effects go beyond higher operating costs.
A weaker peso can reduce reported profits, increase the peso value of foreign currency debts, and affect the financial statements of companies dealing with overseas suppliers and customers.
What makes this interesting is that a company may report a loss even before it pays a single dollar.
Consider a Philippine company that imports equipment from the United States. It purchases a machine for $100,000 on credit when the exchange rate is P58 to one dollar. At that time, the company records the machine and the amount payable to its supplier at P5.8 million.
Suppose the company has not yet paid its supplier when the peso weakens to P63 against the dollar.
The company still owes $100,000. Nothing has changed in the supplier’s invoice. However, settling that obligation would now require P6.3 million instead of P5.8 million. The difference of P500,000 represents a foreign exchange loss.
Under IAS 21, The Effects of Changes in Foreign Exchange Rates, foreign currency monetary items, such as unpaid dollar obligations, are translated using the closing exchange rate at the reporting date. The resulting exchange differences are generally recognized as profit or loss.
In our example, the company would recognize a P500,000 foreign exchange loss if the obligation remains unpaid at the reporting date and the exchange rate is at P63 to the dollar. The company has not yet paid its supplier, but its reported profit has already been affected.
This is one of the hidden costs of a weakening peso. A business may be generating sales and operating normally, yet its financial results may suffer because of changes in exchange rates.
The effect becomes more significant for companies with large dollar-denominated loans. Imagine a Philippine business that borrowed $1 million to finance its expansion. If the exchange rate moves from P58 to P63, the peso value of its outstanding loan increases from P58 million to P63 million.
That is a P5-million increase in the reported liability, even though the company has not borrowed any additional dollars.
But does a weakening peso affect every business in the same way?
Not necessarily.
Consider a Philippine exporter that sells products to an overseas customer for $100,000 on credit. When the sale is recorded, the exchange rate is P58 to one dollar, resulting in a receivable of P5.8 million.
If the customer has not yet paid by the reporting date and the exchange rate has increased to P63, the receivable would be translated to P6.3 million. The company would generally recognize a P500,000 foreign exchange gain.
The same exchange rate movement that caused a loss for the importer has resulted in a gain for the exporter. This shows that the effect of a weakening peso depends on the nature of a company’s foreign currency transactions and whether it has amounts to pay or collect in foreign currencies.
There is also an important distinction between monetary and non-monetary items.
Going back to our equipment example, the machine purchased for P5.8 million does not automatically increase in value to P6.3 million simply because the peso has weakened.
If the machine is measured using the cost model, its original peso cost remains based on the exchange rate when the transaction was initially recognized, subject to depreciation, impairment, and other applicable accounting requirements. It is the unpaid dollar obligation that must be translated using the closing exchange rate.
For business owners, the lesson goes beyond preparing financial statements.
Companies that regularly transact in foreign currencies should monitor their outstanding dollar obligations, review their payment arrangements, and consider how exchange rate movements could affect their cash requirements.
A reported foreign exchange loss may not involve an immediate cash payment, but it can indicate that settling an obligation will require more pesos if the exchange rate remains unfavorable.
The weakening of the peso is therefore more than a concern about the prices of imported goods. It can also change how much a business owes, how much it expects to collect and how much profit it reports.
After all, a business does not have to spend more dollars to find itself paying more pesos.
Floyd Paguio, CPA, MBA, is the chairman of Paguio, Dumayas & Associates, CPAs (PDAC), the Philippine member firm of PrimeGlobal International, and the president of KCD College of Accountancy in Alaminos, Laguna. He has served as a member of the National Board of Acpapp and as a Trustee of the Acpapp Foundation, and currently serves as chairman for Media Affairs.
