Why foreign currency valuation is required ?

[Former Member]

Hi.

I just want to clear my doubt. If we deal with foreign vendors or customers like vendor invoice is done through USD or EUR or GBP but payment is not made till now or customer invoices are done but payment is not received from them in month of August. In that case if we run foreign currency valuation of open vendor invoices and open customer invoices on 31st August it will generate accounting entry and next day i.e, 1st September accounting entry will be reversed. So my question is we have not received from customer and we have not paid to vendor, invoices are still open from customer and vendor side. So if we run foreign currency valuation what will be its actual effect in the business and if we not run foreign currency valuation what are the problems may arrises because later if we pay to vendor through foreign currency then actual loss / gain effect will arrise in our business scenario.

Kindly give me reply.

[Former Member · Accepted solution]

Hi

Your question is not specific to SAP, but it is towards the basic accounting concept of "accrual". Whetever expenses we have incurred but not paid, we make a provision for it at every book closure, and reverse that provision in the next month/year.

Same is the case in Forex revaluation. Take example of INR vs USD, incase I billed my customer @ 42 and as on 31st March the rate is @39 only, it means as on that date the realisable value is not @42 but @ 39. We have to restate all the Receivable as the realisable value at every balance sheet date. Therefore we need to revalue. Following entry will be passed:

Forex Revaluation Expense (Unrealised) Dr. 3

Customer Adjustment A/c Cr. 3

next month I reverse this entry and suppose payment comes @ 38.50, then I need to recognise loss on for 0.50, not the entire 3.50. This is the basic accrual concept

regards

Parag Bhargava

[Former Member]

FC valuation is done mainly to meet GAAP requirements. But what actually drives this requirement, is the need for investors to know the economic impact of exchange rate movements on a company's finances. One of the goals of GAAP is to provide investors with relevant information.

Basically, by doing the valuation before preparing the balance sheet and adjusting the balance sheet accordingly, you can show the users of the balance sheet exactly what the financial position of the company would be, if all open items are settled at the chosen exchange rate. While none of this is realized since actual payments have not been made yet, it is much more relevant than using an out of date exchange rate, which was used on the date of creating an open item.

Indirectly, such valuations can also help management and investors see how effectively a company is managing its foregin currency exposure.

Hope this throws some light.

Edited by: Pradeep Alluri on Dec 16, 2008 8:19 PM

[Former Member]

hi

As part of the period end process, and in anticipation of creating a period-end financial statement, all accounts held in foreign currency and all foreign currency open items must be re-valued at the period end rate. There are two tools within the SAP ERP Packaged Solution for this purpose:

Foreign Currency Revaluation u2013 Balance Sheet Accounts: The program selects every balance sheet account, typically cash accounts, that is held in a foreign currency and re-values the total balance at the currently valid rate. Any (sterling) exchange rate difference is posted to a realised gains/losses account.

Foreign Currency Revaluation u2013 Open Item Accounts: Open item accounts managed in GBP, such as debtors and creditors, may contain foreign currency transactions. The program will individually revalue each open item to determine an overall unrealised foreign exchange gain or loss position. The realised exchange rate gain/loss is posted when the transaction is cleared.

It is a statutory requirement to meet hte FAS52 and GAAP requirements

thanks

Srilaskhmi

[former_member266169]

Hi

foreign currency valuation is that you have correct values at month ends for your balance sheets and P&L's.

It will be reversed at the first day of follwwing month bcs. it is only for balance sheet valuation.

The real exchange rate gain or loss will be realised and posted with the payment.

BR Tarik