Foreign Currencie Valuation
Can somebody explain with some example the followings relating to Foreign Currency Valuation.
1.Lowest Value Princple.
2.Strict lowest Value Principle.
6.Determine Rate type from account balance.
Points will be assigned to all replies.
FC valuation is for Open items of vendor/customer and for Foreign Currency GL accounts like loans, etc
Let's take an example of one case:
If an invoice is booked at the following rate: Local currency is USD and Invoice is booked in EUR.
Assume we book a customer invoice of 1oo EUR on say 1st Nov and assume exchange rate of 1 USD=1.50EUR on 1st November. So total receivable in local currency USD is 150 USD on 1st November.
On 30th November, lets make two assumptions: this remains open and if the exchange rate is 1 USD=1.60 EUR or exchange rate is say 1USD=1.40EUR.
Lowest value principle:
On valuating the above 100 EUR receivable at 1.60, you will get 160USD. That implies there is an unrealized exchange gain of $10. But in lowest value principle, gain is not recognized. However if we take exchange rate of 1.40USD, you will get unrealized loss of $10. This needs to be recognised in books by Dr FC gain/loss account (PL Account) and Cr goes to Receivables(Adjustment) a/c
But you will reverse on 1st Dec, hence status quo of $150 maintained
.2.)Strict lowest value principle:
Assume the above rate on 30th Nov is say 1.40 and we recognized loss of $10. Now say on Dec 31st 2007, if the exchange rate is say 1.45, then it will compare with the previous valuation of November and since the EUR is appreciated, it will not valuated, however if it has been devaluated to say 1.35, then it will valuate
3.) Always valuate: Simple, even gain is also recognized
4.) Revalue only- Only gain is recognized
5.) Reset- Resetting old valuation run. Thus making the valuation difference as zero, thus reinstating the original exchange rate of 1.50
Hope you understand better