currency management.pdf

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Currency Management

Overview

An enterprise may have transactions in foreign currencies or it may have foreign branches.Foreign Currency transactions should be expressed in enterprises reporting currency and thefinancial statement of foreign branches should be translated into enterprises reporting currencyin order to include them in the financial statement of the enterprise.The principle issues in accounting for foreign currency transactions and foreign branches are to decide whichexchange rate to use and how to recognize the effect of exchange rates in the financial statements.Effects of changes in Foreign Exchange RatesIn India, Financial statements are prepared in Rupee, which is the reporting currency. All the transactionsare done in rupee and, therefore, recorded in rupee. However, if enterprise has the transactions in anothercurrency, say, in US, dollars, because the enterprise is making export sales or importing material, plant ortaking loan from abroad, in these cases, transactions shall be in foreign currency but recording and reportinghas to be done in rupee, then the question of translation of foreign currency transaction in INR arises.Further, there may be a case that an enterprise domiciled in India has the foreign operation in theform of

a) Branch in foreign currency: The transactions of foreign branch have to be incorporated in Head Officebooks as the financial statements are presented for whole enterprise including branches, domestic as well asforeign. The transactions of foreign branches are dominated /measured in the currency of the country in whichthe branch is situated, for example, if an Indian company X Ltd. Has a branch in New York. The branch mustbe transacting in US dollars where as X Ltd. Reports in rupee, therefore, an accounting standard is neededwhich will prescribe the method of translation of foreign currency in to reporting currency ( in this case , rupee).

b) Subsidiary in foreign currency: If an enterprise domiciled in India has a subsidiary in foreigncountries, and if as per applicable laws, Indian holding enterprises has to consolidate the accountof foreign subsidiary, the need of accounting standard arises which will prescribe the procedureand principles for translation of subsidiarys financial statement which are in foreign currency into Indian Currency, as the reporting currency as the holding enterprise is Indian rupee.

c) Associated or Joint Venture in foreign currency: The need of Accounting standard will be felt whenproportionate consolidation method under AS-27 [Financial Reporting of Interest in Joint Venture] is appliedfor jointly controlled entities and equity method of accounting is done in case of investment in associate inconsolidated financial statements as per AS-23.

Accounting Standard -11 [AS-11]

AS-11 (revised 2003) shall be applicable in respect of accounting periods commencing on or after 01.04.2004and is mandatory in nature. The revised 2003 AS supersedes AS-11 (1994). However, accounting for

Currency Management


transactions in foreign currencies entered in to by the reporting enterprise itself or though its branches before01.04.2004 will continue to be done as per AS-11(1994).

Applicability of AS-11

The accounting standard applies to 1. a) In accounting for transaction in foreign currencies2. b) In translating the financial statements of foreign operations integral as well as non-

integral.3. c) The accounting standard also prescribes the accounting for Forward Exchange Contract.

Non - Applicability of AS-11

The accounting standard is not applicable to 1. a) Re-statement of an enterprises financial statements from its reporting currency in to

another currency for the convenience of users accustomed to that currency.2. b) The presentation in cash flow statement of Cash Flow arising from transactions in a foreign currency

and the transactions of cash flow of foreign operations.3. c) Exchange differences arising from foreign currency borrowings to the extent that they are regarded

as an adjustment to interest cost (refer AS-16)

CurrenciesCurrencies are legal means of payment in a country.For each monetary amount that we enter in the SAP system, we must specify a currency. Currencies areentered as per ISO standards, for example, USD for US dollar, INR for Indian Rupee.

Few common terminologies associated with Currencies are as follows:

a) Reporting currency is the currency used in presentation of the financial statements.b) Foreign currency - is the currency other than the enterprise currency.c) Group Currency - A group currency is used in the consolidated financial statements. Before theconsolidation process can be completed, all values in the individual financial statements must be translatedfrom the local or transaction currency into group currencyd) Company currency: A currency used for internal trading partnere) Hard Currency: A country specific second currency used in countries with high rate of inflation.f) Index currency: A country specific theoretical currency used in some countries with high inflation as acomparison currency for purpose of statutory reporting.

In SAP, we define various currencies used by our company/company codes

Define Currency Codes (T code OY03)

SPRO-> SAP NetWeaver -> General Settings -> Currencies -> Check currency code

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Other Terminologies:g) Exchange rate is the ratio for exchange of two currencies as applicable to the realization ofcertain assets or the payment of specific liability and even recording of specific transactions orgroup of transactions.

h) Average rate is the mean of exchange rates in force during a period.i) Forward rate is the exchange rate established by the terms of an agreement for exchange of twocurrencies at a specified future date.

j) Closing rate is the exchange rate at the balance sheet date.k) Monetary items - are money held and assets & liabilities to be received and paid in fixed or determinableamounts of money e.g. cash receivables and payables.

l) Non monetary items are assets and liabilities other than monetary items e.g. fixed assets,inventories, investment in equity shares.

m) Settlement date is the date at which receivable is due to be collected or payable is due to be paid.n) Recoverable amount is the amount which the enterprise expects to recover from the use ofasset including its residual value on disposal.What are foreign currency transactions?

Transactions denominated in a foreign currency or require settlement in a foreign currency are called foreigncurrency transactions.Example of foreign currency transactions are

1. Buying or selling of goods or services priced in foreign currency.2. Acquisition or disposal of fixed assets denominated in foreign currency.3. Incurs and settles liabilities denominated in foreign currencies.4. Lending or borrowings when the amounts are denominated in foreign currency.5. Unperformed forward exchange contract.

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Exchange Rate(s)

In SAP, we have to specify for each of the company codes, in which currency, the ledgers should be managed.This currency is the national currency/ local currency /company code currency/ operative currency of theledger. From a company code view, all other currencies are then foreign currencies. In addition to the localcurrency, we can manage the ledger in two parallel currencies, for eg: group currency or hard currency.

In order for the system to translate amount in various currencies, we must define exchange rates. For eachcurrency pair, we can define different exchange rates and then differentiate between them by using exchangerate types.

In Financial Accounting, currencies and currency translations are relevant in the following circumstances-

(a) Account Master Data - Defining account currencies(b) Posting - Posting documents in foreign currency(c) Clearing - Clearing open items in foreign currency(d) Foreign Currency ValuationAs we already defined in the previous section, Relationship between two currencies in known as ExchangeRate.

In other words, exchange rates are used to translate an amount in to another currency.

We define exchange rates in the system for the following purposes: Posting and Clearing

To translate amounts posted or cleared in foreign currency, or to check a manually entered exchange rateduring posting or clearing.

Exchange Rate Differences

In order to determine gains or losses from exchange rate differences.

Foreign Currency Valuation

To valuate open items in foreign currency and foreign currency balance sheet accounts as part of the closingoperations.

Note: Exchange rates are defined at client level and therefore apply for all company codes.

To Maintain Exchange Rates (T Code OB08)SPRO-> SAP NetWeaver -> General Settings -> Currencies -> Enter Exchange Rates

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If you maintain the exchange rates on a daily basis, you should delete the exchange rates that you no longerrequired, so that there are not too many entries in the system.

We do not have to enter all exchange rates. There are many tools that can be utilized to automaticallydetermine other exchange rates from existing ones.

Following tools are available-

a) Inversionb) Reference Currencyc) Exchange rate SpreadExchange Rate Types (T Code OB07)

SPRO-> SAP NetWeaver -> General Settings -> Currencies -> Check Exchange Rate Types

Exchange rates for different purposes for the same date are defined in the system as exchange rate types.If we need to carry out currency translations between a numbers of different currencies, we can simplifyexchange rate maintenance by entering a base currency for the exchange rate type. Instead of enteringtranslation rates between every single currency, we only need to specify the translation rate between eachcurrency and the base currency. All currency translations then take place in two steps - into the base currencyand from the base currency into the target currency.

ExampleThe base currency is INR. You want to translate GBP to USD. To do this, the following entries must be made inthe table for maintaining currency translation rates:

Ratio for GBP -> INR Ratio for USD -> INR

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Translation from GBP to USD is then carried out automatically. The translation is done as though thisexchange rate (GBP-> USD) was actually entered in the conversion table.

The following exchange rate types exist:

Buying rate Bank Selling rate Average rate Historical exchange rate Key date exchange rate

Define Translations ratio for currency translation (T Code OBBS)

The Currency Translation Ratio identifies the relationship of the units of one currency to the units of another. Itis not possible to maintain exchange rate in the system without maintaining the translation ratio for the currencypair. It is essential to maintain these ratios for each exchange rate type & currency pair.

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Configuration of Foreign Currency Revaluation in SAP

In this section, we define the specifications required for the valuation of foreign currencybalances e.g. Bank accounts holding foreign exchange and Open Items in foreign currency Customers and Vendors

Define Valuation methods

IMG Financial Accounting General ledger Accounting Business Transactions Periodic Processing Valuate Define Valuation methods

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SAP uses exchange rate type M to value all foreign currency items. M is the average rate for any foreigncurrency.

In this step, you define your valuation methods for the open items. With the valuation method, you groupspecifications together which you need for the balance and individual valuation. Before every valuation run, youspecify the required valuation method.SAP provides various Valuation methods. We can also create our own key starting with Z.

SAP provides the following valuation methods:

BSK CZ/SK valuation methodEVR Always ValuateKTO FC bal. per account, Lowest cost principle

Double click on BSK to display the configuration parameters

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Val Method BSK is used for foreign currency account balances valuation for e.g. Bank account held in foreigncurrencies.

In the valuation procedure, various configuration options are available:

Lowest Value Principle The Valuation is only displayed if the valuation difference between the localcurrency amount and the valued amount is negative that is an exchange loss is taken place. The valuation iscarried out per item total.

Strict Lowest Value Principle The valuation is only displayed if, as a consequence, the new valuationclass has a greater devaluation and/or a greater revaluation at credit entries than the previous valuation. Thevaluation is calculated per item total.

Always Valuate If you select this procedure, revaluations are also taken into consideration.

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Revalue only if you select this procedure, system only does a revaluation if applicable but does not dodevaluation where there is exchange loss.

Reset- if you select this parameter, then the open items is valuated at the acquisition price. This way thevaluation difference is set to zero. The old valuation method is reset. The account determination is reversed.The revenue that arises is posted to the expense account.

Exchange rates are types that are attached to the valuation methods.

Determine rate type from account balance- If you select this field, the account balance/group balance in therelevant foreign currency is used to determine the exchange rate type. This is relevant for account balancerevaluation.

A document type SA is attached to Valuation method.Configuration details EVR (always valuate)

Configuration details KTO

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Assign GL accounts for Foreign Currency valuation (T code OBA1)IMG >Financial Accounting > General Ledger Accounting >Business Transactions > Periodic Processing >Valuate > Foreign Currency Revaluation > Prepare Automatic postings for Foreign Currency valuation.

Double click on KDB line ItemExchange Rate difference in foreign currency balances e.g. bank accounts held in foreign currency.

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Exchange Rate Difference key: Can be kept blank or you can enter a key with 4 digits e.g. 0001. In case youcreate this exchange rate key then the same has to be updated in the GL code of the foreign currency accounti.e. the control data tab which has the field exchange rate difference key. Only when it is attached, the systemwill re-valuate the foreign currency account.

Expense account: We need to enter the expense GL code for unrealized foreign exchange loss. The losson revaluation is unrealized and will be automatically reversed in the next month e.g. 2345678 unrealizedexchange gain/loss trade.

E/R gains: You need to enter the revenue GL coded for unrealized foreign exchange gain. The loss onrevaluation is unrealized and will be automatically reversed in the next month.

Double Click on KDFHere we will enter the GL codes for AR and AP (the reconciliation account).We can enter different GL codes for currency and currency type or we can keep it blank.12000092 Sundry Creditors for Expenses84000001 Exchange Gain / loss others Realized84565882 Exchange Gain / loss others Revaluation12000023 Creditors Revaluation

Account Determination (OBYC)

There can be exchange rate difference on account of document posted through MM process, in such caseswe need to maintain the exchange gain/loss account for KDM (Materials management exch.rate diffs) keyusing Transaction code OBYC.

Exchange rate differences in the case of open items (KDM)

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In the case of open items, Exchange rate differences arise when an invoice relating to a PO is posted witha different exchange rate to that of the goods receipt and the material cannot be debited or credited due tostandard price control or stock under coverage/shortage.Double click on KDM to display the configuration parameters:

Now system will post the arising Gain/loss automatically to the assigned GL account, for thispurpose default cost centers are required to be maintained for the gain/loss accounts to whichthe posting will be done using transaction code OKB9

currency management.pdf

Documents

foreign currency transactions

reporting currency

foreign currencies

foreign operation

indian currency

currency managementoverview

reporting enterprise

accountof foreign subsidiary