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    Currency Management


    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

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    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 -> Cur