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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
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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 -> 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