Configuring foreign currency valuation in SAP

Foreign Currency Valuation Configuration In Sap

This article aims to provide an overview of foreign currency valuation and translation, as well as the handling of exchange rate differences during the clearing of open items.

At the end of each month, it is necessary to generate financial reports in both the local currency for submission to the local authority and in the group currency for consolidation purposes.

Foreign currency valuation is about valuating transaction currency amount into local currency amount. Foreign currency translation is about valuating local currency into group currency. Let’s discuss both one by one.

Foreign currency valuation configuration in SAP: Transaction currency to local currency

Organizations do have transaction in foreign currency. When document is entered in foreign currency (document currency other than company code currency), local currency amount is derived by using currency exchange rate existing at the time of document posting. But later on exchange rate might change hence amount in local currency derived using exchange rate at the time of reporting will not be same as local currency amount in posted document. Impact of exchange rate changes needs to be taken into account by posting adjustment entries.

On the 5th of August, I recorded a vendor invoice for an amount of 100 GBP.

♦ The exchange rate for currency on August 5th was 65 Indian Rupees (INR) equal to 1 United States Dollar (USD), and 1 British Pound (GBP) equal to 1.3 USD.

The configuration for foreign currency valuation in SAP involves setting the exchange rate type with USD as the reference currency.

Suppose a month-end report needs to be generated on the 31st of August.

♦ On the 31st of August, the exchange rate between Indian Rupees (INR) and United States Dollars (USD) was 70 INR for every 1 USD. Additionally, the exchange rate between British Pounds (GBP) and USD was 1 GBP for every 1.5 USD.

The configuration for foreign currency valuation in SAP involves setting a specific exchange rate type that is based on the reference currency of USD.

In order to determine the precise status of the reporting day, it is necessary to record the following adjustment accounting entry.

The process of recording adjustment entries is known as foreign currency valuation. It is necessary to include the effects of exchange rate fluctuations in financial transactions.

To ensure accurate balance sheet reporting, an adjustment accounting entry is made. This entry accounts for unrealized exchange rate gains or losses and is reversed in the following month with a different posting date.

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Typically, it is common to perform foreign currency valuation on the final day of each month. This process involves recording accounting adjustments on the last day of the month and then reversing them on the first day of the following month.

Foreign Currency Translation Configuration in SAP: Local Currency to Group Currency

After the completion of foreign currency valuation, the next step is to perform foreign currency translation. This process is carried out in order to generate financial reports in the group currency, which are required for consolidation purposes.

Taking into account the aforementioned example, the foreign currency conversion is performed on 31st August.

Below document gets posted as a result of foreign currency translation

An accounting entry is made to adjust the balance sheet in group currency on the reporting day. This entry accounts for unrealized exchange rate gains or losses and is reversed in the following month.

It is common to perform foreign currency conversion on the final day of each month, once the foreign currency valuation has been carried out. This process results in an accounting entry adjustment on the last day of the month, which is then reversed on the first day of the following month.

Up until now, we have been examining the unrealized gain or loss that arises from fluctuations in currency exchange rates. Now let us consider what occurs with the realized exchange gain or loss amounts when an open item is settled.

How sap treats realized exchange rate difference amount?

For instance: Suppose a payment to a vendor is scheduled for the 10th of September.

♦ The exchange rate on September 10th was 72 Indian Rupees for every 1 US Dollar, and 1 British Pound was equal to 1.6 US Dollars.

The configuration for foreign currency valuation in SAP involves setting the exchange rate type with USD as the reference currency.

The payment document will be used to clear the invoice, and a corresponding accounting entry for adjustment will be recorded.

In this scenario, when there is a change in the exchange rate and it affects the vendor open item that has already been cleared, there is no requirement to make a reversal entry for adjustment accounting. However, if there is an unrealized exchange gain or loss, a reversal entry will be posted.

Foreign Currency Valuation: Which accounts are important?

Accounts that are maintained on an open item basis and involve transactions in foreign currencies, such as clearing accounts, GR/IR clearing accounts, reconciliation accounts, etc.

Accounts that are not treated as open items and involve foreign currency transactions, such as bank accounts and sales accounts, need to be configured for foreign currency valuation in SAP.

Foreign Currency Valuation and Translation Configuration in SAP

The following displays the location where account determination is stored for accounts that are managed based on open items.

Configuration for determining the accounts to be used in foreign currency valuation when they are not managed based on open items.

Performing a foreign currency revaluation in SAP: How is it done?

To configure foreign currency valuation in SAP, follow these steps:

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1. General customizing: Set the local currency of the company as EUR.

2. Create an invoice: Access SAP Easy Access and navigate to Accounting -> Financial accounting -> Accounts payable -> Document entry -> FB60 Invoice.

3. Review the customizing settings for foreign currency valuation.

4. Perform foreign currency valuation by following a list of instructions.

Key configuration steps for foreign currency valuation in new GL

Step-I: Setting up a standard quotation for exchange rates is the first step in configuring foreign currency valuation in SAP. This involves defining how exchange rates will be quoted and displayed within the system. The standard quotation can be set as either direct or indirect, depending on whether it represents the amount of local currency needed to buy one unit of foreign currency (direct) or vice versa (indirect).

Step-II: Checking the exchange rate type is crucial for accurate foreign currency valuation. Exchange rate types determine which rates are used for specific transactions and calculations within SAP. It is important to ensure that the correct exchange rate type is assigned to each relevant transaction.

Step-III: Defining translation ratios for currency translation helps establish conversion factors between different currencies. These ratios are used during foreign currency valuation processes to convert amounts from one currency to another based on current exchange rates.

Step-IV: Entering exchange rates into SAP allows users to maintain up-to-date information regarding current market values of various currencies. These rates can be manually entered or automatically updated through integration with external systems such as central banks or financial data providers.

P.S.: Foreign Currency Valuation Configuration in SAP requires careful attention to detail and accuracy when setting up standard quotations, checking exchange rate types, defining translation ratios, and entering current exchange rates into the system. By following these steps correctly, organizations can ensure reliable and precise valuations of their foreign currency transactions.

Checking foreign currency in SAP

In order to perform a foreign currency valuation in SAP, it is necessary to configure certain settings in the Customizing section. These settings can be found under Financial Accounting General Ledger Accounting/Accounts Receivable and Accounts Payable Business Transactions Closing Valuating Foreign Currency Valuation.

Configuring these settings allows for accurate valuation of foreign currencies within the system. It ensures that exchange rate differences are correctly calculated and accounted for during financial transactions involving multiple currencies.

To begin the configuration process, navigate to the Customizing section and locate the relevant path mentioned above. Within this section, various parameters can be adjusted according to specific business requirements.

For example, one important setting involves defining which exchange rates should be used for valuation purposes. This includes determining whether daily or monthly average rates should be utilized, as well as specifying any additional rules or criteria that need to be considered when valuing foreign currencies.

Additionally, other settings may include specifying tolerance limits for exchange rate differences or defining how rounding should occur during currency conversions.

The mechanism of FX revaluation in SAP

At the end of each accounting period, any differences in exchange rates are recorded in two separate accounts: a balance sheet adjustment account and an exchange rate gain/loss account (Profit and Loss Accounts). The specific configuration for these accounts is determined based on the reconciliation accounts for vendors and customers. This ensures that foreign exchange transactions are accurately reflected in both the balance sheet and profit and loss statements.

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The balance sheet adjustment account serves as a temporary holding place for any discrepancies caused by fluctuations in currency values. It allows organizations to adjust their financial statements accordingly, ensuring accurate reporting of assets, liabilities, and equity. By posting exchange rate differences to this account, companies can maintain transparency in their financial records.

To configure these accounts correctly within SAP (Systems Applications Products), it is crucial to consider various factors such as vendor reconciliation accounts and customer reconciliation accounts. These reconciliations ensure that all relevant transactions involving vendors or customers are appropriately accounted for when calculating foreign currency valuations.

Setting up currency in SAP: How is it done?

To establish a new currency in SAP, it is essential to define its characteristics such as the name, ISO code, and other relevant details. This process ensures that the system recognizes and incorporates the newly created currency into its operations. Additionally, determining the decimal places for a particular currency is crucial as it determines how fractions of that currency are represented and calculated within SAP.

Furthermore, configuring translation ratios for currency conversion plays a vital role in accurately converting values between different currencies. These ratios enable seamless exchange rate calculations during transactions involving multiple currencies. By defining these ratios appropriately, businesses can ensure accurate financial reporting and analysis across various currencies.

Lastly, entering exchange rates is an integral part of foreign currency valuation configuration in SAP. It involves inputting current exchange rates between different currencies to facilitate accurate conversions during transactions or financial reporting processes. Maintaining up-to-date exchange rates allows businesses to reflect real-time market fluctuations and make informed decisions regarding international trade or investments.

The purpose of foreign currency valuation in SAP

To determine the accurate financial position on the day of reporting, it is necessary to post an adjustment accounting entry known as foreign currency valuation. This step involves incorporating the impact of exchange rate changes into the financial statements.

Foreign currency valuation is a crucial process in SAP that ensures accurate representation of assets and liabilities denominated in foreign currencies. It helps companies assess their true value by considering fluctuations in exchange rates between transaction dates and reporting dates.

During foreign currency valuation, SAP compares the original transaction amounts recorded in local currency with their equivalent values in foreign currencies based on current exchange rates. The system then calculates any gains or losses resulting from these differences and posts them as adjustments to relevant accounts.

P.S: Foreign currency valuation plays a significant role for businesses operating internationally, especially when dealing with multiple currencies. By accurately reflecting the impact of exchange rate fluctuations, companies can make informed decisions regarding their financial positions and mitigate potential risks associated with volatile markets.