In previous versions of AX, we have to manually calculate and enter an average foreign exchange rate each perriod end for P&L account revaluation. Is that still the case in the latest version of Dynamics 365 for Operations? Thanks.
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[quote user="magic1949"]when you have open transactions that cross periods and exchange rates fluctuate a lot and are involved in extensive import -export then this is very material. When you only trade locally, and/ or settle transactions in the same period, and exchange rates are stable, then it really doesn't matter much[/quote]
I completely aware of the explanation what you acknowledged above ,which is related to balance sheet accounts , not about P&L accounts .
I am keenly looking for business requirement to run FCR for P&L accounts and nature of accounts .
Its primarily to revalue open orders/invoices related to AP and AR.
When you place an order there may be quite a difference in the exchange rate at the time of receipt.
The question is which exchange rate to apply e.g the rate could be different on any of these dates- the date of order, or date of order acceptance, or date of delivery, of date of invoice generation, date of invoice receipt , or date of invoice payment or date of cheque clearance ?
If you are operating in AED and buy in euro then the vendor expects the full amount in euro, similarly if you quoted in GBP and fixed the GBP price then the expected revenue in AED may change month to month
So to correctly estimate revenues, liabilities cash flow etc you need to consider what is the exchange rate at the time of transaction, but also what figure to include in your financial statements so as not to get unexpected shocks later.
Each trading partner obviously wants to pay /receive the right amount. As this will ultimately also determine declared profits, cashflows etc. both shareholders and tax collectors have an interest in how you deal with this and that is why there are relevant accounting standards. when you have open transactions that cross periods and exchange rates fluctuate a lot and are involved in extensive import -export then this is very material. When you only trade locally, and/ or settle transactions in the same period, and exchange rates are stable, then it really doesn't matter much.
Unless you have very long AR and AP payment terms, and very long wip cycles, then I don't see much point in revaluing P&L that way (though it is commonly done). However, you always have to consider the tax regime.
What do the accounting standards say - in general they don't support the use of average rates! (The use of an average rate is generally acceptable where transactions occur uniformly throughout the year.) The other reason for average is when the historical daily rate is not known. For FASB 52 compliance, balance sheet accounts with foreign currency postings (e.g., open payables/receivables) must be revaluated to the Local Currency using the exchange rate in affect as of the balance sheet date. Revaluation is normally run on a period-end basis as part of month-end close using at a minimum an average exchange rate method (spot rates are the preferred method). P&L Accounts in a foreign currency, represented by revenues, expenses, Gains/Losses will use the spot exchange rate on the date those postings were recognized. If a spot rate is not available the n an average rate would be used. So I agree with Ludwig that daily rate update is preferable.
If at all possible, use the spot rate when calculating the balance sheet and P&L account currency revaluation (Gain/Loss postings and currency translation from Functional Currency to Group Currency). Adjustments posted to CTA should be recorded similarly. SAP has many transaction codes that allow for updating the foreign currency exchange rates; OC41 is one of them.
IAS 21 The Effects of Changes in Foreign Exchange Rates prescribes:
IAS 21 answers 2 basic questions:
IAS 21 defines both functional and presentation currency and it’s crucial to understand the difference:
Functional currency is the currency of the primary economic environment in which the entity operates. It is the own entity’s currency and all other currencies are “foreign currencies”.
Presentation currency is the currency in which the financial statements are presented.
In many cases, functional and presentation currencies are the same.
While an entity has only 1 functional currency, it can have 1 or more presentation currencies, for its financial statements
An entity can actually choose its presentation currency, but it CANNOT choose its functional currency.
The primary economic environment is the one in which the entity primarily generates and expends the cash.
Sometimes, sales prices, labor and material costs and other items might be denominated in various currencies and therefore, the functional currency is not obvious and management must use its judgment to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.
Initially, all foreign currency transactions shall be translated to functional currency by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.The date of transaction is the date when the conditions for the initial recognition of an asset or liability are met in line with IFRS. Subsequently, at the end of each reporting period, you should translate:
All exchange rate differences shall be recognized in profit or loss, with the following exceptions:
For example, when an item is revalued with the changes recognized in other comprehensive income, then also exchange rate component of that gain or loss is recognized in OCI, too.
When there is a change in a functional currency, then the entity applies the translation procedures related to the new functional currency prospectively from the date of the change.
When an entity presents its financial in the presentation currency different from its functional currency, then the rules depend on whether the entity operates in a non-hyperinflationary economy or not.
When an entity’s functional currency is NOT the currency of a hyperinflationary economy, then an entity should translate:
All resulting exchange differences shall be recognized in other comprehensive income as a separate component of equity.
However, when an entity disposes the foreign operation, then the cumulative amount of exchange differences relating to that foreign operation shall be reclassified from equity to profit or loss when the gain or loss on disposal is recognized.
When an entity’s functional currency IS the currency of a hyperinflationary economy, then the approach slightly changes:
So that is why erp systems generally don't calculate an average rate.
Hi Frank & Ludwig,
Normally we would run the Foreign currency revaluation for Balance sheet accounts ,but in your scenario user required to run the FCR for P&L accounts , could I know the business scenario and wants to know that what type of accounts and why ?
Thanks in advance.
These are strictly GL account revaluations Ludwig, not AR or AP revals. Thanks for the response. It is as I suspected! As always, thank you.
Hi Frank,
Ok. In this case you have to procede as before and calculate the average rate yourself that is then set up in the exchange rate table and then used for the revaluation.
Irrespective of that, probably try to convince them to use what the standard does because the currency revaluation generates transactions that are classified as un-realized currency gains/losses that are reversed once the transactions - for example invoices - are paid and settled.
Trying to average out currency fluctuations for temporary un-realized profit/loss transactions that occur over the period of a month does not seem to generate much 'value' in my opinion especially if those revalued transactions are settled soon anyway. Yet, this is something you have to discuss with them :-)
Best regards,
Ludwig
Thanks Ludwig. The client wants to use an average rate for the month to value their profit and loss, rather than the last day's rate.
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