Foreign exchange accounting entries-currency revaluation in D365
Scenario- Foreign exchange accounting entries-currency
revaluation in D365
A.
Background
The
theoretical value, or book value, of open transactions in foreign currencies
varies over time because of fluctuations in exchange rates.
IAS
21 The
Effects of Changes in Foreign Exchange Rates provides guidance
to determine the functional currency of an entity under International Financial
Reporting Standards (IFRS).
The
standard also prescribes how to include foreign currency transactions and
foreign operations in the financial statements of an entity and how to
translate financial statements from the entity’s functional currency into its
presentation currency.
A
foreign exchange gain/loss occurs when a company buys and/or sells goods and
services in a foreign currency, and that currency fluctuates relative to
their home currency. It can create differences in value in the monetary assets
and liabilities, which must be recognized periodically until they are
ultimately settled.
For
example, if a US seller sends an invoice worth €1,000 and the customer pays
the invoice after 30 days, there is a high probability that the exchange rate
for euros to US dollars will have changed at least slightly. The seller may end
up receiving less or more against the same invoice, depending on the exchange
rate at the date of recognition of the transaction.
1.
Realized and Unrealized Foreign Exchange
Gain/Loss
Realized
and unrealized gains or losses from foreign currency transactions differ
depending on whether or not the transaction has been completed by the end of
the accounting
period.
a.
Realized Gains/Losses
Realized
gains or losses are the gains or losses on transactions that have
been completed. It means that the customer has already settled the invoice
prior to the close of the accounting period.
For
example, assume that a customer purchased items worth €1,000 from a US seller,
and the invoice is valued at $1,100 at the invoice date. The customer settles
the invoice 15 days after the date the invoice was sent, and the invoice is
valued at $1,200 when converted to US dollars at the current exchange rate.
It means
that the seller will have a realized foreign exchange gain of $100
($1,200–$1,100). The foreign currency gain is recorded in the income section of
the income
statement.
b.
Unrealized Gains/Losses
Unrealized
gains or losses are the gains or losses that the seller expects to earn when
the invoice is settled, but the customer has failed to pay the invoice by the
close of the accounting period. The seller calculates the gain or loss that
would have been sustained if the customer paid the invoice at the end of the
accounting period.
When
preparing the financial statements for the period, the transaction will be recorded
as an unrealized loss of $100 since the actual payment is yet to be received.
The unrealized gains or losses are recorded in the balance sheet under
the owner’s
equity section.
B.
Business
requirement
1.
System
should be able to calculate foreign currency exchange gain loss and their
accounting automatically.
2.
Currency
revaluation required for GL, BANK, Customer and Payable transaction on periodic
basis.
3.
System
should calculate and post realised gain loss at the time of settlement of
invoice with payments.
C.
Process
in D365
Foreign currency
revaluation feature in dynamics 365 deals with the method of translating the
value of all foreign currency-denominated open accounts into the reporting
currency.
All payable
and receivable transactions that are due to be settled in foreign
currency, expose a transaction risk, which refers to the ‘adverse impact that movements in
the exchange rate could have on the companies’ books’.
These revaluations
generate differences in the value of the company’s monetary assets and
liabilities, which get recorded under “unrealized gains and losses”.
When the transaction
is settled, the differences in value between the firm sale or purchase
commitment and the payment date are recorded as realized FX gains/losses on the
balance sheet.
Foreign Currency
revaluation in dynamics 365 can be performed on all open transactions at the
ledger and sub-ledger level as depicted below.
Ø General Ledger
Revalue
ledger balance in reporting currency in case of exchange rate differences
Ø Bank Accounts
Revalue
bank balance in reporting currency in case of exchange rate differences
Ø Account Receivable
Revalue
customer balance in reporting currency in case of exchange rate differences
Ø Account Payable
Revalue
vendor balance in reporting currency in case of exchange rate differences
1.
Setup in
D365
a.
Setup in
Ledger
Path-
Module> General Ledger>Ledger Setup>Ledger
Accounting
currency, reporting currency, accounting currency exchange rate type, budget
exchange rate type, and Main account for Realised Gain/Loss, Unrealised
Gain/Loss must be defined on Ledger setup.
b.
Setup in
Currency Exchange Rate Master
Path-Module>General
Ledger>Currency exchange rates
Exchange
rate must be defined for automatic update of exchange on transaction.
Alternatively, we can change exchange rate the time transaction creation also.
c.
Currency
code required on customer, bank, vendor master.
2.
Transaction
a.
Create
vendor invoice with help of invoice journal
Path>Module>Account
Payable>Invoice Journal
i. Click on New
ii. Select the batch-new page will be open.
iii. Change the date,
iv. select vendor as “account type”,
v. select vendor number in “account”
vi. Put amount of transaction in foreign
currency- example 2000 USD
vii. Select Offset account type as “Ledger”
viii.
Select
Offset account number from lookup.
ix. Fill other required details such as
dimension, invoice date, invoice number etc.
x. Validate and post the transaction.
xi. After posting check the voucher. We can
that system created entries for transaction currency as 2000 USD and Accounting
currency in INR as 2000*82(currency exchange rate was 1USD=82INR) =164000.
b.
Run
currency revaluation batch at the end of month for monthly statement
On 31st
January we will run Currency revaluation batch. Exchange rate on 31st
January was 1 USD= 83INR
Path>Module>Account
Payable>Periodic Tasks>Foreign Currency Revaluation
i. Click on Foreign currency revaluation
ii. Click on Foreign currency revaluation,
select method, considered date, date of rate dimension.
iii. We can run batch for all vendor, or we
can run the batch vendor wise, currency wise, vendor group wise or any other
filter criteria.
iv. Click on OK
v. System will run the Foreign Currency
revaluation batch and post the entries. We can see here system created entries
for 2000 as unrealised loss. (Difference in currency exchange rate was 83-82=
Rs 1)
c.
Make
payment to vendor
Now we
can make payment to vendor with full settlement.
For
Payment-
Path>Module>Account
Payable>Payments>Vendor Payment Journal
i. Click on Vendor Payment Journal
ii. Click on New
iii. Select Batch
iv. Click on Lines
v. New page will be open
vi. Click on New Line- Fill required details
like date, vendor as account type, vendor number in account field, click on
settle transaction,
vii. mark the transaction for settlement,
click on ok,
viii.
select
bank as offset account type, select bank number in offset account
ix. validate and post the transaction. System reversed
the Unrealised loss transaction and posted the realised gain.
(Currency
exchange rate was 1 USD= 81 INR on payment date and on actual transaction date
rate was 1 USD= 82 INR, so realised gain is Rs 1)
Note-
1.
Foreign
Currency Revaluation process is same for Customer, Vendor, Bank and GL.
2.
We can
use the process explain in 2.b “Run currency revaluation batch at the end of
month for monthly statement” for monthly revaluation of GL, Vendor, Customer
and Bank.
3.
Batch for
Foreign Currency Revaluation available separately in each module.
i. For GL
Path- Module>General
Ledger>Currencies>Foreign currency revaluation
ii. For Bank
Path-
Module>Cash and bank management>Periodic tasks>Foreign currency
revaluation
iii. For Customer
Path- Module>Account Receivable>Periodic
tasks>Foreign currency revaluation
iv.
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