Processing Currency Gains and Losses for Accounts Payable

This chapter provides an overview of currency gains and losses, lists prerequisites, and discusses how to generate the A/P Unrealized Gain/Loss Report.

Understanding Currency Gains and Losses

Currency gains and losses are based on exchange rate fluctuations that occur on transactions that involve more than one currency. Two types of gains and losses exist:

• Unrealized gains and losses

• Realized gains and losses

Unrealized gains and losses are calculated on unpaid vouchers as well as the open portion of partially paid vouchers at the end of a fiscal period, whereas realized gains and losses are calculated at the time of payment.

Realized Gain/Loss Calculations

To calculate realized gains and losses, you must post payments. Realized gains and losses are based on exchange rate fluctuations that occur between transactions that involve a foreign or alternate currency payment. When you post payments, the system calculates gains and losses based on whether the exchange rates changed from the date of the voucher to the date of the payment. If exchange rates changed, the system creates journal entries for the gains and losses.

If a foreign currency payment is involved, the potential exists for a standard gain or loss on a transaction. The gain or loss is based on exchange rate fluctuations between the foreign (transaction) currency and the domestic currency at the time the payment was received or issued. To calculate the gain or loss, the system multiplies or divides the voucher amount by the difference in the exchange rate from the time the voucher was entered and the time the payment was issued.

If an alternate currency payment is involved, the potential exists for two gains or losses on a transaction:

• Standard gain/loss.

  An amount based on exchange rate differences between the foreign (transaction) currency and the domestic currency from the transaction date to the payment date.

• Alternate currency gain/loss.

  An amount based on exchange rate differences between the alternate (payment) currency and the domestic currency. This gain or loss is the difference between these amounts:

• The amount calculated by converting the alternate currency payment directly to the domestic currency.

  This is the amount that is actually deposited to or paid from the bank account.

• The amount calculated by converting the alternate currency payment to the foreign currency to the domestic currency.

  Note. The document types for realized gains and losses are different for the Accounts Receivable and JD Edwards EnterpriseOne Accounts Payable systems. The system uses document type RC for receivables and PG for payables. The document type and the description Realized Gain or Realized Loss appear on the post reports.

Example: Realized Gain/Loss on Foreign Currency Voucher and Payment

In this example, a French company enters a voucher in Canadian dollars (foreign currency) and pays it in CAD (foreign currency).

Because of the exchange rate risk, the potential exists for one gain or loss based on the fluctuation of exchange rates between the domestic currency and the foreign currency at the time of payment.

The foreign currency voucher on January 1 is 1,000.00 CAD, which is 717.61 EUR in the domestic currency.

1,000.00 CAD × 0.71761 = 717.61 EUR

The foreign currency payment on February 1 is 1,000.00 CAD

Standard Gain/Loss

The standard gain/loss is –0.06 EUR. This amount is based on the exchange rate fluctuations from the voucher date to the payment date.

1,000.00 CAD × 0.71761 (exchange rate on voucher date) = 717.61 EUR

1,000.00 CAD × 0.71767 (exchange rate on payment date) = 717.67 EUR

717.61 − 717.67 = – 0.06 EUR

Example: Realized Gain/Loss on Foreign Voucher and Alternate Currency Payment

In this example, a Canadian company enters a voucher in U.S. dollars (foreign currency) and pays the voucher in the euro (alternate currency).

Because of the exchange rate risk, the potential exists for two gains or losses - one between Canadian dollar (CAD) and U.S. dollar (USD) and the other between EUR, USD, and CAD.

The foreign currency voucher on January 1 is 500.00 USD, which is 794.30 CAD in the domestic currency.

500.00 USD × 1.58860 = 794.30 CAD

The alternate currency payment on February 1 is 575.07 EUR

The foreign currency amount applied to the voucher is 500.20 USD.

575.07 EUR × 0.86980 = 500.20 USD

The domestic currency amount applied to the voucher is 793.99 CAD.

500.00 USD × 1.58798 = 793.99 CAD

The domestic currency amount of the payment is 728.20 CAD.

575.07 EUR × 1.38176 = 794.61 CAD

Standard Gain/Loss

The standard gain/loss is + 0.31 CAD. This amount is based on the exchange rate fluctuations from the voucher date to the payment date:

500.00 USD × 1.58860 (exchange rate on voucher date) = 794.30 CAD

500.00 USD × 1.58798 (exchange rate on payment date) = 793.99 CAD

794.30 − 793.99 = + 0.31 CAD

Alternate Currency Gain/Loss

The alternate currency gain/loss is + 0.30 CAD. This amount is calculated using exchange rates on the payment date. It is based on the difference between converting the alternate currency directly to the domestic currency and converting the alternate currency to the foreign currency to the domestic currency.

575.07 EUR × 1.38176 = 794.61 CAD

(575.07 EUR × 0.86980 = 500.20 USD) × 1.58798 = 794.31 CAD

794.61 − 794.31 = + 0.30 CAD

Unrealized Gain/Loss Calculations

To record unrealized gains and losses on open foreign currency and vouchers, you can enter the gain and loss amounts manually in a journal entry or have the system create the gain and loss entries automatically.

Unrealized gains and losses apply to unpaid and vouchers or the open portion of a partially paid voucher. If you work with multiple currencies, you record unrealized gains and losses at the end of each fiscal period to revalue open foreign transactions. This gives you an accurate picture of the cash position so that you can forecast and manage the cash flow.

To have the system create gain and loss entries automatically, you run the A/P Unrealized Gain/Loss Report (R04425). This report:

• Revalues open foreign vouchers.

• Analyzes unrealized gains and losses in detail.

• Records unrealized gains and losses.

Prerequisites

Before you complete the tasks in this section:

• Enter new exchange rates on the Revise Currency Exchange Rates form.

  See Setting Up Exchange Rates.

• Create a different version of the A/P Unrealized Gain/Loss Report for each company that has a different base currency.

Generating the A/P Unrealized Gain/Loss Report

This section provides an overview of the A/P Unrealized Gain/Loss Report and discusses how to:

• Run the A/P Unrealized Gain/Loss Report.

• Set processing options for A/P Unrealized Gain/Loss Report (R04425) .

Understanding the A/P Unrealized Gain/Loss Report

You run the A/P Unrealized Gain/Loss Report (R04425) to calculate unrealized gains and losses. The system produces a report that displays:

• Base company currency and the transaction currency of each voucher.

• Voucher number and due date.

• Original and current domestic amount calculated for each voucher.

• Foreign amount of each voucher.

• Unrealized gain or loss for each open voucher.

• Discount amounts for the voucher.

• Pay status of the voucher.

To produce the report, the system uses information from the F0411 and F0414 tables.

You specify whether you want the system to create journal entries for gains or losses, or both, in a processing option. The system assigns journal entries for unrealized gains and losses a document type of JX. This is the only document type that can be used to adjust the domestic side of a monetary (currency-specific) account. The system creates only one journal entry per company. If you leave the processing option blank, the system does not create journal entries.

You can also specify whether you want to create journal entries for unrealized gains or losses as of a specific date. The system selects vouchers that are open as of the date that you specify in a processing option and uses an As Of Aging Server to recalculate the domestic and foreign voucher amounts. Then, if specified in a processing option, the system creates journal entries for the unrealized gains or losses. With as of reporting, you can produce period-end reports to handle financial audit requirements such as balancing open vouchers to accounts payable trade accounts. If you run the A/P Unrealized Gain/Loss Report as of a specific date, be aware that the report takes longer to process. This is because the system first recalculates the open amounts as of the date that you specify and then it calculates the unrealized gains or losses.

Note. Run the A/P Unrealized Gain/Loss Report first without creating journal entries. Review the report and correct any exchange rates, if necessary. Continue to run the program without creating journal entries until you have corrected all exchange rates, and then run the program to create journal entries for unrealized gains and losses.

If you mix currencies when you run the A/P Unrealized Gain/Loss Report, the foreign grand total and any other subtotals appear as **NA** (not applicable) because totals for more than one currency are meaningless. To prevent this, set up a different version for each company that has a different base currency. Setting up a separate version for each company has the added advantage of reducing the size of the report.

Important! To avoid duplicate journal entries, do not set the processing option to create journal entries more than one time per fiscal period.

Example: Unrealized Gain/Loss on a Foreign Currency Voucher

In this example, a Canadian company calculates an unrealized gain/loss amount on an open foreign currency voucher in the euro (EUR).

Because of the exchange rate risk, the potential exists for an unrealized gain or loss at the end of the fiscal period when the open voucher (EUR) is revalued against the Canadian dollar (CAD).

The foreign currency voucher on January 1 is 1,000.00 EUR, or 1,394.25 CAD in the domestic currency.

1,000.00 EUR × 1.39425 = 1,394.25 CAD

The foreign currency voucher remains open on January 31 and is revalued against the CAD.

1,000.00 EUR ×1.139221 = 1,392.21 CAD

Unrealized Gain/Loss

The unrealized gain/loss is + 2.04 CAD. This amount is based on exchange rate fluctuations between the time that the voucher was created and the end of the fiscal period, when the voucher remained open.

1,000.00 EUR × 1.39425 (exchange rate on voucher date) = 1,394.25 CAD

1,000.00 EUR × 1.39221 (exchange rate at end of fiscal period) = 1,392.21 CAD

1,394.25 − 1,392.21 = + 2.04 CAD

Running the A/P Unrealized Gain/Loss Report

Select Monthly Valuation (G1121), A/P Unrealized Gain/Loss Report.

Setting Processing Options for A/P Unrealized Gain/Loss Report (R04425)

Processing options enable you to specify the default processing for programs and reports.

Process

Hold Payment