16 Processing Currency Gains and Losses for Accounts Receivable

This chapter contains the following topics:

16.1 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 invoices the open portion of partially paid invoices at the end of a fiscal period, whereas realized gains and losses are calculated at the time of receipt.

16.1.1 Realized Gain/Loss Calculations

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

Realized gains and losses are calculated when you apply receipts to the invoices, but they are recognized in the general ledger when you post the receipts. To calculate the gain or loss, the system determines if the exchange rate changed between the invoice date and the receipt date as described:

• The invoice date is the date that was used to retrieve the exchange rate to calculate the invoice amounts.

The invoice date can be either the DGJ (Invoice GL Date) or the DIVJ (Invoice Date) in the F03B11 table. You set a processing option in the P03B0011 Master Business Function to specify which date is used when you create an invoice.

• The receipt date is the date in the DGJ (Receipt GL Date) field in the F03B14 table.

This is the date on the receipt detail item that the invoice was paid.

To summarize, the system determines which invoice date (DGJ or DIVJ) was used when the invoice was created and uses that as the invoice date to calculate the gain or loss.

For foreign currency receipts, the potential exists for a standard gain or loss. To calculate the gain or loss, the system multiplies or divides the invoice amount by the difference in the exchange rate from the time the invoice was entered and the time the payment was received.

If an alternate currency receipt 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 receipt date.

• Alternate currency gain/loss. An amount based on exchange rate differences between the alternate (receipt) currency and the domestic currency. This gain or loss is the difference between:

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

16.1.1.1 Example: Realized Gain/Loss on Foreign Currency Invoices and Receipts

In this example, a British company enters an invoice in U.S. dollars (foreign currency) and receives payment in USD (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 payment is received.

Description Currency Amount Exchange Rate January 1 Exchange Rate February 1
Invoice (domestic) GBP 303.60
Invoice (foreign) USD 500.00 1 USD = 0.6072 GBP
Receipt (foreign) USD 500.00   1 USD = 0.6081 GBP
Standard gain/loss GBP + 0.45

The foreign currency invoice on January 1 is 500.00 USD, which is 303.60 GBP in the domestic currency.

500.00 USD Ã— 0.6072 = 303.60 GBP

The foreign currency receipt on February 1 is 500.00 USD.

16.1.1.2 Standard Gain/Loss

The standard gain/loss is + 0.45 GBP. This amount is based on exchange rate fluctuations from the invoice date to the receipt date.

500.00 USD Ã— 0.6081 (exchange rate on receipt date) = 304.05 GBP

500.00 USD Ã— 0.6072 (exchange rate on invoice date) = 303.60 GBP

304.05 − 303.60 = + 0.45 GBP

16.1.1.3 Example: Realized Gain/Loss on a Foreign Invoice and Alternate Currency Receipt

In this example, a French company enters three invoices in Canadian dollars (CAD) and receives payment in Japanese yen (JPY).

When the receipt is entered, the receipt amount (JPY) is compared to the foreign and domestic invoice amounts to determine whether the debt has been satisfied. Because the three currencies involved in the transaction fluctuate against one another, the potential exists for:

• Standard gain/loss between EUR and CAD.

• Alternate currency gain/loss between JPY, CAD, and EUR.

Description Currency Amount Exchange Rate January 1 Exchange Rate February 1
Invoice (domestic) EUR 356.34
Invoice (foreign) CAD 500.00 1 CAD = 0.71268 EUR
Receipt JPY 38,850   1 CAD = 0.70882 EUR

1 JPY = 0.009163 EUR

1 JPY = 0.01287 CAD

Standard gain/loss EUR –1.93
Alternate currency gain/loss EUR + 1.57

The foreign currency invoice on January 1 for 500.00 CAD, which is 356.34 EUR in the domestic currency. The EUR amount is calculated as follows:

• 500.00 CAD Ã— 0.71268 = 356.34 EUR

The alternate currency receipt on February 1 is 38,850 JPY.

The foreign currency amount applied to the invoice is 500.00 CAD.

• 38,850 JPY Ã— 0.01287 = 500.00 CAD

The domestic currency amount applied to the invoice is 354.41 EUR.

• 500.00 CAD Ã— 0.70882 = 354.41 EUR

The domestic currency amount of the receipt is 355.98 EUR

• 38,850 Ã— 0.009163 = 355.98 EUR

16.1.1.4 Standard Gain/Loss

The standard gain/loss is –1.93 EUR. This amount is based on exchange rate fluctuations from the invoice date to the receipt date.

500.00 CAD Ã— 0.70882 (exchange rate on receipt date) = 354.41 EUR

500.00 CAD Ã— 0.71268 (exchange rate on invoice date) = 356.34 EUR

354.41 − 356.34 = –1.93 EUR

16.1.1.5 Alternate Currency Gain/Loss

The alternate currency gain/loss is + 1.57 EUR. This amount is calculated using exchange rates on the receipt 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.

38,850 JPY Ã— 0.009163 = 355.98 EUR

(38,850 JPY Ã— 0.01287 = 500.00 CAD) Ã— 0.70882 = 354.41 EUR

355.98 − 354.41 = + 1.57 EUR

16.1.2 Unrealized Gain/Loss Calculations

To record unrealized gains and losses on open foreign currency invoices, 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 invoices or the open portion of a partially paid invoice. 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/R Unrealized Gain/Loss Report (R03B426) which:

• Revalues open foreign invoices

• Analyzes unrealized gains and losses in detail

• Records unrealized gains and losses

16.2 Prerequisites

Before you complete the tasks in this section:

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

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

16.3 Generating the A/R Unrealized Gain/Loss Report

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

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

• Set processing options for A/R Unrealized Gain/Loss Report (R03B426).

16.3.1 Understanding the A/R Unrealized Gain/Loss Report

You run the A/R Unrealized Gain/Loss Report (R03B426) to calculate unrealized gains and losses. The system produces a report that displays:

• The base company currency and the transaction currency for each invoice.

• The invoice number and due date.

• The original and current domestic amount calculated for each invoice.

• The foreign amount of each invoice.

• The unrealized gain or loss for each open invoice.

To produce the report, the system uses information from these tables:

• Customer Ledger (F03B11)

• Receipts Detail (F03B14)

You specify whether you want to create journal entries for unrealized gains, losses, or both in a processing option. The system assigns these journal entries the document type JX. This is the only document type that is 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 invoices that are open as of the date that you specify in a processing option and uses the F03B14 As Of Aging Server (B03B136) to recalculate the domestic and foreign invoice 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 invoices to accounts receivable trade accounts. If you run the A/R 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/R 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 multiple currencies when you run the A/R Unrealized Gain/Loss Report, the foreign currency 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 of the report for each company with 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.

16.3.1.1 Example: Unrealized Gain/Loss on a Foreign Currency Invoice

In this example, a French company calculates an unrealized gain/loss on an open foreign currency invoice in U.S. dollars (USD).

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 invoice (USD) is revalued against the euro (EUR).

Description Currency Amount Exchange Rate January 1 Exchange Rate January 31
Invoice (domestic) EUR 1,135.45 1 USD = 1.13545 EUR not applicable
Invoice (foreign) USD 1,000.00 not applicable not applicable
Open invoice (domestic) EUR 1,132.25 not applicable 1 USD = 1.13225 EUR
Unrealized gain/loss EUR –3.20 not applicable not applicable

The foreign invoice on January 1 is 1,000.00 USD, or 1,135.45 EUR in the domestic currency.

1,000.00 USD Ã— 1.13545 = 1,135.45 EUR

The foreign invoice remains open on January 31 and is revalued against the euro.

1,000.00 USD Ã— 1.13225 = 1,132.25 EUR

16.3.1.2 Unrealized Gain/Loss

The unrealized gain/loss is –3.20 EUR. This amount is based on exchange rate fluctuations between the time that the invoice was created and the end of the fiscal period, when the invoice remained open.

Transaction Amount (CA Ledger) Original Exchange Rate Current Exchange Rate Domestic Amount (AA Ledger) Gain/Loss
1,000.00 USD 1.13545 not applicable 1,135.45 EUR not applicable
1,000.00 USD   1.13225 1,132.25 EUR –3.20

1,000.00 USD Ã— 1.13225 (exchange rate at end of fiscal period) = 1,132.25 EUR

1,000.00 USD Ã— 1.13545 (exchange rate on invoice date) = 1,135.45 EUR

1,132.25 − 1,135.45 = –3.20 EUR

16.3.2 Running the A/R Unrealized Gain/Loss Report

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

16.3.3 Setting Processing Options for A/R Unrealized Gain/Loss Report (R03B426)

This section discusses the processing options that are specific to multicurrency processing.

16.3.3.1 Process

1. Exchange Rate Date

Specify the date to use to retrieve the exchange rate from the F0015 table. If you leave this processing option blank, the system uses today's date.

2. Create JEs for Gains and Losses (create journal entries for gains and losses)

Specify whether to create journal entries for accounts with calculated gains and losses. Values are:

Blank: Do not create journal entries.

1: Create journal entries for accounts with calculated gains or losses.

2: Create journal entries for accounts with calculated losses only.

3: Create journal entries for accounts with calculated gains only.

3. G/L Date (general ledger date)

Specify the general ledger date to use for journal entries that the system creates. If you leave this processing option blank, the system assigns the last day of the current period as the general ledger date.

4. Batch Status

Specify whether to assign the batch status to journal entries that the system creates based on the setting of the Manager Approval of Input check box on the Accounts Receivable Constants form. Values are:

Blank: Assign the batch status based on the setting of Manager Approval of Input check box.

1: Assign an approved batch status (A) regardless of the setting of the Manager Approval of Input check box.

5. Ledger Type

Specify the ledger type to assign to the journal entries that the system creates. The value you specify must exist in UDC table 09/LT. If you leave this processing option blank, the system assigns the ledger type AA.

6. Date - As of

Specify the effective or as of date to use to select unpaid foreign invoices and calculate gain and loss amounts.

The system recalculates open domestic and foreign invoice amounts as of the date that you enter. After the invoice amounts are recalculated, the system calculates the gain or loss. If you leave this processing option blank, as of processing does not occur.