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Hello Everyone,

When validating Remeasured Balances and postings resulting from a FCR-Run for Cash users at times cannot make sense of resulting postings. Gains and Losses seem to be exaggerated and/or the Historic Valuation Amount does not seem accurate for a specific key-date.

This post aims to address the most common misconception when interpreting figures showing in the ‘Remeasured Balances’ tab of a FCR-Run.

When doubting the plausibility of Gains/Losses for a specific period – this should be checked against settings made in Fine Tuning Activity: Foreign Currency Remeasurement Methods for Cash.

The indicator No Subsequent Reversal Posting (Y/N) for a particular Accounting Principle and Foreign Currency Remeasurement Method will indicate whether acknowledged Gains/Losses will be carried forward and therefore cumulate over several periods.

 

 

We want to illustrate the calculation-logic using a generic example and differing results depending on applied FCR-Method.

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Scenario:

Company Currency: EUR; Bank Account Currency: USD; Exchange Rate: EUR/USD

Starting with period 005/2017 we record one monthly bank-transfer over 1,000.00 USD (EUR/USD = 1.00) over 3 periods resulting in a ending balance in USD in 07/2017 = 3,000.00 USD.

Based on bank account transactions and EXR-movements in 005/2017 and 006/2017 losses are incurred incurred as:

  • 005/2017:    EXR = 0.95 EUR/USD:       -50.00 EUR
  • 006/2017:    EXR = 0.90 EUR/USD:       -50.00 EUR
  • 007/2017:    EXR = 0.80 EUR/USD:     -200.00 EUR

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I. FCR-Run for 007/2017; SoB 4010; No Subsequent Reversal Postings – ‘N’  (i.e. Reversal Postings)

Executing the FCR-Run after 3 months for 007/2017 thus shows us the following results.

 

  • Balance Amount is USD balance on 31.07.2017 is 3,000.00 USD
  • Key Date Exchange Rate (EXR)  = 0.8
  • Key Date Valuation Amount = Balance Amount *  Key Date EXR – here:  2,400.EUR
  • Historic Valuation Amount is the cumulated balance of all transactions in EUR on 31.07.2017 – here:  2,700.00 EUR.
  • EXR Loss/Gain = Key Date Valuation AmountHistoric Valuation Amount
    Here: 2,400.00 EUR – 2,700.00 EUR =  – 300,00 EUR

In this example for 007/2017 an EXR-Loss of only -200,00 EUR has been expected.

006/2017 closed with 2,000.00 USD and a Key Date Valuation Amount of 1,800.00 EUR.
Adding 1,000.00 USD * 007/2017 EXR (0,8 EUR/USD) leaves us with:

  • USD Balance:    3.000,00 USD
  • EUR Balance:    2,600.00 EUR (1,800.00 + 800.00)

3.000,00 USD evaluated against Key Date EXR (0,8 EUR/USD) = 2,400.00 EUR.

The incurred loss of 300,00 EUR appears too high for period 007/2017 – also implying that the Historic Valuation Amount 2,700.00 EUR seems not accurate and not reflecting the actual converted transactions on this bank g/l account up to this key-date.

Causal is that the Historic Valuation Amount represents the cumulated balance of all transactions in EUR including Foreign Currency Remeasurement.

Here for Set of Books 4010 Foreign Currency Remeasurement Method A002 – No Subsequent Reversal Posting is flagged as (N), therefore indicating that realized Gains/Losses from EXR valuation shall be reversed on the first day of a subsequent period.

The cumulative effect leads to the realisation of differences including previous EXR-differences in a period (and again their reversal in a subsequent period) – since EXR-Differenes-Postings are reversed and therefore carried-forward on the g/l bank account.

 

 

Typical Postings for FCR-Run in 006/2017 showing the cumulated EXR-Difference acknowledgement and its reversal in the subsequent period:

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II. FCR-Run for 007/2017; SoB 700; No Subsequent Reversal Postings – ‘Y’  (i.e. No Reversal Postings)

Contrasting this Remeasurement Method with another Set of Book’s Remeasurement Method shows following results for the same bank g/l account:

Tuning Activity: Foreign Currency Remeasurement Methods for Cash

 

Executing the FCR-Run after 3 months for 007/2017 shows the expected EXR-Loss over -200.00 EUR.

 

  • Since previously acknowledged EXR-Losses have not been reversed the Historic Valuation Amount of all transactions in EUR on 31.07.2017 shows:  2,600.00 EUR.
  • EXR Loss/Gain = Key Date Valuation AmountHistoric Valuation Amount
    Here: 2,400.00 EUR – 2,600.00 EUR =  – 200,00 EUR

 

 

Typical Posting for FCR-Run in 006/2017 showing the EXR-Difference realization incurred in 006/2017 and no subsequent reversal:

 

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Comparing both methods and approaches – evaluating and realizing gains/losses from changes in foreign currency it is worth noting that the cumulative effect can go in either direction or level out. Whether postings are to be reversed in the next period – or not – completely depends on applied accounting principles and local auditing-requirements.

 

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