Who Needs Conversion Differences?
We live in a global village, where everything is connected and nothing is too far or out of reach. As time goes by, more companies expand their business activity to additional countries by founding branches, subsidiaries etc. that perform their business activity in the local currency. However, when handling financial reporting everything should be reported in the same currency, usually the local currency used by the headquarters.
If the system currency defined in your company database is different than the local currency, the Conversion Differences functionality is for you:
Based on the selection criteria you define, SAP Business One recommends which journal entries to post for adjusting the differences between the account/business partner balance in the system currency and the balance in the local currency.
After generating the report, you can review the recommended transactions and choose which ones to post. In addition, you can review the transactions you didn’t choose to post by choosing the “Previous Report” button. You can accelerate the Conversion Differences report generation by deselecting the option “Enable Opening Row Details”.
Available from SAP Business One, version for SAP HANA and SAP Business One. This tip and all the other tips are available on the Tip of the week community page. You can also visit the Implementation Arena for useful implementation tips.
I'm trying to align the concept of system currency with a customer who is not familiar with ERPs using a parallel currency. This is something new to most customers who have been using older ERPs.
Without a system currency, the books are translated only at the balance sheet date with P&L translated using the average fx rate. The gain/loss or does not go to P&L but to an equity account (other comprehensive income - CTA).
I think the realized conversion difference gain/loss on the GL account determination should be a P&L account and not an equity account.
However, the Conversion Difference utility which revalues the B/S should use the equity/CTA accounts.
What's your thoughts on this?
The challenge is being able to align our terminologies and processes with how traditional accountants think and work.
could you please describe the specific scenario you are dealing with and which localization?
The scenario is the customer has global operations with the headquarters using USD.
All the subsidiaries have different local currencies and they all have USD as a system currency.
Example. A Canadian Subsidiary. With AR on March 15 @ 1USD = 1.20 CAD and paid on April 15 at 1 USD = 1.10 CAD.
A/R CAD 120 USD 100
Sale CAD 120 USD 100
March 31 —- You do the Conversion Difference by running the conversion difference tool. This revalues your A/R CAD 120 with the balance sheet fx rate. The unrealized gain/loss posting on the system currency can go to an Equity GL (Other comprehensive income). The customer understands this part.
Cash CAD 120 USD 109.09
A/R CAD 120 USD 100
Realized Conversion Diff Gain USD 9.09 ***
**This is the part that I have difficulty explaining to the customer. The subsidiary is CAD local currency and got paid in CAD. In the pure accounting sense, there should be no fx gain/loss because your AR is in CAD and you received CAD payment.
However, we know that the system needs to balance the system currency side using the realized conversion diff gain/loss which posts only on the system currency side.
I’m not sure if this should be treated as “Other Comprehensive Income – Translation Gain/Loss” which is an equity GL because in the strict accounting terms OCI- Translation Gain/Loss happens only at the end of the period when your translate the CAD books to USD books so they are by nature unrealized gains/loss similar to the Exchange Rate Differences. This on the other hand is a realized gain/loss in nature because this happen only during payment.
Your question contains the answer. When System Currency is activated there are 2 key rules:
Therefore, the posting on April 15 that contains a realized System Currency gain (a.k.a. Conversion Diff gain) of USD 9.09 MUST be posted.
When running the Conversion Difference report again after the April 15 posting, the unrealized gain/loss posted on March 31 (you didn't specify what that was), should be reversed - as the unrealized gain/loss is a temporary posting that estimates the expected gain/loss that will arise for the open transactions at the period end.
In connection with which particular account you should post either the unrealized or realized gains/losses to, SAP does not provide accounting advice and recommends that a local accountant should be consulted.
Thank you for your reply.
I understand SAP does not provide accounting advice and as SAP Consultants, we shouldn't either.
It's just that I have a customer who claims that SAP B1's behavior is wrong in terms of how the system calculates the realized conversion difference gain/loss.