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Forex Revaluation Delta Logic and Reversal of Excess Gain/Loss Posted After Payment

Foreign exchange revaluation is an important financial closing procedure as per IAS 21 – The Effects of Changes in Foreign Exchange Rates in order to present true and fair picture of foreign receivables/ payables.

Normally this valuation is posted at the end of period and reversed on the first day of next period. However, there are specific business cases/ local laws prevailing in different countries that allows gain/loss to be part of balance sheet (particularly asset capitalization) instead of charging the whole expense to Profit and Loss Statement. Accordingly, reversal should not be done in this case but rather transferring the gain/loss via cost reclassification of cost to the asset. We are not discussing the mechanism of cost reclassification. We are observing in this blog that how can we achieve the functionality of posting only single entry without any reversal entry on first day of next month.

In SAP, there is a functionality called Delta logic that is suitable to achieve the above requirement. Before having a glance at this functionality and how we can configure this in SAP, we should first understand the business scenario and its relevance to Delta Logic:

 

Scenario:

Example we have purchased goods/ services from any supplier in 100,000 USD @ PKR 155/ USD on 1st Feb 2021. Invoice remains unpaid until month end on 28th Feb 2021. Exchange rate on month end rose to PKR 160/ USD. Business does not want this exchange rate reversed on first day of next month. Let’s say we have achieved this requirement using Delta Logic of SAP and did not reverse the gain/loss, and invoice remain unpaid until the end of 31st Mar 2021. Now question here comes is that what will be the calculations that system should perform after multiple forex revaluations.?

Once delta logic is activated. System will compare exchange rate of last revaluation run and current revaluation run to identify the differences for posting.

Below is the scenario that system will perform with only delta logic active.

Date Transactions Amount in USD Exchange Rate Amount in PKR Gain/Loss
01.02.2021 Invoice              100,000                    155         15,500,000
28.02.2021 Month End Revaluation – Feb              100,000                    160         16,000,000
28.02.2021 Gain/(Loss)            (500,000)           (500,000)
31.03.2021 Month End Revaluation – Mar              100,000                    165         16,500,000
31.03.2021 Gain/(Loss)            (500,000)           (500,000)
01.04.2021 Payment              100,000                    170         17,000,000        (1,500,000)
Total Gain/(Loss) posted        (2,500,000)

In the above example, exchange rate loss is posted thrice. First two times it was loss posted in order to present payables on updated exchange rates. However, on the final entry (i.e. Payment), loss was posted that is actually faced by the organization on foreign purchases and thereby to be charged to P&L.

Above example also witnessed exchange loss posted more than it was actually born by the company due to the fact that loss entries posted in different revaluation runs were not reversed in the corresponding periods. The actual loss is of PKR 1,000,000 which was posted excess. Here, question arises that how SAP treats this loss that overstated expenses in Profit and Loss Statement.

In addition to Delta Logic, SAP allows business to reverse the excess loss posted by marking an additional check of Reversal after Settlement Date during Delta logic configuration.

After marking the above check, system will also check for cleared items posted in foreign currencies and will reverse any additional exchange gain/ (loss) posted in addition to the actual gain/(loss). The table shown above will now be updated accordingly with reversal entry.

Date Transactions Amount in USD Exchange Rate Amount in PKR Gain/Loss
01.02.2021 Invoice              100,000                    155         15,500,000
28.02.2021 Month End Revaluation – Feb              100,000                    160         16,000,000
28.02.2021 Gain/(Loss)            (500,000)           (500,000)
31.03.2021 Month End Revaluation – Mar              100,000                    165         16,500,000
31.03.2021 Gain/(Loss)            (500,000)           (500,000)
01.04.2021 Payment              100,000                    170         17,000,000        (1,500,000)
30.04.2021 Gain/(Loss) Reversal
Month End Revaluation – Apr
         1,000,000
Total Gain/(Loss) posted        (1,500,000)

The above entries mentioned in table seems reasonable as we were finally able to achieve charging of correct exchange rate gain/(loss). Now, in the next steps, we will see how this functionality can be achieved in SAP.

First you need to create Valuation Methods and assign newly created Valuation Methods to Valuation Areas. Valuation Methods and Valuation Areas will be defined normally, and Delta logic comes after defining and assigning valuation methods. Therefore, our focus in this blog is to understand delta logic after defining and assigning valuation methods and areas. Below are the steps regarding how to apply delta logic to your newly created valuation methods.

 

Go to path and Configure as Demonstrated:

Financial Accounting> General Ledger Accounting> Periodic Processing> Valuate> Activate Delta Logic

Mark following checks against your valuation area under Activate Delta Logic feature.

After configuring the Delta Logic, now we will replicate above table entries in system and check how system behaves and whether it provides and posts calculation as per our second table values or not.

 

Foreign Vendor Invoice:

Posting of invoice on 1st Feb 2021 @ exchange rate of PKR 155/USD

 

 

Month End Revaluation – February:

Posting of unrealized loss after revaluation run for the month of February. Exchange rate on the end of month is PKR 160/ USD. Therefore, a difference of PKR 500,000/- is posted as exchange rate loss. Here it can be clearly seen that system did not post a reversal entry on the first day of next month due to delta logic.

 

 

 

Month End Revaluation – March:

Assuming the invoice posted is still unpaid until the end of March. Again, unrealized loss will be posted at the end of March. Exchange rate on the end of month is PKR 165/ USD. Therefore, a difference of PKR 500,000/- is posted again as exchange rate loss. Here it can also be seen that system shows Old Difference as well as the updated difference in New Difference column. Again, system did not post a reversal entry in this revaluation run as well. Now accumulated difference system recognized is PKR 1,000,000/- (i.e. PKR 500,000/ February and PKR 500,000/ March)

In every foreign exchange rate revaluation run with activated delta logic, system posts a delta difference by comparing last revaluation exchange rate and current month end exchange rate rather than comparing original invoice exchange rate and current month end exchange rate. Relevant calculation is mentioned below for reference purposes:

Calculation on March 21 Revaluation Run:

Last Revaluation Exchange Rate: 160

Current Month End Exchange Rate: 165

Exchange Rate Loss Calculated: 5 X 100,000 = PKR 500,000/-

 

 

Payment of Foreign Invoice:

After holding the foreign invoice for two months, company now decided to pay its vendor on 1st April 2021 when exchange rate was PKR 170/USD. At this stage, system will compare exchange rate at the time of invoicing and exchange rate at the time of payment for posting realized exchange rate.

Original Invoice Date Exchange Rate: 155

Current Month End Exchange Rate: 170

Exchange Rate Loss Calculated: 15 X 100,000 = PKR 1,500,000/-

 

 

Effectively at this stage, exchange rate loss being recorded in P&L cumulates to 2,500,000/-

Breakup of Exchange Rate Losses Posted:

PKR 500,000/- posted on revaluation run of February 21.

PKR 500,000/- posted on revaluation run of March 21.

PKR 1,500,000/- posted on final payment of foreign invoice

From above, PKR 1,000,000/- need to be reversed that system will perform in next step.

 

 

Reversal of Exchange Loss after Payment:

Finally, this is the last and most important step when excess exchange rate loss recorded will be reversed. After payment, we will run Forex run for the month of April 21. System will reverse excess exchange rate loss of PKR 1,000,000/- recorded earlier

Above snapshot indicates one additional button system shown on screen as Cleared Items. This button will show further drilldown of items that are cleared and considered by system for reversal of exchange losses recorded historically for such items.

Document posted for reversal of PKR 1,000,000/- is shown below

Above entry shows that system reduces excess exchange loss of PKR 1,000,000/- from Realized Exchange rate gain/ loss account.

This is the complete cycle of foreign invoices being paid with delta logic in place as well reversal of exchange gain/loss after settlement is also activated.

 

3 Comments
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  • hi Arsalan,

    Nice document ! there is a requirement I wanted to check with you how the system will behave and have impact on the below:

    so they have reval accounts with multiple accounts rolling up in current state they're trying to move to a 1:1 relationship with reval accounts to GL accounts for FX but need to assess the impact of this.

    thanks,

    Sharmila

     

     

     

     

     

     

    • Can you provide any example in tabulated form, how your business is trying to map the Foreign Gain/ Loss Realized/ Unrealized GLs.