Local Currency Translation in Foreign Currency Valuation

During foreign currency valuation, you can translate account balances from your local currency to your group currency, in order to meet the requirements of FASB 52 (US GAAP) or IAS 21 (IFRS). The valuation of the parallel local currencies does not take place separately. Instead, the valuation of the first local currency (functional currency) is translated into the second and third local currencies (reporting currency or display currency).

Technical Details

Technical Name of Product Feature	Not relevant
Product Feature Is	New
Country Dependency	Valid for all countries
Software Component Version	FI-CA 606
Application Component	FI-CA-CL-FC (Foreign Currency Valuation)
Availability	SAP enhancement package 6 (SP15) for SAP ERP 6.0 SAP enhancement package 7 (SP08) for SAP ERP 6.0
Required Business Functions	None

Additional Details

Note Note

This function is not available if you have configured several financial statement views with deferred inverse posting in Customizing for foreign currency valuation.

End of the note.

Foreign currency valuation follows these steps:

The system valuates the individual currencies.
For the reporting currency or currencies, the system translates the result for the functional currency using the current exchange rate.
The system translates the account balances (of the receivables account and adjustment account) from the functional currency to the reporting currency.

Example Example

In company code 0001, you use Argentinian pesos (ARS) as the functional currency, and euros (EUR) as the reporting currency.

The following exchange rates are valid at the time the invoice is posted:

10 ARS = 1.5 EUR
10 ARS = 1 USD

You post the following receivables:

Document Number	Amount in Document Currency	Amount (ARS)	Amount (EUR)
4711	1 000 ARS	1 000	150 EUR
4712	150 EUR	1 000	150 EUR
4713	100 USD	1 000	150 EUR

The following exchange rates are valid at the time of the foreign currency valuation:

10 ARS = 1 EUR
10 ARS = 0.80 USD

The system valuates the functional currency as follows:

Document Number	Amount in Document Currency	Amount (ARS)	Valuation (ARS)	Valuation Difference (ARS)
4711	1 000 ARS	1 000	1 000	0
4712	150 EUR	1 000	1 500	+500
4713	100 USD	1 000	1 250	+250

The system generates the following postings in the functional currency:

Document currency EUR: Debit Receivables adjustment 500 ARS, credit Exch. Rate Difference Revenue 500 ARS
Document currency USD: Debit Receivables adjustment 250 ARS, credit Exch. Rate Difference Revenue 250 ARS

For valuating the reporting currency, the system translates the valuation differences in the functional currency, using the exchange rate on a key date, to the reporting currency as follows:

Document Number	Amount in Document Currency	Valuation Difference (ARS)	Valuation Difference (EUR)
4711	1 000 ARS	0	0
4712	150 EUR	+500	+50
4713	100 USD	+250	+25

The system generates the following postings in the reporting currency:

Document currency EUR: Debit Receivables adjustment 50 EUR, credit Exchange rate differences revenue 50 EUR
Document currency USD: Debit Receivables adjustment 25 EUR, credit Exchange rate differences revenue 25 EUR

During the translation of the account balances, the system translates the balance posted in the functional currency (receivables account + adjustment account) into the reporting currency, and compares this with the actually posted balance in the reporting currency. The system posts the difference to the G/L account defined in Customizing for Contract Accounts Receivable and Payable under Start of the navigation path Closing Operations Next navigation step Foreign Currency Valuation Define Accounts for Open Item Exchange Rate Differences End of the navigation path (translation posting).

Document currency	Balance (ARS)	Balance (EUR)	Translation of ARS Balance (EUR)	Difference (EUR)
EUR	1 500 (1 000 + 500)	200 (150 + 50)	150	-50
USD	1 250 (1 000 + 250)	175 (150 + 25)	125	-50

The system generates the following postings in the reporting currency:

Document currency EUR: Debit balance translation 50 EUR, credit Receivables adjustment 50 EUR
Document currency USD: Debit balance translation 50 EUR, credit Receivables adjustment 50 EUR

End of the example.

Effects on Customizing

System Settings in the Company Code

For each company code, in which you want translation to take place, you specify that the translation should be made using the first local currency. To do so, set the Foreign Currency Valuation Based on First Local Currency indicator in Customizing for Contract Accounts Receivable and Payable under Start of the navigation path Organizational Units Next navigation step Set Up Company Codes for Contract Accounts Receivable and Payable End of the navigation path .

If you set this indicator, you are required to translate at least one of the parallel local currencies in the company code based on the first local currency. You make the setting for this in Customizing for Financial Accounting (New) under Start of the navigation path Financial Accounting Global Settings (New) Next navigation step Ledgers Ledger Define Currencies of Leading Ledger End of the navigation path ; enter the value 2 in the Outg. Currency field for the second and third local currency.

Caution Caution

You should not make a change like this in a production system.

End of the caution.

Note Note

The currency translation only affects those local currencies where the base currency for the currency translation is the first local currency. That means it is possible to valuate one of two local currencies separately, whereas for the other, the valuation of the first local currency is translated.

End of the note.

System Settings for Foreign Currency Valuation

With regard to the valuation of the reporting currency or currencies, the system does not use most of the settings for the valuation method for the translation (such as the valuation procedure). You can enter an exchange rate type for the valuation method. This exchange rate type is used specifically for the translation. (See Customizing for Contract Accounts Receivable and Payable under Start of the navigation path Closing Operations Next navigation step Foreign Currency Valuation Define Methods for Foreign Currency Valuation End of the navigation path in the Rate category determination group box.)

You enter the G/L accounts, to which the translation postings are made, in posting area 0075 in Customizing for Contract Accounts Receivable and Payable under Start of the navigation path Closing Operations Next navigation step Foreign Currency Valuation Define Accounts for Translating Account Balances End of the navigation path .

You enter the document types for the translation postings on the valuation method used. You have to enter a document type for the translation posting. The document type for the reversal posting on the key date + 1 is optional.

The system posts the translation documents using origin 4T (Foreign Currency Valuation Translation)

If the foreign currency valuation is reversed, the system also reverses the translation documents.