This section covers the aspects and functionality of currency translation, which result from the need to portray the statements of foreign companies in group currency as a part of the consolidated financial statements. The Consolidation system provides so-called currency translation methods for this purpose. The methods define which set of balance sheet / income statement items are to be translated with which translation key and exchange rate indicator. You can choose from essentially four translation keys:

• Translation using ‘uniform rates’: These are entered in the exchange rate table as of the current date (spot rate, average annual rate)

• Translation using historical rates in Consolidation based on period and year structures derived from the individual financial statement

• Transfer of values that have already been translated into the group currency at the remote site (usually historical values)

• Translation of values from transaction currency directly into group currency, thus bypassing the local currency

The following paragraphs discuss in detail the typical procedures used for the most important balance sheet and income statement items.

There are three methods for translating fixed assets:

• Spot rate method
  The asset master records contain all depreciation areas exclusively in local currency; and only local values are posted to Consolidation. The Consolidation system translates these values into group currency using annual uniform exchange rates. It displays the translation difference resulting from the changes to the spot exchange rates between the previous and current period in a separate column on the asset history sheet.

• Structuring by acquisitions years
  The foreign company also valuates its assets exclusively in its local currency, and data is only translated into group currency by the consolidation department. However, in order to assign the correct exchange rate for the year of acquisition to each transaction type (in particular: depreciation, retirements and transfers), separate asset master records must be created for each year of acquisition. For this, a setting can be made in Customizing which ensures that only acquisitions for a single year are posted to an asset master record. Once this setting is made, acquisitions in subsequent years must be posted to a new sub-number and retirements (or partial retirements) must be posted to one of a list of sub-numbers that correspond to the year of acquisition. A more detailed structuring by periods of acquisition is possible using this method, but is difficult to implement in practice. It would entail transferring an extremely large volume of data into the Consolidation system.

• Remote historical translation
  Besides storing the local valuation in local currency (for commercial balance sheets, tax statements, calculations, and so on), the foreign company code also stores its local and corporate valuations for the consolidated financial statements in group currency. The company maintains its own exchange rate table, which the system uses to translate all acquisition transactions at spot rate into group currency. For retirements and transfers, the local divestiture amount is also allocated to the corporate areas in percentages relating to the total acquisition and production cost of the asset. The depreciation of each period is thereby determined using a quasi-weighted historical exchange rate.

Finally, amounts in group currency are not only available in the individual asset master records and their corresponding line items, but also in the accounting documents. Realtime update accesses these and writes to the consolidation staging ledger, which stores the fixed assets as well as the entire balance sheet in group currency. Also refer to the respective FI documentation for more detail about portraying multiple currencies in Financial Accounting.

On the consolidated balance sheet, owner equity is stated either at spot exchange rates or at historical exchange rates.

Within consolidation of investments during the year of acquisition the equity (or portion thereof) is cleared against the corresponding investment book value of the acquiring company, and goodwill (or another clearing item) is activated for the amount of the difference. If, in subsequent years, the equity items are adjusted, the company is, of course, interested in analyzing these adjustments, and, especially, in recognizing the (retained) capital earned since the acquisition. In this case it is imperative that any effects on exchange rates be disclosed and also to use historical valuation - even if only for auxiliary statements. You should therefore always post to equity accounts in transaction currency = group currency, and at the same time ensure that absolutely accurate translation into group currency takes place, be it by entering the exchange rate manually.

The Consolidation system currently stores its own additional journal entry history for these sensitive business transactions affecting equity and investment items. An automatic interface to the journal entry history does not yet exist. Since this data’s reportable volume is still within reason, and since this information is highly sensitive, no automation is planned at this time. In light of the recommendation above, the integrity of these equity accounts is increased if validation checks are applied against the accounting records transferred to consolidation.

Accounts receivable and payable are usually stated at the current exchange rate on the consolidated financial statement. The group-internal receivables and payables to be eliminated often lead to currency-related differences. Users usually want to keep these separated from the periodic posting differences. If you accept this within the elimination of IC payables and receivables (‘after’ corporate valuation), translation at spot rate can be used. Alternatively, you can translate the IC receivables and payables directly from transaction currency. In this case, the currency-related differences are already separated during currency translation (‘before’ corporate valuation).

In general, the translation keys already described for fixed assets are applicable for the remainder of the balance sheet. These should, however, be described again from a pure general ledger standpoint:

• Spot rate method: No special currency handling is necessary for accounts being stated on the consolidated financial statement when translated at spot rate. Parallel storage in group currency for each individual posting in the local ledger is not necessary if you are certain that the corporate group only valuates at spot rate for the financial statement date and does not require any historical values or daily values.

• Daily rate method: If there are balance sheet accounts which you want to valuate for the consolidated financial statement at the more accurate daily exchange rates instead of at spot date-related uniform exchange rates, you must activate parallel storage of group currency in the applicable company codes. Then, in Consolidation, the transferred amounts in group currency will be retained by choosing the appropriate translation key, and will not be overwritten with figures newly translated from local currency.

• Structuring years of acquisition: To accommodate the central, historical currency translation at the group parent, the FI document includes the additional field ‘Year/period of acquisition’, which can be activated in the general ledger account. This manually entered year is transferred to Consolidation, and is used in central currency translation to determine the historical exchange rate. Translation into group currency does not take place for the local company code.

• Remote historical translation: In the document header you can either manually specify an historical exchange rate, or, as opposed to structuring years of acquisition, specify a date for exchange rate determination. Then, according to this date, all line items in the document will not only be translated from the transaction currency into local currency, but also from the local currency into group currency. These historical corporate values are then stored in the document itself and, when applicable, in the corresponding fields of the local ledger. From there they are transferred to Consolidation, where they remain unchanged, as in the daily rate method.

Basically, the following requirements exist for income statement items:

• Average annual rates: As with the spot rate method, no preparations in the local company code are needed for central translation according to average annual exchange rates.

• Average monthly rates: With only minimal preparatory measures in the individual financial statement, you can have the central currency translation either translate the accumulated period balance at the period exchange rate and put the change in corporate value from the previous period into the new period field, or translate each period value at the exchange rate of the corresponding period.

• Daily rates: If the periodic statement is to be translated even more up-to-date, you must activate local translation at daily rates in the additional document field. The locally translated values are transferred to consolidation in both local and group currencies. Central currency translation only determines the resulting translation differences without calculating the amount in group currency.

• Balance sheet item dependencies: Every once in a while corresponding accounts on the balance sheet and on the income statement (e.g., income statement depreciation; annual adjustments to fixed assets) should be translated in the same manner. If, for whatever reasons, this is not possible in the individual financial statement, the central currency translation in consolidation is able to partially rectify this after-the-fact using appropriate dependency rules.