Foreign currency revaluation

13 Friday May 2016

Posted by Ludwig Reinhard in Accounts Payable, Accounts Receivable

Tags

Accounts Payables, Accounts Receivables, Foreign Currency, Foreign currency revaluation

This post deals with the foreign currency revaluation feature available in the Accounts Payable (AP) module and illustrates the effect that different parameter settings have on the foreign currency revaluation calculation and ledger posting. Please note that the examples and explanations made in the following do also apply for the Accounts Receivable (AR) module as the foreign currency revaluation functionality in AR is basically identical to the one in AP.

The examples below are all recorded in the Contoso DEMF company that uses the EURO as accounting currency. All sample vendor invoices are recorded in USD in January and February 2022. For those months/days, the following currency exchange rates apply:

The post is separated into four parts. The first part starts with an analysis of the different currency revaluation methods. This part is followed by a subsection on the different financial dimension options available for foreign currency revaluation postings. Part 3 deals with the posting profile parameters and part 4 concludes this post by having a look at the different dates that can be selected when running the foreign currency revaluation process.

Part 1: Foreign currency revaluation method
Let’s start by having a look at the different currency revaluation methods (standard, invoice date and minimum) that can be selected in the foreign currency revaluation parameters form. For that purpose a vendor invoice with a total amount of 1000 USD has been recorded on 1 January when the exchange rate between the USD and EUR stood at 1,00.

In order to illustrate the different foreign currency revaluation method options, three currency revaluations will be run on 28 .January and 31. January respectively, where the following currency exchange rates between the USD and EUR apply:

The first currency revaluation is run on 28 January with the “Standard” method.

Because of the appreciation of the USD, an unrealized foreign currency loss of 250 EUR arises that is shown in the following revaluation report.

The unrealized loss is posted on the account for unrealized currency losses and increases the vendor liability expressed in EUR currency correspondingly.

Next, a foreign currency revaluation with the „Invoice date” method is run.

Please note that selecting this method does not allow you changing the date value shown in the “Date of rate” field. As the “Considered date” value can be changed, I entered 31 January to identify the effect that this change might have on the transactions generated.

Result:
The revaluation report and the corresponding voucher show that the invoice method reverses the previous foreign currency revaluation. If you have a look at the voucher date then you can identify that the date value entered in the “considered date” field is used as the posting date for the foreign currency revaluation voucher.

The third foreign currency revaluation is run with the “Minimum” method. This time, the considered date and date of rate values are set to 31 January.

Result:
This time, Dynamics AX does not record any foreign currency revaluation adjustment and does not create a voucher. That is because the “Minimum” method does not record a foreign currency gain as it would result in an unrealized exchange rate profit that some countries – such as Germany – do not allow to report in corporate financial statements.

Part 2: Foreign currency revaluation dimensions
After having a look at the different method options available for foreign currency revaluations, the financial dimensions parameter is investigated next. To do that, let’s first have a look again at the invoice voucher that has been recorded on 1 January.

The invoice voucher illustrated in the previous screen-print shows that the vendor invoice is recorded with the financial dimension “Business Unit 002”.

Against the background of the invoice voucher generated, let’s have a look at the foreign currency revaluation voucher that is generated when “None” is selected in the dimensions parameter field.

If the foreign currency revaluation process is started with this parameter setup, Dynamics AX shows the following message:

If you confirm this message with Yes and run the foreign currency revaluation, a voucher similar to the one shown in the next screen-print results:

As one might expect, the foreign currency revaluation adjustment is recorded without any financial dimension value.

To identify what difference the selection of any other dimension parameter makes, the previous foreign currency revaluation is first reversed by using the invoice date method shown above and then run again by selecting “Posting” in the dimension parameter field. Please see the following screen-print for details.

Result:
This time, the foreign currency revaluation voucher is generated with the financial dimension that has been used for posting the vendor invoice.

To see what difference the last dimension parameter (“Table”) makes, the previous foreign currency revaluation is cancelled again by using the invoice date method and run once again with the following settings:

Result:
This time, the foreign currency adjustment voucher is generated with the financial dimension “Business Unit 001”.

Please note that the financial dimension value “Business Unit 001” is taken from the vendor master record as exemplified in the next screen-print.

Part 3: Foreign currency revaluation posting profile
In this this part I want to focus on the difference that the selection of a specific posting profile makes to the foreign currency adjustment voucher. To do that, the previous foreign currency revaluation was first reversed by using the Invoice date method shown previously and then re-run with the following parameter settings:

Please note that the “FX” posting profile is setup with a different summary account.

Result:
Different from what one would expect from the parameter settings shown above, the foreign currency adjustment voucher still uses the same vendor summary account (No. 200100) for recording the unrealized foreign currency gain. Please see the next screen-print.

The underlying reason for this behavior is that the dimension setting “Posting” overwrites the posting profile parameter setting.

In order to verify this system behavior, the previous foreign currency revaluation is reversed (by using the Invoice date method) and re-run with “Table” selected in the financial dimensions field.

Result:
This time, the unrealized foreign currency revaluation gain is recorded on the summary account that has been specified in the “FX” posting profile.

Note:
Using a separate posting profile for recording unrealized foreign currency profits can help companies in two ways.
First, through an easy identification of a company’s foreign currency exposure and the related risks. That is, while the unrealized foreign currency gain/loss accounts do not differentiate between group internal and external currency risks, the use of a separate posting profile with vendor/customer group specific summary accounts for foreign currency adjustments, can help companies assessing whether or not the use of foreign currency hedging instruments might be beneficial. The consideration behind this statement is that only risks from external currency fluctuations should be hedged while group internal currency risks do not require costly hedging instruments.
Second, the separation of currency revaluation effects on separate ledger accounts can alleviate the financial consolidation process.

Part 4: Foreign currency revaluation dates
After reversing the previous foreign currency revaluation once again, a second vendor invoice for 2000 USD is recorded on 1^st February. On this date, the USD/EUR exchange rate stood at 1,00. For details, please see the next screen-prints.

With the two vendor invoices posted in Dynamics AX, a first foreign currency revaluation was run with the following setting:

Result:
Dynamics AX generates a foreign currency adjustment based on the exchange rate valid on 28 February (0,6 EUR/USD or 1,6667 USD/EUR). Because the considered date (31 January) is before the date the second vendor invoice was posted (1 February), only the unrealized foreign exchange rate gain for the first invoice is taken into consideration.

After reversing the previous foreign currency revaluation, the revaluation process is re-run with a considered date value that is after the date on which the second vendor invoice was recorded.

Result:
This time, both invoices are included in the foreign currency revaluation process for recording the unrealized foreign exchange rate gain.

[Invoice 1: 1000 USD, Invoice 2: 2000 USD => Total: 3000 USD * Exchange rate as of 28 February (1,6667 USD/EUR) = 5000 EUR => 2000 EUR unrealized foreign currency exchange rate loss]

Hope you found some useful information in this post. Till next time.

GL foreign currency revaluation types

26 Sunday Apr 2015

Posted by Ludwig Reinhard in General Ledger

≈ Comments Off on GL foreign currency revaluation types

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Dynamics AX 2012, Foreign currency revaluation, Vendor payments

If you record foreign currency transactions you might experience a situation in which Dynamics AX records foreign currency gains/losses on the wrong ledger account. This blog post illustrates the circumstances under which you might run into this situation and provides you a possibility how to fix this issue.

Scenario
For this example, the following (fictional) currency exchange rates between the EUR and USD are used. (Please note that the local company currency is EUR). The first transaction recorded in Dynamics AX on 1 January 2015 is a vendor invoice for 1000 USD. At the time the vendor invoice is recorded the EUR/USD exchange rate stands at 80 EUR/100 USD, resulting in an amount equivalent to 800 EUR. As the invoice is not settled until the end of January 2015, a foreign currency revaluation is run in the Accounts Payable module. This foreign currency revaluation process results in an unrealized exchange rate gain of 50 EUR (1000 USD * [80/100 EUR/USD – 75/100 EUR/USD]), which is recorded on the ledger account for unrealized exchange rate profits. The next screenshot shows the corresponding voucher.
On 5 February 2015 the vendor invoice is paid by using a wire transfer. This transfer is – as usual – recorded in a vendor payment journal in the Accounts Payable module. Because the USD appreciated to 87 EUR/100 USD at the time the payment is made, an exchange rate loss of 70 EUR is realized. This loss is recorded on the ledger account for realized exchange rate losses. At the same time, Dynamics AX cancels the previously recorded unrealized exchange rate gain of 50 EUR. The next screens show the payment made and the corresponding vouchers created. Please note that the payment is made via a transfer account – in my example account “109053 Transfer Bank Charlie”. This transfer account is cleared on 8 February when the bank transaction is posted (see the next screenshot). As the EUR/USD exchange rate changed from 87 EUR/USD (at the time the payment was made) to 83 EUR/USD (at the time the bank transaction was posted), a balance of 40 EUR remains on the payment transfer account. This balance can be identified in the following screenshot.
To clear this balance on the transfer account the foreign currency revaluation process is run in the General Ledger module for the respective account. The outcome of this revaluation process is a balance of 0 EUR on the transfer account. EN_11 If one takes a close look at the foreign currency posting that is made to clear the balance on the transfer account, one can identify that the balance was posted on the ledger account that is used for recording unrealized exchange rate losses (see the next screenshot). Posting the remaining balance of 40 EUR against the unrealized exchange rate loss account is wrong because the transaction represents a realized loss. The next figure summarizes all transactions that have been recorded for this example and highlights the remaining realized and unrealized exchange rate gains and losses recorded in Dynamics AX.Even though the total exchange loss of 30 EUR is correct from an overall perspective, the elements that make up this total amount are wrong. That is, if your company reports realized and unrealized currency exchange gains/losses separately, your profit and loss statement shows incorrect figures.

Possible solution
In this section I will show a possible solution to the problem illustrated. This solution requires some minor system modifications that are described next.

Step 1
The first modification required is extending the Base Enum values “FinancialGain” and “FinancialLoss” of the “CurrencyGainLossAccountType” Base Enum. In my example I simply added the country codes for Germany (DE) and the USA (US). Please see the next screenshot for details.

Step 2
The next (optional) step is to change the following two labels: @GLS109008 and @GLS109005.

Step 3
Step three requires extending the LedgerExchAdj class by the same country codes that have been used in step 1. Please note that those codes are entered slightly different (#isoDE, #isoUS).

Step 4
A similar adjustment is required in the ledger form as illustrated in the following screenshot.

The result of those modifications is that two new exchange rate transaction types are available in the ledger form (see the next screenshot).

With this setup I repeat the previously recorded transactions on another (“fresh”) bank account and its corresponding transfer account. All steps and vouchers are identical except the voucher that is generated when running the foreign currency revaluation in GL for the transfer account.

As you can identify from the next screenshot, after having done the previously described system modifications, Dynamics AX does now record the exchange rate adjustment of 40 EUR on the newly setup account that represents a realized exchange rate adjustment. This change allows you reporting currency exchange rate differences correctly in your profit and loss statement.
Please note that the foreign currency revaluation process in the Bank module is also affected by the changes described here. For details, please see my previous post.

Foreign currency revaluation cash and bank management module

12 Sunday Apr 2015

Posted by Ludwig Reinhard in Bank Management

≈ Comments Off on Foreign currency revaluation cash and bank management module

Tags

Bank, Dynamics AX 2012, Foreign currency revaluation

For most users, Dynamics AX does not provide a foreign currency revaluation functionality in the Bank Module. As a result, differences between the General Ledger Module and the Bank Module can arise. The following example illustrates how those differences might arise and what users can do to avoid them. (Note: All EUR/USD exchange rates used in the following are purely fictional).

Scenario
A company located in the EURO-zone has some idle foreign currency reserves (3 mio. USD) and deposits them in its bank account („Bank 13“) on 15 December 2014. At the time the money is deposited, the exchange rate between the EUR and the USD stands at 0.73 EUR/USD resulting in an amount equivalent to 2.19 mio. EUR. On 31 December 2014 the EUR/USD exchange rate is 0.70 EUR/USD. At this exchange rate the foreign currency deposit value expressed in EUR-currency is 2.1 mio. To track the exchange rate loss in Dynamics AX, the periodic General Ledger foreign currency revaluation process is run. The result of this periodic process is that a foreign currency loss of 90000 EUR is recorded on the main account “Bank 13” in the General Ledger Module.As this transaction is recorded in the General Ledger Module only, a difference between the General Ledger and Bank Module balance for Bank Account 13 arises as illustrated in the following screenshots.

Solution
To fix this issue the (country-specific) foreign currency revaluation functionality in the Bank Module can be made available for all Dynamics AX users. This can be realized by adding country codes into the “BankExchAdj_RU” menu item.Similar changes are required in the “BankExchAdj_RU” class and for the extended data type „BankExchAdjVoucher_RU“. The next screenshots illustrate the changes required. After doing all those adjustments a new foreign currency revaluation functionality can be identified in the periodic section of the cash and bank management module. The only thing missing to use this functionality is setting up a number sequence in the Bank Module parameters to record the exchange adjustment vouchers.

Finally, all the transactions that have been recorded on “Bank 13” are re-entered for “Bank 14”. The only difference is that the periodic foreign currency revaluation process is now run from the Bank Module rather than from the General Ledger Module. The outcome of those transactions can be viewed in the next screenshots. As one might expect, using the new foreign currency revaluation functionality that is available in the Bank Module results in identical balances in General Ledger Module and the Bank Module.