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In this article we are going to understand foreign currency valuation, foreign currency translation and how
exchange rate difference amount is treated while clearing of open item.
Every month end, financial reports need to be prepared for local authority in local currency as well as for
group consolidation in group currency.
Foreign currency valuation is about valuating transaction currency amount into local currency amount. Foreign
currency translation is about valuating local currency into group currency. Lets discuss both one by one.
Example:
Company code currency: INR
Group currency: USD
Example 1: On 5th August, I posted vendor invoice of 100 GBP.
Currency exchange rate on 5th August: 65 INR = 1 USD & 1GBP= 1.3 USD
(Currency exchange rate type has reference currency USD)
Vendor invoice is posted in below currencies:
Example:
Lets say vendor payment is being done on 10th September.
Currency exchange rate on 10th September: 72 INR = 1 USD & 1GBP= 1.6 USD
(Currency exchange rate type has reference currency USD)
Payment amount is 100 GBP.
Invoice will get cleared with payment document and an adjustment accounting entry will get posted as below
In this example, impact of exchange rate change is realized (vendor open item has been cleared) hence no need
to post reversal of adjustment accounting entry. Reversal entry is posted for unrealized exchange gain or loss.
What are the accounts relevant for foreign currency valuation?
Accounts which are managed on open item basis and have foreign currency transaction. E.g. clearing accounts,
GR/IR clearing account, reconciliation account etc.
Accounts which are not managed as open item and have foreign currency transaction e.g. Bank accounts, sales
account etc.
Below shows place where account determination is maintained for accounts which are managed on open item
basis:
Account determination for GL accounts which are not managed on open item basis but are relevant for foreign
currency valuation.