Managing the Foreign Currency Valuation

Objectives

After completing this lesson, you will be able to:
  • Explain the various methods of foreign currency valuation
  • Manage the foreign currency valuation of open items
  • Manage the foreign currency valuation of balance sheet accounts

Foreign Currency Valuation

Flowchart of FAGL_FCV with two branches: Line item and balance valuation, leading to determining the valuation difference via test runs, simulation, with key date reversal and delta logic.

You carry out the foreign currency valuation before creating the financial statements.

Valuation: Accounts and Items

The valuation includes the following accounts and items:

  • Balance sheet accounts for the foreign currency, that is, the G/L accounts that you manage in a foreign currency
  • Open items (customers, vendors, and G/L accounts) posted in the foreign currency (the line items are valuated)

Report FAGL_FCV valuates open items in the foreign currency as well as open items in the foreign currency balance sheet accounts. The posting document generated by the foreign currency program is reversed automatically with the same program, on the first day of the next month. The reversal is independent of the valuation area for which the foreign currency valuation run was started. If you do not want to reverse the valuation postings during open item valuation, you must make additional configurations for using the delta posting logic.

Foreign Currency Valuation of Open Items

Diagram with P&L and balance sheet. P&L shows EUR 10 expense from currency valuation. Vendor has USD 500 and EUR 600 with EUR 10 difference. Liabilities show EUR 610 payables.

A foreign currency valuation is necessary if vendor or customer accounts contain open items in a foreign currency. The amounts of these open items are translated into the local currency at the time they are entered using the current exchange rate. For example, foreign currency USD 500 translates to local currency EUR 600.

Foreign Currency Valuation Considerations

Here are some considerations regarding foreign currency valuation:

  • The exchange rate might be different at the time of closing, and open items need to be valuated again.

  • A program valuates the open items using the new exchange rate and enters the valuation difference in a separate table. It also creates the valuation posting, which is the expense from currency valuation to the adjustment account for foreign currency.

  • A valuation cannot be made by a posting to the payables account because a posting cannot be made directly to reconciliation accounts. The amount is posted to an adjustment account, which appears on the same line of the balance sheet as the reconciliation account.

Program FAGL_FCV for Foreign Currency Valuation

SAP Foreign Currency Valuation window showing settings for company code TA00 dated 30.11.2021; report code FAGL_FCV; app name Perform Foreign Currency Valuation.

Additional features of the FAGL_FCV REPORT

  • It is possible to work with parallel dialog processes for data selection.

  • Parallel processing, not just parallel data selection, is possible.

  • Test runs are saved in the log. The logs can be displayed on the Outputs and Technical Settings tab page of the FAGL_FCV program.

  • Perform a simulation run and post the simulation results for reporting to a specific Simulation Extension Ledger.

    For more details, please refer to the lesson Posting Ledger Group-Specific FI Documents in this training.

Valuation of Open Items

The image illustrates financial accounting, showing Receivable, Realized, Bank, Revenue, and adjustments between key dates with exchanges rates: Invoice (1.8), Valuation (1.6), Payment (1.5).

The accounts show the posting transactions when valuing items in a foreign currency.

Transactions Performed

The following transactions are performed:

  • In the period that the valuation is performed (as defined by the key date), a posting is made to adjust the overall receivables balance for the change in exchange rates.
  • To bring the balances back to the original position, this posting is reversed in the next period.
  • A subsequent valuation or the payment clearing is then based on the original posting.
  • The adjustment posting is made on the key date as usual. It is then reversed the following day. However, you can define another posting date.

Definition of Valuation Methods

Diagram showing the connection between Valuation Area and Valuation Method inside a dotted oval, pointing downward to Accounting Principle in a separate box.

For a valuation run to function, you must enter a valuation area for Financial Accounting (FI).

This area must be defined in Customizing and be assigned a valuation method. You cannot do it during the run itself. The valuation method defines with which valuation approach (such as the lowest value principle) the valuation is carried out.

Linking the valuation areas with an accounting principle (AP) is mandatory for balance valuations, or if there are several new G/Ls. However, it is not mandatory for OI valuations of one ledger.

To define valuation methods, in Customizing, choose Financial Accounting→General Ledger Accounting→Periodic Processing→Valuate→Define Valuation Methods.

Do not confuse the valuation areas to be defined with the depreciation areas in Asset Accounting (FI-AA). These valuation areas are original FI valuation areas. You also use these valuation areas if you want to model parallel financial reporting in the SAP system. If you just need the local valuation approach as is, then you only have to define one valuation area. You can select the ID and name easily.

Valuation Methods

Screenshot of SAP showing Valuation Methods details for IFRS, using Always Valuate with exchange rate types set to M. Options like Group Vendors and Bal. Valuation are unchecked.

The valuation method contains the valuation approach that is used for carrying out a foreign currency valuation as part of the closing operations.

General Specifications for the Foreign Currency Valuation

In a valuation method, make the following general specifications for the foreign currency valuation:

  • The valuation procedure to be used, for example, Lowest Value Principle or Always Valuate
  • How the exchange rate differences determined should be posted, for example, which document type to use
  • The basis on which the exchange rate should be determined, for example, which exchange rate type to use

The valuation methods can be maintained as time-dependent.

Valuation: Ledger Approach

Spreadsheet detailing three steps in accounting: defining valuation areas, assigning accounting principles to valuation areas, and assigning accounting principles to ledger groups.

Valuation: Ledger Approach

The details of the Valuation Ledger Approach are as follows:

  • In addition to the leading ledger, you need at least one non-leading ledger.
  • Define valuation areas originating in FI.

    In Customizing, choose Financial Accounting→General Ledger Accounting→Periodic Processing→Valuate→Define Valuation Areas.

  • Define accounting principles.

    In Customizing, choose Financial Accounting→Financial Accounting Global Settings→Ledgers→Parallel Accounting→Define Accounting Principles.

  • Assign an accounting principle to the valuation areas.

    In Customizing, choose Financial Accounting→General Ledger Accounting→Periodic Processing→Valuate→Assign Valuation Areas and Accounting Principles.

  • Combine the accounting principles with the corresponding ledgers.

    In Customizing, choose Financial Accounting→Financial Accounting Global Settings→Ledgers→Parallel Accounting→Assign Accounting Principle to Ledger Groups.

  • Define which valuation method (for example, lowest value principle or always valuate) to use for each valuation area in Customizing.

Note

In practice, you may have to create several areas for local valuation because your local valuations may be the same from a technical perspective.

Account Determination: Exchange Rate Differences for Open Items

Flowchart of a financial transaction labeled KDF, detailing receivables and types of losses and gains in categories: exchange, valuation, and translation with balance sheet adjustments.

Foreign Currency Valuations: Open Item Basis

To carry out foreign currency valuations in accounts managed on an open item basis, define account entries for the following:

  • Valuated exchange rate gains

  • Losses for each reconciliation account in subledger accounts

The system posts the account entries for the realized exchange rate differences in foreign currency during the open item clearing.

To find the account determination for the foreign currency valuation, in Customizing, choose Financial Accounting→General Ledger Accounting→Periodic Processing→Valuate→Foreign Currency Valuation→Prepare Automatic Postings for Foreign Currency Valuation.

Note

Because the same accounts are posted to the different ledgers in the ledger solution in General Ledger Accounting, it is enough to define the account determination without specifying a particular valuation area. Leave the field blank.

Number Range Interval for Valuation Run ID

SAP screen showing Maintain Number Range Intervals for NR Object FrgnCrcyVal. Run No. Interval is from 0000000001 to 9999999999, with the current number as 1.

The number range interval is needed to internally count the update runs. But the number of the run also displays on the result screen of an update run.

Note

Only one interval per client is defined. The interval must have number 01, and the number range should be as large as possible.

To define the number range interval, run transaction FAGL_FCV_SNRO.

Valuation of Open Items with Delta Posting Logic

Financial flow example with Receivable, Realized, Bank, Revenue, Receivables Adjust., and Valuation. Numerical steps show invoice, valuation, payment, and post-payment valuation adjustments.

The figure is an example of how valuation of open items with delta posting logic (FAGL_FCV) is displayed.

Delta Posting Logic: Overview

SAP Foreign Currency Valuation screen showing exchange rate difference example from EUR to USD with posted amount changes. Instructions emphasize valuation difference calculation.

Scenario

In certain countries, you are not allowed to reverse year-end foreign currency valuation postings in the following year.

Solution

If you still want to (or have to) work without a correction document, you can change an existing valuation area to a valuation area with delta posting logic. In this context, it is simply referred to as "using the delta logic".

To define a delta valuation area, in Customizing, choose Financial Accounting→General Ledger Accounting→Periodic Processing→Valuate→Activate Delta Logic. You can also start the functions directly using the V_FAGL_FCV_DELTA table view.

Valuation Differences

The following are features of valuation differences:

  • If an FI valuation area is changed to delta logic in Customizing, no cancellation posting is made. Only one FI document is posted.

  • If the exchange rate does not change before the next valuation, no further valuation posting is made.

    The open item is only valuated again if the exchange rate changes accordingly, and then, only taking into account the difference to the previous valuation.

The valuation differences are stored in the FAGL_BSBW_HISTRY table.

Delta Posting Logic: Reversal

Two screenshots explaining delta posting logic. First shows settings for DE and IFRS. Second shows effects on FACL_FCV with options for Year-End and Mid-Year Valuation.

You can set an additional indicator in the same transaction. This is the indicator for using the clearing date as the reversal date.

Note

Use the clearing date for the reversal posting only if it is necessary. This is because the program cannot ensure that the period is open. If the period is closed, the system issues an error message and the posting is not carried out. Instead, it is saved in a batch input session.

Summary: Delta Posting Logic

To understand the logic behind the delta posting, consider the following steps:

  1. When a vendor invoice is cleared in the G/L, the exchange rate difference that is actually realized is not immediately entered. This is because the clearing document is entered in all ledgers in the G/L.

    The exchange rate difference to be realized may be different in different ledgers.

  2. To clear the documents with foreign currency in the G/L, the difference in the amount between the original invoice date and the clearing date is always displayed or posted as the realized exchange rate difference. The correct realized exchange rate difference is then determined for each valuation area during the next foreign currency valuation run. The difference is determined by using the difference amounts recorded in the FAGL_BSBW_HISTRY table and the actual exchange rate on the clearing date.

  3. Once calculated, the exchange rate difference is posted against the realized exchange rate.

  4. This second posting has the date of the valuation run, usually the end of the month, as the posting date.

  5. To ensure that the posting date of the correction valuation run is the clearing date of the valuated item, set the indicator for using the clearing date as the reversal date.

Summary: Valuation of Open Items

Chart illustrating valuation with and without delta posting logic from 2017 to payment. FC and LC values shown. Graph transitions over time (t) with valuations listed for both principles.

The figure shows an example of the valuation postings that would result as the value of an open item changes from period to period. This depends on whether the lowest principle or the strict lowest value principle method is selected.

How to Manage the Foreign Currency Valuation of Open Items

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Manage the Foreign Currency Valuation of Open Items

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Foreign Currency Valuation of Balance Sheet Accounts

Diagram explaining IFRS valuation: foreign currency and local currency balances result in a 480 exchange rate difference due to a 1.3 valuation rate at the key date.

You can carry out a valuation of the balance sheet accounts of foreign currency using the report FAGL_FCV. On the G/L Account Balances tab page, choose the foreign currency balance sheet accounts.

Valuating Foreign Currency Balance Sheet Accounts

You need to consider the following points when valuating foreign currency balance sheet accounts:

  • Depending on the valuation method used and the balance of the foreign currency balance sheet account, you may end up devaluing or revaluing your accounts.
  • You can execute the valuation run with the same selection criteria multiple times.
  • If new transactions have been posted to the account since the last valuation run, these are valuated during the current run.

Account Determination: Exchange Rate Differences

Transaction KDB diagram showing exchange rate loss and gain accounts. Key details bank FC, account number 12345678, chart YCOA, company code 1010. Currency FC labeled as exchange rate difference key FC.

Foreign currency accounts are evaluated on the account balance level.

Exchange rate differences in foreign currency balance sheet accounts are posted to various gains and losses accounts. This is based on the exchange rate difference key that you enter in the G/L account master record. You can define these keys in Customizing.

How to Manage the Foreign Currency Valuation of Balance Sheet Accounts

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