If customer or vendor accounts contain open items in a foreign currency, the foreign currency valuation is necessary in FI-GL. The amounts of these open items were translated into the local currency at the time that they were entered using the current exchange rate. The exchange rate is probably different at the time of closing, and, therefore, open items need to be valuated. The valuation cannot be made by a posting to FI-AR or FI-AP because reconciliation accounts cannot be directly posted to. Therefore, the amounts are posted to an adjustment account in FI-GL, which appears in the same line of the balance sheet as the reconciliation account.
The preceding figure shows the valuation process with the assumption of a rising exchange rate.
The preceding figure shows the valuation process with the assumption of a dropping exchange rate.
The accounting consequence depends on the applied valuation principle:
- International Financial Reporting Standards (IFRS)
- United States General Accepted Accounting Principles (US-GAAP)
If your company has to map parallel valuation, open items posted in a foreign currency also have to be addressed. Based on local and international accounting principles, the valuation procedure can be different.
FI-GL covers all important valuation procedures:
Always Evaluate
In this procedure, the items to be valuated have to be entered/reported in the balance sheet with the exchange rate of the current valuation date, no matter if that will mean valuation profits or valuation losses.
Lowest Value Principle
In this procedure, the asset and the liabilities of the balance sheet are treated differently.
Assets, for example, receivables, will only be valuated with the current exchange rate if the valuated amount will be less than it was at the posting date. If the valuated amount will be higher than the original amount of the posting date, no valuation is needed.
Liabilities, for example, payables, will only be valuated with the current exchange rate if the valuated amount will be higher than it was at the posting date. If the valuated amount will be lower than the original amount of the posting date, no valuation is needed.
Strict Lowest Value Principle
In this procedure, the valuation is only displayed if the valuation amount on the key date is less than the purchase value in the case of a receivable, and is greater than the purchase value in the case of a payable. That is, there has been a loss due to exchange rate fluctuation. The valuation run automatically uses the date of the last valuation as the comparison date.
FI-GL offers two different solutions to model parallel financial reporting:
- Account Solution
- Ledger Solution
FI-GL uses the Ledger Solution to picture the closing activities in the training BR240.
You can configure the foreign currency valuation methods and variants in FI-CA customizing via Closing Operations → Foreign Currency Valuation.
If the different accounting principles have no effect on the valuation of open items, and the valuation is not important for the reclassification, choose Valuation Based on one Account Balancing View.
If the system is to consider the valuated open items in the reclassification, choose Valuation Based on Several Account Balancing Views.
If the system is to consider the valuated open items in the reclassification, and the inverse postings for the adjustment postings are not to take effect automatically one day after the valuation key date, choose Valuation Based on Several Account Balancing Views with Deferred Inverse Posting.
The Valuation Based on one Account Balancing View setting only allows you to execute transaction FPW1 in combination with a valuation method (fixed method assignment).
The Valuation Based on Several Account Balancing setting and the Valuation Based on Several Account Balancing Views with Deferred Inverse Posting setting only allow you to execute transaction FPW1 in combination with a valuation variant (flexible method assignment).
You can check the Valuation Areas to display different valuation approaches and post to different accounts (Account Solution) or to different ledgers (Ledger Solution) in FI-CA customizing (Define Valuation Areas).
If you use the Ledger Solution, you have to combine a valuation area with the corresponding ledger group to map parallel accounting. The ledger group stands for one ledger or combination of ledgers in FI-GL for the purpose of applying the functions and processes of general ledger accounting to the group as a whole.
If you do not need valuation areas, you can use posting area 0070 to define a balance sheet adjustment account for every G/L account to be evaluated.
If you use valuation areas, you can use posting area 0071 to define a balance sheet adjustment account for every G/L account to be evaluated.