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Business Case

Refer to our previous blog in this series to get the business context of the currency conversion Blog 7.1.

Introduction

  1. The following Models are required to perform currency conversion
    • Rate Model
    • Financial / Consolidation Model
    • Rate Model stores the currency rates used for the translation into the reporting / group currency.
  2. Linking the Financial / Consolidation Model to Rate Model
  3. Currency dimension: Two distinct currency type dimensions are used for implementing currency conversion in SAP BPC. The reporting currency (RPTCURRENCY) in Consolidation model and input currency (INPUTCURRENCY) in the Rate model
  4. CURRENCY attribute in Entity dimension: defines the local reporting currency of the input / submitted values for the entity member
  5. RATETYPE attribute in Account dimension: determines the rate and the logic to be used in translation of the given account (average, closing or historical)
  6. Business Rules for currency conversion are defined with the rates and logic to be applied to each Account Rate Type is set in the business rules table.
  7. The Script Logic to invoke the stored procedure and to pass to the program the appropriate parameters.
  8. Data Manager Package to execute the task set.

Required Models

Rate Model

A Rate Model is a support/driver model for financial and consolidation models. It is used to store the exchange rates that support the currency translation in financial applications. The Time and Category/Version dimension of Rate model must be identical to the Time and Category/Version dimension used by the Financial / Consolidation models.
Financial / Consolidation model must be linked to the Rate Model in the General Settings of the model as given in the picture below:
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Financial Model

Financial Model is used for Planning and Reporting purposes and it is a periodic model.

Consolidation Model

Consolidation Model is used to consolidate the financial results and it is a YTD model which consolidates results. Note: The master data (dimension) can be shared by models within an environment.

Required Dimensions

Rate Model must include Currency (INPUTCURRENCY) dimension detailing the exchange rates by each input currency.The Currency Conversion process makes use of the Rate Model, where the appropriate exchange rates will be searched for each relevant currency. But for Rate Model to fulfil certain requirements R_ACCOUNT (Account dimension for Rate Model) and R_ENTITY (Entity dimension for Rate Model) are specific and utilised only by Rate Model.

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R_ACCOUNT

This dimension is used to store the different types of rates like Average Rate (AVG), Closing Rate (CLO), Historical Rate (HIST) etc.
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 ENTITY

R_ENTITY is used as the entity dimension for the Rate model. In this example, we will be using the default member, typically named Global.

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INPUT CURRENCY

This dimension is used to store each applicable local currencies. This dimension will have the exhaustive list of currencies used by the entities in the Group.

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CATEGORY/VERSION

This dimension defines the groups in which we store the values of our Model. Like Plan, Actual and Forecast.

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 TIME

This dimension defines the units of time for our Model and how these units aggregate. CATEGORY and TIME can be shared by all models involved in Financial Planning / Consolidation.

RPTCURRENCY

This dimension is used to define the reporting currencies in which we need to perform currency translation. This dimension will have only those currencies which are needed for reporting and the local currency (LC). Currency Type attribute with “R” denotes Reporting Currency, “L” denotes Local Currency and “G” denotes Group Currency.

Difference between Reporting Currency Vs Input Currency

Input currency (INPUTCURRENCY) can be any currency used across the Group for the local reporting and planning purposes. Report Currency (RPTCURRENCY) are those currencies which we used to report, consolidate and plan for an organisation which is present in multiple geographies. For example: A company based in United States having operations in India and Australia will convert the local currency values to US Dollar.

In this example Input Currency is INR for India and AUD for Australia but Reporting Currency is USD,
Currency Type dimension in RPT Currency should be same as Input Currency
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 Required Dimension Attributes

Currency Translation can run on any type of reporting application. Before running it, there are some required dimension attributes that should be checked to ensure that the following conditions, which are mandatory for currency translation are met.

Account Dimension Attribute – RATETYPE

The System uses this attribute to determine value. This attribute must be a valid member of RATE Account Dimension, such as AVG conversion rate for Average, CLO for Closing period rate for Closing. This value is not optional.

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 Entity Dimension Attribute – CURRENCY

 The attribute is used to denote the local currency for current entity for example for ENTITY US, the currency is USD for ENTITY AUSTRALIA, Currency is AUD. Value of this attribute should be valid member of INPUTCURRENCY Dimension.
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 Currency Dimension Attribute – CURRENCY_TYPE

The currency dimension must include the attribute REPORTING, whose values are Y or blank, and CURRENCY_TYPE, whose values can be G for group currency, R for reporting currency, T for transaction currency, or L for local currency.

Note – For Group Currency (this value is mainly used for Consolidation, so for other type of reporting application, it is can be omitted.)
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 Time Dimension Attribute – YEAR

This attribute contains the year information of id. The YEAR attribute also allows you to filter, sort, and report based on the year. For example, if ID is 2017.JUL, YEAR is 2017

Time Dimension Attribute – PERIOD

This attribute denotes which period current time belongs to. The PERIOD attribute allows you to filter, sort, and report based on the period.
For example, if ID is 2017.JUL, period is JUL.

Time Dimension Attribute – TIMEID

This is one of the most important properties that are required for the currency translation to work. The system uses this attribute to lookup rates from the rate application. This attribute is a numerical value for current time.
For example, 2017.JUL, TIMEID is 20170700.

Time Dimension Attribute – MONTHNUM

The system uses this attribute to determine the “Last Period” of prior fiscal year. This attribute basically, helps to determine the opening period rate in the rate formula. This attribute takes the numerical value of month.
For example, 2017.JUL, MONTHNUM is 7.

Input Currency Dimension Attribute – MD

This attribute is used to denote the relationship between current currency and the standard currency. It can take two values:
D: Divide. If attribute “MD” does not exist, “D” is default relationship.
M: Multiply. If the rate of a currency to the standard one is a small number, for example AUD to USD, we can store the amount in AUD equal to 1 USD and mark it as “M”. This attribute can be used to improve accuracy.

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Conclusion

SAP has made available multiple options for Currency conversion now. On the million dollar question of which tool you should select for Currency conversion depends on various factors. Please contact us for your Currency conversion specific requirements, we will be able to guide you through the process and arrive at best choice suited to your organisational needs.

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Blog

Introduction

This article helps you to understand some basic concepts around currency translation, the need for currency translation, steps involved in currency translation and the rules and methods related to Currency Translation. The subsequent articles to this will also help you get a better understanding of how currency translation can be done in SAP BPC 10.1 (Classic).

What is Foreign Currency Translation?

Currency translation is the process of converting one currency value in the denomination of another currency based on the exchange rates defined. Companies which operate in different countries have the need to translate their financial reports from different local currencies to one common reporting currency or group currency. It is about converting the amounts related to accounting stated as per one particular currency to another currency to meet the finance reporting related requirements.

As per the United States Generally Accepted Accounting Principles regulations, the items in the balance sheet are converted in accordance with the rate of exchange as on the date of balance sheet, whereas items in the income statement are converted in accordance with the weighted-average rate of exchange for that particular year. The losses and profits that are derived as a result of the converting are showcased in the equity category of the owner in the form of a separate item.

The International Accounting Standard 21 ‘The Effects of Changes in Foreign Exchange Rates’ lays down the manner in which foreign currency transactions as well as operations should be accounted in the finance related statements. It also suggests the manner in which statements should be translated into a reporting currency.

Need for Currency Translation

  1. Currency translations helps a company create financial statements that feature a single currency
  2. Governing tax authority often requires companies to only use one denominated currency as part of their recording procedure
  3. For multinational companies having cross-border operations, currency translation will be essential
  4. Single currency as part of financial statements will make these statements easier to read and analyze
  5. It is near impossible to draw rational conclusions from a statement, which features more than one currency

Key Concepts explained around Currency Translation

Functional Currency

The functional currency is the primary currency of the business or business unit for a multinational company.

According to International Accounting Standards (IAS) and U.S. GAAP “the currency of the primary economic environment in which the entity operates; normally, that is, the currency of the environment in which an entity primarily generates and expends cash.

For example: An Australian company with bulk of its operations in United States would consider the U.S. dollar as its functional currency, even if the financial figures on its Balance Sheet and Income Statement are expressed in Australian Dollars.

Reporting Currency

This is the currency which is used to report an entity’s financial statements. So, for a multinational company accountant must convert foreign currencies into a single reporting currency at the specified exchange rate.

Group Currency

The primary currency is used by a company on its consolidated financial statement. This involves a currency translation from all foreign currencies into the single group currency. A group currency is important to those companies that generates revenues in more than one currency or that have subsidiaries or divisions in foreign countries.

Local Currency

This is the currency used in a particular country for it’s the transactions happening in that country, so a multinational company can operate in each of the locations in their respective local currency. For example An Australian company having it branch in India will operate in INR as the local currency in India.

Foreign Currency Translation Reserve (FCTR)

Exchange differences arising from translating assets and liabilities at the closing rate of balance sheet date compare to the average rates used by Retained Earnings taken directly to the foreign currency translation reserve.

Average Rate

The average rate for a period refers to a calculated average exchange rate for the specific financial period. This is typically the financial year, as it is the basis for most financial statements.
The average rate should be calculated by checking each rate during the period and dividing it by the number of these different rates.
The average rate for the period is used for translation currencies for income statement accounts.

Closing Rate / End Rate

The ending rate for the period is the exchange rate at the end of the financial period. For example, if the financial year ends on December 31, the currency translation would use the exchange rate of this date.
Liability and asset accounts use the ending rate for the period for currency translation. Nonetheless, fixed assets are not translated with the ending rate.

Historical Rate

The original historical rate at the point of acquiring simply uses the exchange rate of the date when the entry was created for the income statements. For example, if the qualifying transaction happened on July 22, even if the financial year ends on December 31, the exchange rate used should be from July 22.
Fixed assets are always translated with the historical rate. It must be noted they also won’t be re-translated later on.

Keys steps involved in Foreign Currency Translation

  1. Determine the Functional Currency of the foreign entity
  2. Remeasure the financial statements of the foreign entity into the reporting currency of the parent company
  3. Record gains and losses on the translation of currencies

Methods of Currency Translation

Rule 11 of the International Accounting Standards Board sets forth an acceptable methodology for currency translation. These rules define “functional” currency as the one that predominates in the foreign subsidiary’s economic environment. The functional currency may differ from the “local” currency, which is the official currency of a nation. Parent companies use the “reporting” currency for financial reporting — it’s normally the home currency. Currency translation is largely a matter of converting the functional currency into the reporting currency.

Current Rate Translation Method

The accounting standards’ methodologies employ the functional currency translation approach, which relies on the current rate method when the functional currency is the same as the local currency — for example, a London subsidiary using the British pound. In the current rate method, assets and liabilities use the current, or “spot,” exchange rate existing on the date of translation — the date on the balance sheet. The method translates equity items excluding retained earnings using the transaction date’s spot rate. Retained earnings and income statements use an average of the period’s translation rates, except when the foreign operation can identify an appropriate specific rate.

Temporal Rate Translation Method

The accounting standards call for foreign operations to use the temporal, or historical, rate method when the local currency differs from the functional one. For example, a subsidiary of a Australian company with foreign operations in a small country in which all business transpires in U.S. dollars, not the country’s local currency, would use the temporal method. When you apply the temporal rate method, you adjust income-generating assets on the balance sheet and related income statement items using historical exchange rates from transaction dates or from the date that the company last assessed the fair market value of the account. You recognise this adjustment as current earnings.

Monetary-Nonmonetary Translation Method

A company uses the monetary-non-monetary translation method when a foreign subsidiary is highly integrated with the parent company. The goal is to represent translated amounts as if they arose from exports sent from the parent company to the subsidiary’s markets. You translate monetary assets and liabilities such as cash, accounts receivable and accounts payable using the current exchange rate. You use the historical rate when you translate non monetary items such as inventory, fixed assets and common stock. For example, you would use the spot rates existing at the time you purchased inventory items.

Rules for Translation of Financial Statements

Assets and liabilities: Translate using the current exchange rate at the balance sheet date for assets and liabilities.

Income statement items: Translate revenues, expenses, gains, and losses using the exchange rate as of the dates when those items were originally recognised.

Allocations: Translate all cost and revenue allocations using the exchange rates in effect when those allocations are recorded. Examples of allocations are depreciation and the amortisation of deferred revenues.

Different balance sheet date: If the foreign entity being consolidated has a different balance sheet date than that of the reporting entity, use the exchange rate in effect as of the foreign entity’s balance sheet date.

Profit eliminations: If there are intra-entity profits to be eliminated as part of the consolidation, apply the exchange rate in effect on the dates when the underlying transactions took place.

Statement of cash flows: In the statement of cash flows, state all foreign currency cash flows at their reporting currency equivalent using the exchange rates in effect when the cash flows occurred. A weighted average exchange rate may be used for this calculation.

If there are translation adjustments resulting from the implementation of these rules, record the adjustments in the shareholders’ equity section of the parent company’s consolidated balance sheet.

Conclusion

Different companies might have slight differences as to which transactions should be recorded with which rate. It is a good idea to check with the responsible jurisdiction prior to currency translation to ensure you use the correct rates.

Next Steps

Please refer to our next blog in this blog series to understand the detailed configurations required in SAP BPC Blog # 7.1.

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