Foreign Currency Revaulation

Foreign Currency Revaulation

Foreign Currency Revaluation is a financial process that involves adjusting the values of outstanding transactions in foreign currencies to reflect changes in exchange rates. This is particularly relevant for businesses engaged in international trade, where transactions may be denominated in currencies other than the company's functional currency.

Here's a simple explanation of the process:

1. Customers' Transactions:
   • Sum the values of all customer transactions that are not fully allocated, using the exchange rate as of the transaction date.
   • Sum the values of the same customer transactions using the current exchange rate.
   • The differences between these two sums are recorded on the Accounts Receivable (AR) account and the Exchange Variation Account.
2. Suppliers' Transactions:
   • Sum the values of all supplier transactions that are not fully allocated, using the exchange rate as of the transaction date.
   • Sum the values of the same supplier transactions using the current exchange rate.
   • The differences between these two sums are recorded on the Accounts Payable (AP) account and the Exchange Variation Account.
3. Balance of Foreign Currency Bank Accounts:
   • Evaluate the balance of foreign currency bank accounts by summing the values of all transactions not fully allocated, considering the exchange rate at the transaction date.
   • Sum the values of the same transactions using the current exchange rate.
   • Record the differences on the appropriate bank accounts and the Exchange Variation Account.
4. Balance of Foreign Currency Investment Bank Accounts:
   • Similarly, assess the balance of foreign currency investment bank accounts by summing the values of transactions not fully allocated, using the exchange rate at the transaction date.
   • Sum the values of the same transactions using the current exchange rate.
   • Reflect the differences on the respective investment bank accounts and the Exchange Variation Account.

Foreign Currency Revaluation extends beyond customer and supplier transactions to encompass the balances of foreign currency bank accounts and investment bank accounts. This comprehensive approach ensures that the financial statements accurately portray the impact of exchange rate fluctuations on all relevant financial elements, including cash and investment holdings. The Exchange Variation Account continues to play a crucial role in recording these adjustments without directly affecting primary financial accounts.

In essence, the purpose of Foreign Currency Revaluation is to account for the impact of currency fluctuations on outstanding transactions. The adjustments made ensure that financial statements accurately reflect the current value of assets and liabilities, considering the most recent exchange rates.

This process helps businesses maintain accurate financial reporting in the face of currency volatility, allowing for a more precise assessment of their financial position. The Exchange Variation Account serves as a temporary holding account for these adjustments, preventing direct interference with the primary revenue and expense accounts.

Explain

1. Comprehensive yet simple steps for Revaluation: Highnix ERP system offers comprehensive functionality for revaluing open foreign currency transactions. This feature encompasses various aspects, including Investment Accounts, Accounts Payable (AP), Accounts Receivable (AR), and Bank Balances. Investment Accounts can be conveniently created within the Bank Account management module. These accounts serve as repositories for funds designated for specific purposes, such as investments, rather than being utilized for invoice payments or receipts.
2. Date for Revaluation: This is the date of the revaluation and the system will base on this date to scan all the outstanding accounts mentioned above to check for the exchange rate from the exchage rate modules.This parameter specifies the date on which the revaluation process takes place. The system utilizes this date to scan all the outstanding accounts mentioned earlier, including Investment Accounts, Accounts Payable (AP), Accounts Receivable (AR), and Bank Balances. During the revaluation, the system checks the exchange rates stored in the exchange rate modules corresponding to the specified date.
3. To make the exchange variance realized:
   1. Highnix ERP incorporates a powerful feature designed to cater to the management needs of users. Many companies have specific requirements for financial reporting, including the inclusion of unrealized exchange rate gain/loss. With this feature, Highnix ERP enables companies to generate financial reports that reflect these unrealized gains or losses accurately.
   2. Once the reporting is completed, the Finance team may need to reverse the transaction. Alternatively, some companies prefer to realize the exchange rate at the time of reporting without requiring manual journal entries. Highnix ERP simplifies this process by providing a user-friendly option in the form of a dropdown box.
   3. By selecting 'No' in the dropdown box, the system automatically creates general ledger (GL) entries charging the unrealized gain/loss to the appropriate account in the current month. Additionally, it generates corresponding reverse entries at the beginning of the next month to nullify the impact.
   4. On the other hand, if 'Yes' is selected, the system charges the transaction to the pre-set Realized Exchange Rate Account. In this case, no additional entry is created for reversal purposes.
   5. By offering these options, Highnix ERP streamlines the management of exchange rate gain/loss, providing flexibility to cater to different reporting preferences without the need for manual interventions.

How Highnix ERP Revaluate the exchange rate gain and loss

In Highnix ERP, when the foreign currency revaluation link is activated, the system undertakes the following processes:

1. Customers' Transactions:
   • It calculates the sum of all customer transaction records in foreign currencies that are not fully allocated, considering the exchange rate as of the recorded date.
   • Additionally, it calculates the sum of all unallocated customer records in foreign currencies using today's exchange rate.
   • The disparities between these two sums are then recorded on the Accounts Receivable (AR) account and the Exchange Variation Account.
2. Suppliers' Transactions:
   • Similarly, the system computes the sum of all supplier transaction records in foreign currencies that are not fully allocated, using the exchange rate as of the recorded date.
   • It also computes the sum of all unallocated supplier records in foreign currencies using today's exchange rate.
   • The variances between these two sums are recorded on the Accounts Payable (AP) account and the Exchange Variation Account.
3. Foreign Bank Account Balance Revaluation:
   • The system evaluates the balance of foreign currency bank accounts by summing the values of all transactions, taking into account the exchange rate at the transaction date.
   • It then sums the values of the same transactions using the current exchange rate.
   • The differences between these two sums are recorded on the respective foreign bank accounts and the Exchange Variation Account.

This functionality ensures that foreign currency revaluation in Highnix ERP accurately reflects the impact of exchange rate fluctuations on both customer and supplier transactions. The recorded differences are systematically accounted for in the appropriate accounts, maintaining the integrity of financial reporting and facilitating a comprehensive overview of the organization's financial standing.

How Applying Customer or Supplier Payments Affects Exchange Rate Records

#Tag Exchange Rate Recognition

It is important to note that if an advance payment is received from a customer or paid to a supplier in a foreign currency, the exchange gain or loss will be recognized when the payment is applied to an invoice, NOT at the time the payment is received or paid.

The system will automatically create a journal entry for the exchange gain or loss, referencing the corresponding invoice with a remark such as "Sales Invoice nnnn," where nnnn is the transaction number of the related invoice.

The logic behind recording foreign exchange gain or loss only when a payment is applied against an invoice is consistent with standard accounting practices for the following reasons:

Exchange Gain or Loss is Realized Upon Settlement:

• Foreign exchange gains or losses are typically recognized when a foreign currency transaction is settled. In this case, the settlement occurs when the payment is applied to the invoice. At that point, the actual exchange rate (at the time of application) is compared to the rate used for the invoice, and any differences are recognized as gain or loss.

Alignment with Accrual Accounting Principles:

• Under accrual accounting, revenue and expenses are recognized when earned or incurred, rather than when cash is received or paid. Since the invoice represents a recorded obligation, the gain or loss on settlement reflects the actual financial impact at that time.

Practicality and Reduced Complexity:

• Recognizing gains or losses only upon application simplifies accounting processes and avoids premature recognition of gains or losses that might change before settlement. Exchange rates may fluctuate between the time a payment is received and when it is applied to an invoice, making early recognition less reliable.

Deferred Revenue Handling:

• Until a payment is applied, the amount received may be treated as a liability (e.g., "Unearned Revenue" or "Customer Advance"). Recognizing foreign exchange gain or loss before application could lead to accounting inconsistencies if the payment remains unapplied for an extended period.