It is common practice for organizations to conduct transactions in currencies different from their local/company code currency. This is what is referred to as Foreign Currency Transaction.
Where open items denominated in foreign currency exist at a key date (meaning weekly, monthly or yearly closing date), then they have to be evaluated to determine the exchange gain/loss (exchange rate movement) arising therefrom. A foreign currency valuation (Forex valuation) is nothing but restating the value of your foreign currency balances (assets and liabilities) by comparing the exchange rates at the time of the creation of the open item (Original Document generation) to the rate existing at the key date.
In this week’s posts we will be discussing the topic of SAP Foreign Currency valuation, by going through the following:
1) Scope of Foreign Currency Valuation
Generally, currency valuations covers the following
a) Customer open items, Vendor open items and General Ledger Open Line items, Managed in foreign currency.
b) Other General Ledger Balance Sheet Accounts Managed in Foreign Currency, but not flagged as open item management accounts.
2) Valuation Methods
The valuation method basically contains the relevant parameters in the valuation process. In this step we make all the specifications necessary for the SAP valuation program to run.
You set up Valuation methods by going through the menu path below:
IMG — Financial Accounting (New) — General Ledger Accounting (New) — Periodic Processing – Valuate — Define Valuation Methods
You can create your own valuation method by clicking on New Entries, or copy and existing one by clicking on copy, or use a system provided one.
Click on New Entries
a) Valuation Method: Enter a key that will represent your valuation method. This is a maximum of four character alpha-numeric key.
b) Lowest value principle: flagging this indicator means that the items are valued according to the lowest value principle. Meaning that the valuation result is only taking in to account, if the valuation difference between the local currency amount (of the foreign currency transaction) at the original document creation and the newly revalued amount is negative, that is valuation run resulted in a loss. With this procedure, the valuation is calculated per item total, and items with same invoice reference are viewed together.
c) Strict lowest value principle: flagging this indicator means the valuation is only displayed if, the new valuation result has a greater “devaluation and/or a greater revaluation” than the previous valuation. Just like the above, the valuation is calculated per item total, and items with the same invoice reference are viewed together.
d) Always evaluate: Flagging this indicator means all foreign currency balances and foreign currency open item are valuated and the revaluation result is booked irrespective of what the result is (loss or gain).
e) Revaluate Only: If this indicator is selected, it means that the system only takes the valuation run into consideration if it results in a gain. That is “Revalue Only – Do Not Devalue”. This is the opposite of the “Lowest value principle”.
f) Group Vendors: Here Vendor accounts are categorized into groups, and during the valuation process the group is then viewed as a whole and the same conditions apply to them.
g) Group Customers: Here Customer accounts are categorized into groups, and during the valuation process the group is then viewed as a whole and the same conditions apply to them.
h) G/L Valuation Group: Here General Ledger accounts are categorized into groups, and during the valuation process the group is then viewed as a whole and the same conditions apply to them.
i) Balance Valuation: If this indicator is selected, open items are balanced per account or group and currency. The balance is then valuated and the valuation difference is posted as an expense or revenue. If you do not select this indicator, the open items are summarized and valuated per reference number. If there is no reference number, each line item is valuated individually.
j) Post per line item: If this indicator is selected, revaluation is done at line item level. Meaning that a line item is generated for each valuated item in the valuation posting as well as in the adjustment account. If not selected, the valuation results are posted in a summarized form
k) Document Type: Enter the document type that the revaluation postings will use.
l) Exchange Rate Type: Select your exchange rate type for the revaluation process. Normally the standard exchange rate type “M” (Standard translation at average rate) is used, although you can use any custom exchange rate type you defined.
3) Valuation Areas
By defining your valuation areas, you can report different valuation approaches and post to different accounts. In this IMG activity, you define your valuation areas for your closing operations. The valuation method we defined above will be assigned to our valuation area we will define in this step.
Follow the menu path below to define your valuation area (s).
IMG — Financial Accounting (New) — General Ledger Accounting (New) — Periodic Processing – Valuate — Define Valuation Areas
Click on new entries or copy and existing valuation area.
Specify a key to represent your valuation area, assign your valuation method to it and select a suitable currency type (we select the company code currency).
4) Assignment of Accounting Principle to Ledger Group
In this IMG activity, we assign our adopted accounting principle to our ledger group.
Follow the menu path below to Assign Accounting Principle to Ledger Group.
IMG — Financial Accounting (New) — General Ledger Accounting (New) — Periodic Processing – Valuate — Check Assignment of Accounting Principle to Ledger Group
Click on New Entries.
Enter your adopted accounting principle (in our example GAAP) and select a target ledger (in our example leading ledger-0L).
Save your entries.
5) Assign Accounting Principle to your Valuation Areas
In this IMG activity, you assign your adopted accounting principles to your valuation areas.
Follow the menu path below to assign your adopted accounting principles to your valuation areas.
IMG — Financial Accounting (New) — General Ledger Accounting (New) — Periodic Processing – Valuate — Assign Valuation Areas and Accounting Principles
Click on new entries.
Select your defined valuation area and your adopted accounting principle, and save your entries.
6) Activate Delta Logic
The valuation process can take two forms:
a) The so called “Gross Method”, by which the program compares the exchange rate existing on the date of the original document creation to the exchange rate prevailing on the Key Date, and any difference booked as exchange difference. With this approach valuation results are reset on the first day of the following period (Key Date+1)
b) The Delta Logic: with this approach valuation results are not reversed on key date +1. The delta logic ensures that the system does not execute any reversal postings for the valuation postings in the following period. The next valuation run takes the difference between the last valuation date and the current key date.
If it is required for you to use the Delta valuation Logic, activate it through the following the menu path below:
IMG — Financial Accounting (New) — General Ledger Accounting (New) — Periodic Processing – Valuate — Activate Delta Logic
Select you valuation area (in our case Z1)
To activate the delta logic for the valuation area, set the indicator for the delta logic.
7) Prepare Automatic Postings for Foreign Currency Valuation
In this activity, we define how, and to which accounts, the valuation results are posted. The system reads the settings done here to determine how to automatically Post Exchange rate differences when valuating open items and foreign currency balances.
In the same configuration step we can also define the accounts for realized exchange rate differences during open item clearing.
You can also define here the Exchange Rate Key to which you assign the gain and loss accounts for posting any exchange rate differences that occur during valuation. The exchange rate keys you define here are entered in the master records of the G/L Accounts that you want to valuate.
Follow the menu path below to configure automatic postings for Foreign Currency Valuation.
IMG — Financial Accounting (New) — General Ledger Accounting (New) — Periodic Processing – Valuate — Foreign Currency Valuation — Prepare Automatic Postings for Foreign Currency Valuation
a) Double click on “Exchange rate difference using exchange rate key” to define the exchange rate key and assign the gain and loss G/L accounts to it, for the posting any exchange rate differences.
Click on Create, and make the relevant entries.
Save your entries.
The next step is to assign to the relevant G/Ls (in the G/L Master data) an Exchange Rate Key created above. That assignment means that any exchange rate difference from transactions on this G/L will be posted to these accounts as configured above.
Use transaction FS00 to do this assignment.
b) Double click on “Exchange Rate Dif.: Open Items/GL Acct” to maintain settings for automatic Post of Exchange rate differences when valuating open items and foreign currency balances, or use transaction OB09.
Click on new entries.
Maintain your entries and save.
Exchange rate difference realized: This is an exchange rate difference which results at the point of clearing an open item (example through incoming or outgoing payments). Maintain here the P&L account that the realized differences are to be posted. Note that this can be a single account, or a different account for gain and another for loss. The offsetting postings are done on the relevant G/L account.
Valuate: You maintain here the accounts to be posted to incase of unrealized exchange differences arising from the valuation process. When you valuate open items in foreign currency, the exchange rate difference determined is posted as an unrealized exchange rate difference.
Note: the Field Balance Sheet Adjustment Account contains the G/L Account that is posted to instead of the account itself that is being evaluated. This is necessary to maintain the original value of this account, because valuation differences are unrealized differences. The offsetting postings go to the relevant P&L Accounts.
c) Double click on “Payment difference for Altern. Currency” to maintain settings for automatic Posting of Payment differences.
Maintain your settings and save.
8) Foreign Currency Valuation Run
We can now run the currency valuation transaction after the configuration settings above.
Go through the menu path below:
Accounting – Financial Accounting — General Ledger — Periodic Processing — Closing – Valuate — Foreign Currency Valuation (New).
Or use transaction FAGL_FC_VAL
9) Resetting Foreign Currency Valuation Run
If for whatever reason you want to undo/reset the valuation postings you have made, you can do so. What you just need to do is to run the valuation program again entering the same selection parameters as the valuation run, but this time flagging the field reset, as below. What this does is to recreate the status before the valuation run, that is, all valuations posted are set to zero by an inverse posting.
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