Foreign Exchange Revaluation Journals

Using the Foreign Exchange Revaluation Journal for your foreign currency Customers, Suppliers (Vendors) & Bank accounts

Written By Niall Conlon (Draft Writer)

Updated at November 8th, 2021

1.    Introduction:

The system handles the posting of multi-currency transactions by allowing Bank accounts, Customer and Supplier (Vendor) accounts to be set up in a currency that is different to the base currency of the company. All transactions posted to these accounts are translated into the base currency amount based on the rates held in the system’s currency table or entered against each specific transaction. 

When the transactions are finally settled (i.e.: a Customer pays their account, a Supplier (vendor) account is paid or a Bank account is converted to base currency) the system handles the calculation and automatic posting of any realised gains/losses.

Therefore, a gain occurs if a Foreign Exchange (FX) payment actually costs less in base currency than that originally posted - or if a FX amount received translated into more in the base currency than originally posted. Losses are generated if the opposite applies. This multi-currency processing is handled within the system as transactions are posted.

At a financial period end, if the business wishes to produce an accurate Balance Sheet at a specific period end, it needs to consider the real value at the Balance Sheet date of any outstanding FX balances it holds, bearing in mind any changes in the exchange rates that may have arisen since the FX transactions were originally posted. 

To facilitate this, the system provides a 3 step revaluation wizard to enable you to revalue your company’s foreign bank, customer or supplier (vendor) accounts at any point in time and to post the corresponding adjusting journals to the General Ledger automatically. 

These adjustments are called Unrealised Gains/(Losses) because the gains or losses may not actually be real at that point in time. Gains/(Losses) are posted as reversing journals so as to only affect the month end reporting. 

Note that this Revaluation function is available in the multi-currency version only of the system. 

2.    Why Revalue Accounts?

A Balance Sheet is designed to reflect the financial position of the company at a particular point in time. FX balances that were previously posted and are still outstanding are likely to be worth a different amount if the FX exchange rates have fluctuated since the transactions were posted. 

For example, a Supplier (vendor) account balance of €5,000 Euro converts to £3,023.98 GBP at a monthly average exchange rate of 1.653450 Euro to the STG £. However if at month end the exchange rate has risen to 1.752908, the €5,000 is now only worth £2,852.40. This represents a reduction in the amount owing of £171.58, which is an unrealised gain to your company, i.e. if the company paid the Supplier (vendor) at that point in time, it would have to pay £171.98 less than when the original invoices were posted.

While a fluctuation in exchange rates may not be permanent, it usually represents a trend in the rate. It is good accounting practice to recognise gains/losses as they arise rather than waiting until the transaction is paid and recognise the total “realised” gain/loss in that period. 

In addition the real value of the balance sheet values of the debtors, creditors or bank accounts in base currency should be recognised at each month end. 

Therefore, it is prudent to revalue any outstanding FX accounts on a period by period basis.  The system facilitates this approach, with auto reversing journals.

3.    What does the Revaluation Wizard Do?

The Foreign Exchange Revaluation Journals Wizard does the following:

i)    Enables users to revalue foreign Bank, Supplier (vendor) and Customer accounts as part of the month/year end process.

ii)    Provides easy access to the currency maintenance functions to enable update of period end exchange rates.

iii)    Enables the user to view or export (to Excel) the account adjustment details prior to posting.

iv)    Enables the user to automatically adjust the base currency value of any foreign currency bank, debtors and creditors accounts based on the period end rates, while the foreign currency balance remains the same.

v)    Automatically generate the General Ledger journals to post the difference (gain/loss) to the relevant control accounts and the unrealised exchange gain/loss account in the general ledger.  

vi)    The journal is posted as a reversing journal to accrue for a loss/gain as if the account was settled right now. This automatic reversal after the period end allows you recalculate the Unrealised Gain/(Loss) each period based on the most up to date rates.

vi)    The amount of the revaluation is also included in any aged debtors or creditors reports to allow them to be reconciled to the relevant control account in the General Ledger.

4.    Accessing and processing the Revaluation Journal Wizard:

The Revaluation Journal can be accessed from the ‘General’ top-level menu option as shown below:

 Step 1 – Selecting the Type of Accounts to Revalue and the Period Date to Apply:

The first step in using the wizard simply involves choosing the types of accounts you wish to revalue and selecting the period end date for the journals. You can decide it is appropriate to revalue your Bank & Loan accounts, foreign customer and foreign supplier (vendor) accounts both individually or altogether. Simply use the tick boxes to select which account types you wish to revalue. 

You must then indicate which period you wish to create the journals in, i.e. which period must be re-valued. Use the drop down box to select the period. This determines the rates to be applied and the period the revaluation journals will be calculated for and posted to.

NB: Note that this screen displays the General Ledger account code of the Unrealised Gains/Losses Account. In the case below this is account ‘4130’ but may be different depending on your own chart of accounts.

By default the system includes a required ‘Account Type’ for Unrealised Gains/Losses. You can associate this account type with whatever General Ledger account you wish using the System Accounts screen in Codes Maintenance. Click on the link provided (as shown above) to access this screen:

Use the ‘Account No’ drop down to associate the Unrealised Gains/Losses account with the correct General Ledger account. This will determine the Profit & Loss account to which the unrealised gain/loss journal resulting from the revaluation is posted.

Step 2 – Setting Period End Exchange Rates:

The next step involves setting period end exchange rates for each foreign currency. For example, although you may now be in October and using October exchange rates for day to day transactions, you may wish to revalue your foreign currency accounts at the end of September rate for all of your September transactions.  Having entered the chosen "Period End Date" in the "Foreign Exchange Revaluation Journal" screen above, click "Next" which will bring up the following screen of historical exchange rates by financial period to facilitates this.

Click ‘Edit’ beside each currency and record the exchange rate which pertains at the chosen period end.

Step 3 – View the Adjusted Base Currency Balances & Generate Adjusting Journals:

Depending on the type of accounts chosen (Bank account, Suppliers (vendors) or Customers), this screen will list the accounts to revalue up to the revaluation date as shown at the top. 

The following fields are shown in the grid:

Account Type: This states whether the account is a Bank, Customer or Supplier (vendor) account.

Account Code: Bank, Customer or Supplier (vendor) account code.

Account Name: Bank, Customer or Supplier (vendor) account name.

Currency: Currency code associated with the account.

Exchange Rate: The period end exchange rate at which the account will be revalued. 

Posting A/C: This is the General Ledger Account code that the revaluation journal will be posted to, i.e. the Bank, Debtor or Creditor control account General Ledger number.

Foreign Balance: This is the foreign currency balance up to the period date.

Base Balance: This is the current base currency balance as calculated with the day to day posting exchange rates. The base currency code is shown in brackets in the column heading.

Revalued Balance: This is the revalued base currency balance based on the updated period end exchange rate.

Gain/Loss: This is the foreign exchange gain/loss calculated based on the updated exchange rate. This will be the value (positive or negative) that needs to be adjusted.

Note that you have the option of exporting the contents of the grid to Excel by clicking on the ‘Export’ button. This is useful if you wish to create a record of the accounts that were revalued or if you wish to perform any further checks prior to creating the journals.

The Creditors and Debtors ageing reports are updated to reflect the currency revaluation adjustments when run in base currency to ensure that the totals still tally up with the relevant control accounts (see below).

5.    Creating the Revaluation Journals:

After you have checked the accounts and the revaluation amounts calculated, click ‘Generate Revaluation Journals’ to generate the postings to the General Ledger. 

After the journals are created you will receive a confirmation message.  A link will be provided at the bottom of the screen which will enable you to access the Transactions Browser where the created journals can be viewed. 

If the adjustment is positive (i.e. increase in debtor or reduction in creditor amount):

>    A Debit General Journal (GD) for the difference is posted to the relevant control account.

>    A Credit General Journal (GC) is posted to the defined ‘Unrealised Gains/Losses’ account.

If the adjustment is negative (i.e. reduction in bank or debtor or increase in creditor balance):

>    A Credit General Journal (GC) for the difference posted to the relevant control account.

>    A Debit General Journal (GD) is posted to the ‘Unrealised Gains/Losses’ control account.

Revaluation General Ledger (GD/GC) Journals are posted with the following details:

GL Account No: Relevant General Ledger Account code. This will either be the Bank, Debtor or Creditor control account. This enabled you to trace where the gain/loss originated from. The other side will be the Profit & Loss ‘Unrealised Gains/Losses’ account

Date: Period date the journal is posted to and the next period where it will be reversed.

Ext Ref: ‘REVALUATION’ and internal reference concatenated.

Department: Blank.

Description: “Foreign Bank Revaluation Journal” with the appropriate currency code and revalued exchange rate appended to the description for reporting purposes.

Tax Code: N/A

Amt: The foreign currency transaction amount will be ‘0.00’.

Bcamt: The revaluation amount field.

Unrealised gains/losses are posted as reversing journals and therefore are reversed automatically at the start of the next period. This recognises the expected gain/loss at that point of time, some of which will be realized in the following period and allows the recalculation of the Unrealised Gain/(Loss) each period based on the balances then outstanding and the exchange rates then applying.

Note that revaluation journals cannot be edited via the transaction editing screen once they have been created.  If you wish to cancel them you have the option of reversing them or if you made a mistake and revalued at the wrong rate, you can re-generate a new journal. Any prior journals for the period will automatically be reversed for you.

6.    How do I reconcile revalued Creditors & Debtors Control Accounts with Ageing Reports?

The Aged Creditors and Debtors (Summary & Detailed) layouts have an extra section at the bottom of the reports to facilitate reconciliation with the aged Creditors or Debtors control accounts as reported in the Trial Balance.

Therefore, when you run an ageing report in base currency for a period in which there is a balance in the Unrealised Gains/Losses account, the report will include a section displaying the unrealised gain/loss for the period and will add that to the overall creditors or debtors Balance (section outlined in red below). 

This will enable you to arrive at the total for reconciliation with the Debtors or Creditors control account as shown in the Trial Balance.

In the example below, the total Aged Debtor balance at the end of September is €2,014,006 as per Aged Debtors report. In this period, an unrealised gain of €77.75 was recorded after the customer accounts were revalued. This represents a Debtors control total of €2,014,083.99 for reconciliation with the Debtors control total in the Trial Balance for September (see following screenshot).