FOREX

[#1]

Dear Guru's

Regarding foreign currency valuation , in transaction OBa1 , we assign accounts for realized gain/loss & accounts for unrealized gain/loss & an adjustment account we do this for every reconciliation account,what i need to know is how this concept works in terms of why do we need unrealized gain/loss accounts for example? i need to understand why we enter all these accounts (business-wise) & i would really appreciate it if it was in journal entries example as well,Thx a lot guys.

Regards

H.emam

[Former Member]

At the month-end/year-end, you need to revaluate your foreign currency balance sheet accounts and foreign currency open items into local currency (reporting currency of the company code) at the rate prevailing on the date of preparation of your financial statements. All the gains/losses that occur on account of this revaluation is unrealized. A gain/loss is realized when the open item is getting actually cleared, i.e. a customer payment or a vendor payment in foreign currency.

Therefore, you need to assign unrealized gain/loss account determination in OBA1. These are not real (just revaluated for month-end reporting purpose) and hence are reversed on the first day of next month, so the balances go back to where they were before revaluation. In that next month, some of your open items get cleared (which result in realized gain/loss) and some new open items get added. The result will get revaluated again at month end (and reversed beginning of next month).

Example:

Lets say you have only one customer on whom you raised a customer invoice for USD 100. Your company code currency is GBP. The exchange rate (M rate) on the date of customer invoice (Apr. 27 2009) is 1 GBP = 1.5 USD.

Dr. Customer USD 100 (GBP 67)

Cr. Sales USD 100 (GBP 67)

Lets say the item is open on Apr. 30 2009, on which date the month-end rate is 1 GBP = 1.6 USD. When you perform FC revaluation, the entry is

Dr. Unrealized loss USD 0 (GBP 4.50)

Cr. Customer recon. USD 0 (GBP 4.50)

This GBP 4.50 is unrealized loss. After this entry, your customer recon. a/c. balance is USD 100 (same as before), i.e. GBP 62.50 (at month-end rate).

This entry gets reversed on May 1, 2009, after which the recon a/c. balance is back to where it was before the revaluation on Apr. 30, i.e. USD 100 (GBP 67).

Now, lets say your customer pays the invoice on May 5. Bank gives you a rate of 1.7 USD per GBP on that day. The entry is

Dr. Bank USD 100 (GBP 59)

Dr. Realized loss USD 0 (GBP 😎

Cr. Customer USD 100 (GBP 67)

Hope this helps!