Oracle Applications: Revaluation Overview and Functional Implications

Prepared by: John Koch Creation Date: February 3, 2003 Last Update: August 31, 2011

Contents
INTRODUCTION ............................................................................................................................ 3 TERMS OF REFERENCE: ................................................................................................................ 3 HOW REVALUATION WORKS IN ORACLE GENERAL LEDGER ....................................................... 3 TECHNICALITIES .......................................................................................................................... 4 SUB-LEDGER IMPLICATIONS: PAYABLES ..................................................................................... 6 FUNCTIONAL IMPLICATIONS FOR USERS ...................................................................................... 8 USEFUL REPORTS AND PROCESSES .............................................................................................. 8

Introduction
Revaluation is a process that revalues accounts that have transactions denominated in a foreign currency. This process is required under FAS 52 and IAS 21 in order to report financial statements that appropriately reflect the effect of fluctuations in exchange rates on assets and liabilities denominated in foreign currencies. Revaluation is performed on the account balance, not the individual transactions. Any account may be revalued, however, typically only balance sheet accounts whose balances consist of monetary assets or obligations, or open transactions such as accounts payable or accounts receivable are revalued. Revaluation records the change in value, due to exchange rate fluctuations, of an asset or liability between the date of the transaction and the date of the financial statement.

Terms of Reference:
In order to discuss the concept of revaluation within the context of Oracle Applications, some key terminology must first be understood. The following terms and concepts may have different meanings within contexts outside of Oracle General Ledger. Their usage in this document is based on the definitions described below: Functional Currency: Functional currency refers to the currency in which a set of books in Oracle is denominated. This is not to be confused with the accounting currency or functional currency as used in GAAP or FASB definitions and standards (specifically FAS 52 definitions of functional and reporting currency). Also known as the primary currency or base currency of a set of books. For purposes of this document, there is no distinction made for reporting currency books or MRCs in Oracle General Ledger. Foreign Currency: Any currency other than the functional currency of a set of books. Cross-Currency Payments: Cross-currency payments are payments made from a bank account in a currency other than the primary currency in which the bank account is denominated. For example, South African Rand (ZAR) payments made from a bank account in which the balance is denominated in British Sterling (GBP). Revaluation: Often used interchangeably with remeasurement. In Oracle, revaluation is a process that reviews the foreign currency balances for an account and converts them to the functional currency based on the month-end exchange rate. A journal entry is created to adjust the functional balance to the month-end converted amount (amount of Revaluation journal entry = difference between balance and the balance times the month-end rate).

How Revaluation Works in Oracle General Ledger

Oracle revaluation functionality is very comprehensive, but in order to accurately track and account for balances to be revalued, data must be stored in a somewhat complex manner for use in the revaluation calculations. When foreign currency transactions are entered in Oracle, they are automatically converted to the functional currency at the exchange rate associated with the transaction and balances of foreign currency based transactions are actually stored in both the converted functional currency and the entered currency. The functional currency account balance is made up of all foreign currency transactions entered throughout the period and converted to functional currency amount at various exchange rates plus the balance of the transactions that originated in the functional currency. When the revaluation process is run, the system looks at the converted functional currency amount of the balance made up of foreign currency transactions, and multiplies it by the monthend rate to determine the month-end translated balance of the account and the amount of unrealized gain or loss due to exchange rate fluctuations between the date of the transaction and month end. The journal entry created by the revaluation process, increases or decreases the account balance, in the functional currency, by the amount of the unrealized gain/loss. To understand how the system works, it is important to note that revaluation is not performed on a transaction basis, but rather on an account balance basis. The account balance is made up of individual transactions entered at various exchange rates throughout the period. While the net effect is essentially the same, the manner in which the system calculates revaluation is different at a balance level than if it were performed at a transaction level. In accordance with FAS 52 and similarly with corresponding IAS 21, monetary assets and liabilities denominated in foreign currencies are revalued at the month-end exchange rate. The resulting unrealized foreign exchange gain/loss is booked to the income statement for that period. The range of applicable balance sheet account numbers to be revalued are defined for each set of books in the Revalue Balances screen in General Ledger. Oracle only revalues accounts that contain foreign currency balances and that are within the ranges defined in the General Ledger Revalue Balances form. Most companies does not revalue income statement items.

Technicalities
In the database, account balances are stored in a single table, GL_BALANCES. The GL_BALANCES table contains a row for each account combination and currency that makes up the entire balance of the account for a given period. The balance of each account is made up of a calculation of four columns: beginning balance DR, period net DR, beginning balance CR, and period net CR. The period net columns store account activity for the period and are used to calculate the period-to-date (PTD) balance displayed for each currency by the General Ledger Account Inquiry screen. The Year-to-date balance displayed in the GL Account Inquiry screen is calculated via the following formula: Begin_Bal_DR + Period_Net_DR Begin_Bal_CR Period_Net_CR.

For foreign currency balances, converted (functional currency), amounts are stored in four additional columns: Begin_Bal_DR_BEQ, Period_Net_CR_BEQ, Begin_Bal_CR_BEQ, and Period_Net_CR_BEQ. The BEQ notation at the end of the column name represents base currency equivalent which is the functional currency amount. These amounts are represented in the GL Account Inquiry screen as PTD Converted and YTD Converted balances. The formula for YTD Converted balance is: Begin_Bal_DR_BEQ + Period_Net_DR_BEQ Begin_Bal_CR_BEQ Period_Net_CR_BEQ. For PTD Converted balances, the formula is: Period_Net_DR_BEQ Period_Net_CR_BEQ. In addition, when a foreign currency transaction is entered and stored in the gl_balances table, the translated_flag is populated with R. The R flags the account balance for revaluation.

The formula for Revaluation looks at the account balance in the entered (foreign) currency, multiplies it by the month-end exchange rate, and then compares it to the translated functional currency balance. A journal entry is created for the difference. Technically, the formula looks like this: ACCOUNT AMOUNT = ((Begin_balance_dr + period_net_dr begin_balance_cr period_net_cr) * month-end rate) This is the entered (foreign currency) balance multiplied by the month-end rate. LESS (begin_balance_dr_beq + period_net_dr_beq begin_balance_cr_beq period_net_cr_beq) This is the originally converted (functional currency) balance.

The resulting journal entry updates only the translated functional currency balances the BEQ columns. This is why the revaluation journals contain entered amounts of zero and converted amounts that represent the difference calculated above. Manual journals in the functional currency amount to adjust the balance and record exchange rate gains or losses will not properly offset the revaluing foreign currency balances held in the translated functional currency of an account. Likewise, when accrual account balances are not relieved in the originating currency and exchange rate, the BEQ columns do not get zeroed out and the system continues to generate adjusting balance and exchange gain/loss entries (as illustrated in the formula above) based on those amounts in subsequent months even if the net primary (functional) currency balance of the account is zero.

Sub-ledger Implications: Payables

Standard Payables functionality allows for multi-currency payments to be made out of a single bank account. For example, a bank account whose base currency is defined as GBP can be used to create EUR denominated payments to pay EUR denominated invoices. From a business perspective, this does not mean that the actual bank account holds all the currencies in which an invoice may be paid. The actual bank account balance may hold only GBP which are then used to purchase EUR at a specified exchange rate in order to pay the draft issued by Accounts Payable. To illustrate, please consider the following example of a foreign currency invoice payment that takes place in a single, GBP-denominated set of books. When the system accounts for the Invoice and the Payment, in a General Ledger GBP-denominated set of books, the corresponding journal entries are created: Entered Amt Converted Amt Invoice Entry (1.5 GBP/EUR) DR Expense 100 EUR CR A/P 100 EUR Payment of Invoice (1.6 GBP/EUR) DR A/P 100 EUR DR FX Loss CR Cash 100 EUR

150 GBP 150 GBP

150 GBP 10 GBP 160 GBP

The balance sheet now includes a credit of 100 EUR for the cash account. This amount will be revalued against GBP at month-end. However, as stated earlier, the bank doesnt actually hold EUR, it only holds GBP. Therefore, this asset account should not have a EUR balance to revalue against GBP at month-end since it is actually denominated in GBP. To prevent such balances from being included in the revaluation calculations and thus impacting the accuracy of the revalued balances, foreign currency payments must be cleared in Cash Management. The clearing of foreign currency payments in Cash Management creates the following entries to eliminate the foreign currency balances: Clearing of Payment (Assumes that the bank payment rate = payment rate in Oracle)

(Cross Currency EUR Journal) DR Cash 100 EUR 160 GBP CR Susp Accr 100 EUR (Cross Currency GBP Journal) DR Susp Accr 160 GBP CR Cash 160 GBP

160 GBP

The system creates two separate journals with a source of Payables and a category of Cross Currency. Two journals are required because the journal to clear the foreign currency balance is in the foreign currency, while the journal to update the functional currency balance is in the functional currency. The system creates these cross currency journals in both the primary book and related MRC book(s), to clear foreign (non-functional) currency amounts for each affected set of books.

Functional Implications for Users

The complex technical example above has some relatively simple implications for users. These implications can be summarized with a few dos and donts: DO: Always clear account balances in the same currency in which the original entry was booked. This applies primarily to accruals. Any difference between invoice and payment should be booked to realized gain/loss. If reversing revaluation journals, always use the system-generated auto-reversals to reverse revaluation entries in the following period. Reconcile monetary asset and liability accounts in the currency in which they are denominated. If they are denominated in multiple currencies or in foreign currencies, remember to back out the revaluation entries when reconciling. Use Cash Management to clear foreign currency payments and reconcile bank accounts. For manually entered accruals, use single-book adjustments to record foreign exchange gains/losses to clear account balances in MRC books that legitimately result from foreign currency fluctuations between date of AR accrual and date of cash receipt. DONT: Attempt to reverse system-generated revaluation journals with manual journal entries in the primary (functional) currency. Attempt to adjust the functional currency balance of cash accounts that contain foreign currency entries unless you have reconciled the account and know in which currency the adjustment must be made.

Useful Reports and Processes

There are several reports that may be useful in analyzing a particular account to for reconciliation purposes or to understand what activity contributes to its balance. Account Analysis - (180 Char): This report helps to trace GL account activity in the functional currency (or STAT) back to its original source. The report displays journal entry lines and beginning and ending balances for the period (or range of periods) and GL account (or range of accounts) selected. This report can be run for a single period or a range of periods within a single fiscal year.

Key Parameters: Type: Depending upon the value chosen for the parameter Type, the report will display information about the origin of the transaction. Valid values include: Entry Item: If this value is chosen, the report will display external reference information about the source transaction such as Journal Import Created for transactions originating in the sub-ledgers or that are imported form external systems and ADI. Source Item: If this value is chosen, the report will display information from the source transaction such as an invoice or check number (if the transaction is imported from Payables). Line Item: If this value is chosen, the report will display information related to the source transaction such as a vendor name. Account Analysis Foreign Currency(180 Char): This report is identical to the Account Analysis report described above except that it helps to trace foreign currency activity within a specific range of periods and accounts. General Ledger Foreign Currency: This report lists beginning and ending balances and all journal entry lines affecting each account balance in a foreign currency. Both foreign and converted functional journal amounts and account balances are displayed. This report can be used to review general ledger activity entered in a foreign currency and to reconcile revaluation journals. Trial Balance Foreign Currency Summary1: This report lists the beginning and ending foreign currency balances and period activity summarized by natural account segment in the selected currency. Balances can be viewed on a Period-to-Date or Year-to-Date basis. Trial Balance Foreign Currency Detail: This report lists that same information as the Trial Balance Foreign Currency Summary1 report, except that balances and activity are displayed by account combination rather than summarized by account segment.