Foreign Currency Revaluation in Dynamics 365 Finance

In any organization with business spanning across multiple countries, multi-currency transactions play a vital role in day-to-day business. Any accounting software should be able to facilitate currency conversions not only at the time of booking the transaction but also calculating the forex gain/loss incurred during the end of any period or after settlements are made against open transactions. Dynamics 365 Finance & Operations offers an effectively simple functionality to facilitate such important transactions.

Called as Foreign Currency Revaluation, it provides the following features:

1. Calculate the unrealized foreign currency gain/loss against all open transactions for any vendor/customer.

2. Account the unrealized gain/loss into the respective GL accounts.

3. Knocking off the unrealized gain/loss accounts by transferring the balance to the realized gain/loss accounts at the time of settlements.

This functionality is beneficial to any accounting manager who wishes to know any gain/loss that might incur before making actual payments and make important business decisions accordingly.

Dynamics 365 Finance not only has a very short and simple setup to set up Foreign Currency Revaluations, but also a very easy way to run the process.

Setup

Starting with the setup, the below settings need to be configured first:

1. Setup currency exchange rates

Path: General Ledger -> Currencies -> Currency Exchange Rates

As per the above screenshot, the user can have multiple currency conversion rates setup for any date range.

2. Configure main accounts for Unrealized Gain/Loss and Realized Gain/Loss

As per different business requirements, the foreign exchange gain/losses can be accounted in a single GL account or multiple GL accounts. Based on that, the necessary accounts should be configured. They can come under Expenses or Revenue.

3. Link the main accounts to the Ledger

For the system to account the gain/loss amount into the respective GL accounts, it is necessary to link them in the Ledger first.

Path: General Ledger -> Ledger Setup -> Ledger

4. Enable multi-currency option in bank master

Path – Cash & Bank management -> Bank account -> Enable the option “Allow transactions in additional currencies”

This will enable the bank settlements to be done in any currency.

5. Lastly, Foreign Currency revaluation exists for each module (AP, AR, GL) and it is accessed directly without any setup.

The setup is complete with the above steps. Now comes the process flow. As an example, the transactions will be run for the months of June and July where each month has a currency rate of 1 USD = 70 INR and 1 USD = 75 INR respectively. Based on these currency rates, the system will calculate a profit for customer payments and a loss for vendor payments respectively.

Let’s start with the profit scenario first

1. Create a back dated FTI journal in the month of June. Select the amount as 1000 dollars.

The accounting impact for the journal in USD and INR will be as below:

2. Navigate to Accounts receivable -> Periodic Tasks -> Foreign Currency Revaluation

Click on Foreign Currency Revaluation at the top.

Clicking that will open the parameters window. Here, user can run the FCR for a specific vendor/customer. The considered date and Date of rate should be selected as the date when the new currency rate will take effect. In this case, it will be 1st of July, where the currency rate will become 1 USD = 75 INR. Click on OK.

Once it is run, it will create an entry in the same screen as shown below:

By default, the latest entries are at the bottom.

Select the entry and click on voucher to see the effect.

The voucher effect is as shown below:

As per the above accounting impact, the system calculated that from 1st July, there will be a net gain for any customer payments against invoices made in June. Hence, the system will select the Unrealized Gain account and post the currency difference amount in it as an income. The customer’s outstanding balance also increases by the same amount.

The simplified accounting effect is as below:

Now if a payment is created in the month of July against the invoice booked in June, the system will post the payment journal as per the current exchange rate (i.e., 75 INR) and transfer the Unrealized amount to the Realized amount.

This effect is as shown below:

The simplified impact is as shown below:

The customer account is settled and a revenue of the currency difference amount is recorded as a Realized Gain.

The brief summary of these transactions can be found in the Customer transactions (Customer Master  -> Customer -> Select Transactions from the top panel)

The above was an example where there is a net gain from customer payment. Exactly equivalent accounting impacts will take place for other scenarios like vendor gain, vendor loss and customer loss as well.

The below table shows the exactly the type of impact incurred for vendor/customer transactions for increasing or decreasing currency rate:

Now, what if the user makes the payment without running FCR?

In that case, the system will directly impact the Realized Gain/Loss account for the currency variation amount against the vendor/customer. No Unrealized GL will be accounted.

In conclusion, the process of running FCR is useful to determine the best time span for making payments in order to benefit from currency exchange rates.