Switching the Accounting Method for Foreign Currency Translation

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Switching the Accounting Method for Foreign Currency Translation

In this topic, we use an example to explain the procedure for switching the gain/loss accounting method for currency translation. More...

Very broadly, the steps are:

  1. Select the new method on the Options tab of the Company Profile.
  2. Create new accounts and modifying existing revaluation codes ,or create new codes in General Ledger.
  3. In Accounts Payable and Accounts Receivable, modify current account sets or create new account sets for any multicurrency account sets.
Example:
  • Sample Company Ltd is a multicurrency company. Its functional currency is Canadian dollars.

    In the fiscal year 2019, Sample Company Ltd used the Realized and Unrealized Gain/Loss accounting method. The company revalues balances of monetary accounts once a year.

  • There is only one US customer, and, as of December 31, 2019, their balance in USD is 1,000.00 with CAD equivalent of 1,500.00.
  • Sample Company Ltd maintains a USD bank account, with a balance in the account of 5,000.00 as of December 31, 2019.

    The CAD equivalent functional amount is 6,750.00.

  • Sample Company Ltd wants to switch to the Recognized Gain/Loss accounting method as of January 1, 2020.
  • Complete all period-end and year-end procedures.
  • Run Create New Year.

Steps to take in 2019:

  1. In Accounts Receivable, revalue the balances of your accounts receivable.

    Assume that the exchange rate on December 31, 2019 is 1 USD = 1.4000 CAD. Thus, when revaluation is performed in A/R, the following reversing G/L entry is created on December 31, 2019:

    G/L AccountSource CurrencyFunctional Currency
     DebitCreditDebitCredit
    Receivables Control0.000.000.00100.00
    Unrealized Exchange Loss0.000.00100.000.00
  2. In General Ledger:
    1. Open General Ledger > G/L Periodic Processing >  Create Revaluation Batch, and then revalue the balance of USD bank accounts, using 1 USD = 1.4000 CAD as the exchange rate for Year/Period 2019-12.

      The G/L revaluation creates the following reversing entry on December 31, 2019:

      G/L AccountSource CurrencyFunctional Currency
       DebitCreditDebitCredit
      USD Bank0.000.00250.000.00
      Unrealized Exchange Gain0.000.000.00250.00
    2. Open General Ledger > G/L Reports >  Trial Balance Report, and then print the report.

      The report shows the following entries:

      G/L AccountSource CurrencyFunctional Currency
       DebitCreditDebitCredit
      USD Bank5,000.00 7,000.00 
      Receivables Control1,000.00 1,400.00 
      Unrealized Exchange Gain   250.00
      Unrealized Exchange Loss  100.00 
    3. Open General Ledger > G/L Periodic Processing >  Create New Year, and then click Process.

Steps to take in 2020:

  1. In General Ledger, post the reversing revaluation entries created by the 2019 revaluation:
    G/L AccountSource CurrencyFunctional Currency
     DebitCreditDebitCredit
    Receivables Control0.000.00100.000.00
    Unrealized Exchange Loss0.000.000.00100.00
    G/L AccountSource CurrencyFunctional Currency
     DebitCreditDebitCredit
    USD Bank0.000.00100.00250.00
    Unrealized Exchange Gain0.000.00250.000.00
  2. In Common Services:
    1. Open Company Profile, and then click the Options tab.
    2. In the Gain/Loss Accounting Method field, select Recognized Gain/Loss.
    3. Click Save.
  3. In General Ledger:
    1. On the G/L Accounts screen, create new accounts for Recognized Exchange Gain and Recognized Exchange Loss.
    2. On the Revaluation Codes screen, modify existing revaluation codes or create new ones.
    3. Assign the new revaluation codes to the new exchange gain and loss accounts.
  4. In Accounts Receivable:
    1. Modify existing account sets or create new account sets for the USD customers.
    2. Revalue the balances of your accounts receivable.

      In our example, we assume that the exchange rate on January 31, 2020 is 1 USD = 1.6500 CAD. Thus, when revaluation is performed in Accounts Receivable, the following General Ledger entry is created on January 31, 2020:

      G/L AccountSource CurrencyFunctional Currency
       DebitCreditDebitCredit
      Receivables Control0.000.00150.000.00
      Exchange Gain0.000.000.00150.00
  5. In General Ledger:
    1. Revalue the balance of the USD Bank account using 1 USD = 1.6500 CAD as the exchange rate for Year/Period 2020-01. The General Ledger revaluation creates the following entry on January 31, 2020:

      G/L AccountSource CurrencyFunctional Currency
       DebitCreditDebitCredit
      USD Bank0.000.001,500.000.00
      Exchange Gain0.000.000.001,500.00
    2. Print the Trial Balance report.

      The multicurrency accounts display the following values for January 31, 2020:

      G/L AccountSource CurrencyFunctional Currency
       DebitCreditDebitCredit
      USD Bank5,000.00 8,250.00 
      Receivables Control1,000.00 1,650.00 
      Unrealized Exchange Gain   0.00
      Unrealized Exchange Loss  0.00 
      Exchange Gain   1,650.00
      Exchange Loss  0.00 
Important!
  • At the transaction date, each asset, liability, revenue, or expense arising from a foreign currency transaction of the recording entity should be translated into functional currency using the exchange rate in effect at the date of the transaction.
  • At each balance sheet date, recorded balances of monetary assets and liabilities that are denominated in a currency other than the functional currency of the recording entity should be adjusted to reflect the current (spot) exchange rate. The resulting exchange gain or loss should be included (that is, recognized) in the net income for the current period.