Description
SoftLedger is a multi currency system that can create transactions in all fiat currencies and convert them to the reporting currency of your Locations.
It uses a foreign currency rate provider to bring in all daily currency pair values. At the end of each month, you can choose to provide a different rate for currency pairs when closing the Forex Accounting Period. This action will create month end reversing entries that can set balances to be converted based on the inputs entered into the Forex Task at the close of a monthly accounting period.
See the full process below, and consider reading our in-depth article on the topic: Foreign Currency Revaluation: Definition, Process, and Examples
How does it work?
Step 1: Determine which Ledger Accounts need to be remeasured
The system will check to determine which Ledger Account balances are to be remeasured at month end when closing the Forex Task in the Accounting Periods module with the following criteria:
Ledger Account setting for “remeasure_fx” = true
Ledger Account has Posted Journals booked in a posted currency that is different than its Location's reporting currency
Ledger Account has Posted Journals with “posted_date” less than or equal to this Accounting Period's end date (e.g. Journals prior to the close of any period, such as January 31st, 2022)
Step 2: Calculate what each currency balance should be
Once it is known which Ledger Accounts need to be remeasured, the system replaces the transaction rate used at time of transaction with the inputted forex remeasurement rate at month end to determine what each posted currency balance should be. The process:
Recognize the balance for each posted currency used for the Ledger Account in each Location from the existing transaction rate used for all Journal Entries.
Record what the balance for each Ledger Account in each Location would be if the user inputted remeasurement rate had been used instead of the original transaction forex rate.
Calculate the difference between existing balance and the newly calculated remeasured balance and sum up in each Location for all Ledger Accounts marked to remeasure to know what values will be entered in the Journal Entries in the next as a gain or loss.
Step 3: Create reversing Journal Entries between existing and new remeasured balance
Once the delta between existing balance and new remeasurement balance is known, the system will book Journal Entries with the Ledger Account being remeasured, and the Forex Gain/Loss Account stored for the Location. If there is a gain from the forex fluctuation, the forex account will be used on the credit side, and if there is a loss, then the forex account will be used on the debit side.
These entries are booked for the last day of the month for the accounting period being remeasured (e.g January 31st for a January close) and then reverse on the following day (e.g. February 1st). See the example forex revaluation article to get an idea of what this looks like.
Step 4: Repeat the above process for each Ledger Account balance in each Location
This process is started at the lowest level Location and then works its way up to parent Locations, all the way up until the Global Location.
Note: If using Forex Remeasurement, Ledger Accounts set to remeasure should be set to the Global Location with access to Child Locations, since this account needs to be accessed by all Locations up the tree to enter the Forex Remeasurement reversing entries. This process will also create reversing Journals in the Global level Location so balances are in accordance with the user inputted forex remeasurement rates all the way up to the most Global consolidated level.
The Full Process for Forex Remeasurement
Identify all Ledger Accounts to be remeasured
The first step is to determine which Ledger Accounts are to be remeasured. In general, this is any balance sheet account you expect to have a posted currency different than the reporting currency of your Locations.
Note: Only balance sheet accounts (Type: Asset, Liability, or Equity) can be remeasured. Income statement accounts do not carry cumulative balances and therefore should not be remeasured.
For any Ledger Accounts that need to be remeasured at month end, ensure that Remeasure Forex Rates is checked when creating or editing Ledger Accounts under Financial>Accounts:
Set the Forex Gain/Loss Account
Before closing the Forex module for any Accounting Period, be sure that you have the Forex Gain/Loss Account set under the Location details available under Financial>Locations for each Location. This is the account that will be used when calculating gain or loss from foreign currency fluctuations, and will be on the other side of the Ledger Accounts chosen to be remeasured in the previous step
If you would like to use a different Forex Gain/Loss Account for each Location within SoftLedger, you can set a Ledger Account under the Location details in Financial>Locations.
Remeasure Forex Rates
Under the Accounting Periods section, click the lock button icon under Forex, for the period you want to close. For any Locations with transactions booked in currencies that are different than the reporting currency for that Location, you have the option to set a new rate:
Once you add or accept your rates for all pairs, you then navigate to the Approve Re-Valuations tab in the same screen (as indicated below) and click "Post Remeasurement and Close FX":
Once you click Save Rates and then Approve Re-Valuations, the following will happen (see the How it Works section above for more details):
A Journal Entry will be recorded for any gains and losses resulting from the change from the original transaction rate
The balance for any Ledger Accounts set to be remeasured will be adjusted accordingly
Important Considerations
This is ONLY for Balance Sheet Type Ledger Accounts (Type: Asset, Liability, Equity)
Remeasurement Entries are reversing, and should be done each monthly close
If you start remeasuring a Ledger Account and want to stop, you would need to reopen previous accounting periods past the point of the first time a Ledger Account was remeasured to reverse this process.