Description
SoftLedger has the ability to accept any fiat currency on any transaction, and convert that transaction to the reporting currency of the entity. This enables users to book transactions in foreign currencies while maintaining their financial statements in their functional currency. The process of converting transactions from a foreign currency into an entity's functional currency is called remeasurement and is required under GAAP. SoftLedger automatically does this for Ledger Account balances that have been flagged for foreign currency remeasurement. Be sure to see the How do I remeasure foreign currencies support article for a detailed walkthrough on how to set up the remeasurement process in SoftLedger.
Example foreign currency remeasurement case
Below is a simple example of a foreign currency transaction to help illustrate how the remeasurement process works in SoftLedger. Assume the following setup:
Location: US Enterprises
Location reporting currency: USD
Ledger Account: EUR Checking Account 110010
Ledger Account Type: Asset
Remeasure Forex Rates: Enabled
With the above setup, let's review the below transaction in EUR, within US Enterprises, using Account 110010:
DR: EUR Operating Account EUR 10
CR: Revenue EUR (10)
While this Journal was denominated in EUR, SoftLedger will display USD balances in places such as Trial Balance, Financials, etc by storing the foreign exchange rate at the time of the transaction for entries posted in a currency other than the reporting currency.
For this example, let's assume that the EUR to USD forex rate is 1:1 at the time you receive the cash for the revenue earned. In that case, the 10 EUR in the transaction is equal to 10 USD, so the balance for Ledger Account 110010 would be 10 USD when viewing in the USD Enterprises Location (assuming this is the only transaction).
Remeasurement process and result
Assuming this is the only transaction for this account, let's review what would happen when closing the forex task in the accounting periods for January 2022. Within the Admin>Accounting Periods module, if the desired forex rate to use at the end of the month is EUR:USD of 1.1:1, then when closing the Forex Task this would look like this:
Once the forex rates above are approved and the forex task has been closed in the accounting period, the system would review the foreign currency transactions posted to Ledger Account 110010 and create Journal Entries dated January 31, 2022 to convert the foreign currency denominated activity into USD using the inputted forex remeasurement rate of 1.1:1. The end result would look like this:
Forex Remeasurement Journal Entry:
January 31st, 2022 Journal Lines
Dr EUR Checking Account 1 USD
Cr Forex Gain & Loss Account 1 USD
February 1st, 2022 Journal Lines (reversing portion)
Dr Forex Gain & Loss Account 1 USD
Cr EUR Checking Account 1 USD
This would result in the system showing a balance for the 110010 EUR Checking Account of 11 USD when viewing the Trial Balance, Balance Sheet, etc. with an end date or system date set to January 31st, 2022.
This is a simple example with one transaction and one Ledger Account and Location combo, but this same process takes place for all Journal Lines involving an eligible Ledger Account to be remeasured with all Location combos the Ledger Account appears in. This would include the Journal Entry happening at a subsidiary level, and moving up to display in parent level Locations.