FOREIGN CURRENCY VALUATION:

Before creating Financial Statements , we have to perform Foreign Currency Valuation for the
Transaction done in Foreign Currency .

So at the year end ,there could be some revenue or expense due to exchange rate fluctuations
which will be reflected in the Financial Statements.

If your company manages amounts in foreign currencies, you have to perform a foreign
currency valuation in order to create your financial statements. Foreign currency valuation
covers the following accounts and items:

Foreign currency balance sheet accounts, that is, the G/L accounts that you manage in foreign
currency.

1. The balances of the G/L accounts that are not managed on an open item basis are valuated in
foreign currency.

2. Open items that were posted in foreign currency.

3. Open items that are open on the key date are valuated in foreign currency.

In foreign currency valuation, you have the following options:

1. You can perform the valuation in the company code currency or a parallel currency (for
example, the group currency).

2. You can also use different valuation methods (for example, lowest value principle).

3. If you translate an additional currency from the company code currency, foreign currency
valuation automatically performs a currency translation in accordance with the set of books
assigned (such as US GAAP or IFRS).

What happens when we run FCV

When a foreign currency valuation is done in SAP, all open items and balances in a foreign
currency will be converted to local currency using the current exchange rate maintained in the
system. After taking FCV run SAP creates two postings.

After taking FCV run SAP creates two postings. One for actual valuation at the month-end and
the other for reversal on the next day i.e. first day of next month (depends on configuration),
but sometimes next period is not open for the reversal postings, so SAP only creates one
posting. Now if you have taken the valuation run via batch input then you can open the period
and continue with the batch run.

If no batch run were selected then have to manually reverse the postings on the next day with
the only transaction code FBB1. This transaction does not post balance in other currencies than
the local one.

Scope of Foreign Currency Valuation

Generally, currency valuations cover the following:-

Customer open items, Vendor open items, and General Ledger Open Line items, Managed in
foreign currency. (Each document is evaluated separately and the valuation posted with
gain/loss)

Other General Ledger Balance Sheet Accounts Managed in Foreign Currency, but not flagged as
open item management accounts. (Only the balance of G/L account is valuated and gain/loss is
posted)

Foreign currency valuation is only done for Balance sheet G/L accounts

We need to determine G/L accounts for open item managed G/Ls and for G/Ls which are not
managed as open item basis

The above set up is must if you want to valuate any G/L account.

Exch. Rate Diff. using Exch. Rate Key – KDB :- Here we set G/L account for the G/L accounts
which is not managed as open items

Exchange Rate Dif.: Open Items/GL Acct – KDF :- Here G/L account is set for open item managed
G/Ls

Let’s see the account determination for KDB account key:

Now if we double click on the KDB account key, the system will ask you to enter the chart of
account – so the account is determined on chart of account level, correct?

But in below screenshot you can see, we have option to choose valuation area (highlighted
field)

So we can set G/L account on Valuation area + chart of account level (Note: Valuation area is
optional and mostly G/Ls are not set per valuation area)

In above screenshot the G/L accounts for realize exchange rate gain and loss are maintained
with exchange rate difference key.

As said earlier this setting is used for the G/L accounts which are not managed as open items, so
now let’s link this customizing to the G/L account:
Here in the control data tab of G/L account, we can assign the exchange rate difference key.
Based on this key; G/L accounts for loss/gain will be determined.

The above G/L account does not have an open item management tick. But even if this account
has that tick, the system will not restrict you to assign this key in G/L and neither considers it in
valuation.

Account determination for account key KDF

This setup is required for open item managed G/L accounts

From the above snapshot, it can be considered that each and every G/L account needs to be
configured, when its managed as an open item basis; unlike the previous one, where we just
create exchange rate keys and then assign it in G/L master data.

Account key KDF can also be maintained on valuation area level.

The highlighted area in the above figure explains how/on what basis G/L accounts can be
determined.

We have below possibilities to set the G/L account:

For the G.L account

For G/L and currency combination

For G/L and currency type combination

There are two options for assigning Loss and Gain G/L accounts:
The G/L accounts which are managed on open item basis, needs a clearing.

For e.g. vendor invoice is booked on 01.01.2020 it is stored as open item and cleared when
payments made against the invoice.

Let’s say the payment against the invoice is made after two months on 04.03.2020

Now when the valuation run is taken on the 31.03.2020 system calculates the difference
between the exchange rate of Invoice booking date and the rate of clearing date

And the difference is posted to exchange rate difference realized account (Highlighted in above
screenshot)

But what about the valuation runs comes between the invoice booking date and clearing date:
In the above example invoice was booked on 01.01.2020 and not cleared till 31.01.2020

But still we need to evaluate the balance of vendor in the month end, in order to have correct
financial reporting to local tax authorities.

So this time system calculates the exchange rate difference of invoice date and the date on
which valuation run is taken

And the difference is posted to valuation G/L accounts (highlighted above)

We have one more option to set Balance sheet adjustment account

In most of the cases, we know the valuation difference is calculated and reversed in the next
month, so there might be a requirement to not book these differences on the same G/L
account, instead, post to the separate G/L account.

In that case we will assign different Balance sheet adjustment account otherwise the same G/L
Account should be maintained.
And now the last section: Translation –

This field is used to translate the balances into group currency. We will discuss this in separate
blog.

Transaction FAGL_FC_VAL
If the create posting is not ticked then transaction will be executed in test mode

Executing the transaction with batch input session helps many times, several times error does
not appear in a test run and comes at the time of direct posting

In those cases system stores the data in batch input which is not posted and you can rectify the
error and run the session
Variant configured here impacts on the displayed output after executing the transaction. We can
configure user-friendly variant, easily as per the requirement.

If the save log button is not ticked, then it’s almost impossible to track the valuation runs, so
make sure the end-user is applying this check-in each evaluation.

Conclusion

This brings us to an end of this blog post. We will quickly recap the points covered here:

FAGL_FC_VAL valuates the Balance sheet GL items and the valuation difference is posted to
different accounts based on Master data setup and configuration

Valuation run ended with errors can be processed further from batch input

Save the logs of each valuation run to identify/revisit the errors

Hope you like reading this blog, do mention your suggestions in comment section.

Currency Exchange Rates in SAP

Realistically, a company may have transactions in different currencies. If a company is based in

Europe and purchases from a foreign vendor based in United States, you would expect 2 (two)
different currencies involved in the financial transaction.
In this scenario the two currencies are: EUR and USD. SAP in turn should be able to handle this
transaction with different currencies through the exchange rate functionality. This is of course
considering that the necessary maintenance and configuration is accurately setup in the SAP
system.

What is the purpose of exchange rate functionality in SAP? Why do we have to maintain
exchange rates in SAP?

3 Purposes for Exchange Rates in SAP

As stated in the Exchange Rate SAP Help Document, there are three purposes:

Posting and Clearing

Exchange Rate Differences

Foreign Currency Valuation

Posting and Clearing

To translate amounts posted or cleared in foreign currency.

To check a manually entered exchange rate during posting or clearing.

You want to see the converted amount of the concerned currencies during posting and clearing.

When you go on a vacation in a foreign country (for example: South Korea) you will most likely
check the exchange rate and do a conversion for the items you will pay for in KRW currency to
your local currency.

Exchange Rate Differences

To determine gains or losses from exchange rate differences.

Exchange rate frequently changes.

The exchange rate today may not be the same exchange rate tomorrow. Thus, you will expect
some differences.

In turn, SAP should be able to handle those differences.

It is possible that during the time of payment, you may have differences in the amount. It could
either be a gain or loss due to exchange rate differences.

Foreign Currency Valuation

To valuate open items in foreign currency and foreign currency balance sheet accounts as part
of the closing operations.
Recall that we do this during period end close or as part of financial closing tasks.

Configuration and Maintenance of Exchange Rate in SAP

OY03 – Currency Maintenance

You first need to maintain the needed foreign currency (KRW). This also considers that the
company’s local currency is maintained as well (EUR). Example provided below on the foreign
currency KRW.

Note: Alternative Key for Currency is only utilized in Spain and Belgium. Here you can define a
key term for currencies which differ from the currency key and ISO code.

he primary checkbox denotes Primary SAP Currency Code for ISO Code. You may click on the
checkbox and press F1 for more information.

OY04 Define Decimal Places for Currency Codes

In case needed, you can define the decimal places for the concerned currency. In our case, we
have set it to 0.

OB07 Maintain Currency Translation Exchange Rate Types

Here we defined Exchange Rate Type M for Standard translation at average rate.

Reference Currency: Currency key which should be used for all foreign currency translation for
the exchange rate type in question.

Buying and Selling rate: Exchange rate type whose average rate is used to determine the
buying / selling rate.

Inverter exchange rate: Indicator that in the case of a missing exchange rate entry in the system
for the required translation from one currency into another, the inverted exchange rate
relationship may also be used. If KRW to USD is missing, SAP can use USD to KRW.

Exchange rate type uses special translation model: If you set this indicator it means that the SAP
System internal translation modules calculate using a different algorithm. The algorithm has
been adjusted to meet the European Monetary Union statutory guidelines. The indicator must
be set if the statutory conversion rules agreed by the participating countries in the EMU are to
be used.

Fixed: Describes an exchange rate type that works with fixed exchange rates. Exchange rate
fixing affects the application if exchange rates are to be calculated from currency amounts you
have entered. Manual input of exchange rate during transaction.

OBBS – Currencies Translation Ratios

We maintain the translation ratios for the purpose of understanding the relationship between
currencies. It is maintained per exchange rate type and currency pair.

Inflation impacts the relationships between currencies, so translation ratios are maintained on a
time period basis. This maintenance is done way less than the succeeding maintenance of
exchange rates as the rates fluctuate daily.

For example, USD to GBP and USD to JPY will have different translation ratios.

USD to GBP will have a ratio of 1:1 because 1 USD is 0.79 GBP

USD to JPY will have a ratio of 1:100 because 1 USD is 107.77 JPY

In our case, KRW to EUR will have a ratio of 1:1 because 1 KRW is 0.00074 EUR

IMPORTANT: Pay attention to the validity date of your maintenance. Ensure they are consistent
with one another.

OB08 – Currency Exchange Rates

OB08 can also be accessed by S_BCE_68000174. On a high-level note, the concept of exchange
rate maintenance would follow the table below.
In the screenshots, you will notice that Ratio (from) and Ratio (to) are greyed out as it is covered
in the previous maintenance in OBBS.

You will also notice columns called Indirect quotation and Direct quotation.

Transaction Code FAGL_FCV or Transaction Code F.05

By going to transaction code FAGL_FCV, you will see the screen below.

You can indicate the necessary parameters (through the tabs) to narrow down the scope and/or
focus on certain items only. IMPORTANT: Be sure to select “Execute Test Run” first to get an
overview of the results.
Valuation Key Date Notes –Foreign currency valuation considers documents that have a posting
date before the key date and that have not yet been cleared by the key date. Open item
management must be activated for the corresponding account.

Serves as the Key Date for the foreign currency valuation.

Valuation of Open Items – Foreign currency valuation considers documents that have a posting
date before the key date and that have not yet been cleared by the key date. Open item
management must be activated for the corresponding account.

Valuation of G/L Account Balances – Posting period and fiscal year are determined for the
specified key date. Foreign currency valuation considers for this period the account balance that
is cumulated in the relevant fiscal year. The following dependencies apply:

If the key date falls in period 12, the balances of special periods 13-16 are also considered.

In the case of P&L accounts, you can set up the program so that it only considers the current
period balance.

Valuation Area Notes – You can click on the field in SAP and press F1 on your keyboard to read
the information.
Valuation Area for FI Year-End Closing

Valuation areas are used in Financial Accounting for closing preparations. They enable you to
use different valuation approaches and post to different accounts.

CAUTION: In foreign currency valuation, the saved valuation differences are not used to
calculate the realized exchange rate differences.

If you are okay with the test results, you can choose from the available options: “Post Valuation
Immediately” or “Place Valuation in Batch Input Session”. Ideally, you may want to opt for the
Batch Input Session to keep track or have some additional control before posting is final.

In the screenshot below, I entered “MEC_P05_FCV” as the Batch Input Session Name so I can
quickly identify which Session to process.

Tip: You can also process the session in foreground so you can visualize what SAP is doing for
the valuation posting.

If you need to undo or reset the FCV postings, enter the same parameters and select the “Reset
Valuation” checkbox.

For those who are using classical ledger, you can use transaction code F.05 where you will see
the sample screen below.

Valuation Method in this scenario is set to “OPN” which can stand for Open Item Valuation for
example.

Valuation in Currency Type in this scenario is set to “10” which can stand for Company Code
currency for example. This would consider Company A’s Company Code 0001 currency of EUR.

Similar to the previous explanation, you can filter out or narrow down you scope according to
your need by specifying the values in other tabs such as Open Items, GL Balances, etc. You can
also enter a batch input session name to quickly isolate the session in transaction code SM35.

The results would look something like this: You will see the currency, revaluation rate, exchange
rate, old difference, new difference, etc.
Valuation Method:

It determines the method with which a foreign currency valuation is to be performed as part of
the closing procedures. An example of a method is the lowest value principle.

Lowest value princple

Indicator that the items are valued according to the lowest value principle.
The valuation is only displayed if the valuation difference between the local currency amount
and the valued amount is negative, that is an exchange rate loss has taken place. The valuation is
calculated per item total. Items with invoice reference are viewed together.
A valuation principle in which the lower of two possible valuation rates either MUST be used
(strict lowest value principle) or CAN be used (moderate lowest value principle

Strict lowest value principle

If this field is selected, the item is valued according to the strict lowest value principle.
The valuation is only displayed if, as a consequence, the new valuation has a greater devaluation
and/or a greater revaluation for credit entries than the previous valuation.
The valuation is calculated per item total. Items with the same invoice reference are viewed
together.

Post per line item

Normally the valuation results are posted in a summarized form. If you select this parameter, a
line item is generated for each valuated item in the valuation posting as well as in the adjustment
account, such as the expense or revenue account.

Balance Valuation for Open Items

If you select this parameter, open items are balanced per account or group and currency. The
balance is valuated according to the valuation method. The valuation difference is posted as an
expense or revenue (per account, only revenue OR expense).
If you do not select this parameter, the open items are summarized and valuated per reference
number. If there is no reference number, each line item is valuated individually. The differences
that arise are posted as an expense or revenue (per account, expense AND revenue).

Example: 3 line items: A, B and C

A Reference number 1 100 USD 190
B Reference number 1 30-USD 50-
C No reference number 10 USD 15
1) No balance valuation, lowest value principle, spot exchange rate 1.8
Total from A + B 70 USD 140 DEM Valuation difference 14- DEM
( 70 * 1.8 = 126 126 - 140 = - 14)
C 10 USD 15 DEM No valuation, due to lowest
value principle

2) Balance valuation, lowest value principle, spot exchange rate 1.8

Total A - C 80 USD 155 DEM Valuation difference = 11- DEM
(80 * 1.8 = 144 - 155 = - 11)
The total is posted as an expense.

3) No balance valuation, revaluation and devaluation, spot exchange

rate 1.8
Total A + B 70 USD 140 DEM valuation difference 14- DEM
( 70 * 1.8 = 126 126 - 140 = - 14)
C 10 USD 15 DEN valuation difference +3 DEM
Postings, expense 14 DEM, revenue 3 DEM

Determine exchange rate type from account balance

If you select this field, the account balance/group balance in the relevant foreign currency is
used to determine the exchange rate type.

Exchange rate type from invoice reference balance

If you select this field, the balance per invoice reference number and currency is considered for
the exchange rate type determination.
Reset Valuation Run: In this case open items are valuated at the acquisition price. This way the
valuation difference is set to zero. This is useful to reset previous valuations