How to Comply with IAS 21 When You Record Foreign Currency Transactions

  • by Harsh Mathur, Senior Consultant, Infosys Limited
  • July 10, 2012
Learn how to set up foreign currency valuation and foreign currency translation in SAP ERP Central Component (SAP ECC) 6.0 following the rules prescribed in International Accounting Standard (IAS) 21. The rules apply to organizations following a dual reporting format (i.e., reporting as per International Financial Reporting Standards [IFRS] and local US Generally Accepted Accounting Principles [GAAP]) using the SAP General Ledger functionality.
Key Concept

Dual reporting is a format in which an entity is required to report as per multiple accounting principles at the same time. This reporting format may be applicable in an SAP system for both the Classic GL, as well as the SAP General Ledger. However, the SAP General Ledger has made dual reporting more convenient due to the introduction of multiple ledger concepts.

International Accounting Standard (IAS) 21, which is titled “The Effects of Changes in Foreign Exchange Rates,” prescribes rules for foreign currency valuation and foreign currency translation. It was issued by the International Accounting Standards Board (IASB). Foreign currency valuation is the recording of foreign currency transactions in functional currency. Foreign currency translation is the translation of a foreign operation into presentation currency. The SAP General Ledger functionality of SAP ERP Central Component (SAP ECC) 6.0 provides the capability to comply with the rules of IAS 21 with respect to foreign currency valuation and foreign currency translation in an organization following a dual reporting format.

The Classic GL can meet IFRS requirements, but in the situation in which an entity has to maintain financial statements as per multiple accounting principles, revaluating and posting foreign exchange differences can become a challenge. The SAP General Ledger simplifies this process significantly by linking the revaluation with multiple ledgers. The Classic GL does not support this feature.

A multinational organization may have to deal with foreign currencies in two different situations. One of the situations arises when that organization has to record transactions in a foreign currency. For example, A US-based, multinational company having US dollars as its functional currency also has to record transactions in a foreign currency, such as the Japanese yen. IAS 21 prescribes rules for recording such foreign currency transactions in the functional currency (i.e., foreign currency valuation).

Harsh Mathur

Harsh Mathur is a senior consultant at Infosys Limited, a consulting and IT services major. By qualification he is a chartered accountant and a member of the Institute of Chartered Accountants of India. He carries 10 years of experience with expertise in SAP financials and controlling. He has worked on implementation, upgrade, and support projects for clients primarily in the high-tech industry.

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