Plan Your SAP S/4HANA Finance Implementation with an Understanding of Multicurrency Architecture
- by Muralidharan Sethuraman, Director Enterprise ERP IT Finance, Johnson Controls
- November 16, 2016
Learn about the multicurrency architecture in SAP S/4HANA Finance and discover how to set up the right solution design aligned to Generally Accepted Accounting Principles (GAAP), external reporting, and internal management reporting needs.
Reading this article, you will learn:
- How to set up a multicurrency architecture in the SAP S/HANA Finance template
- Business drivers for functional currency setup in a ledger, as well as technical challenges and solution options in setting up a full-fledged functional currency solution design
- The future SAP roadmap in the area of a multicurrency setup in a ledger
In both the classic General Ledger and the SAP General Ledger, you can define three parallel currencies in FI, two currencies in Controlling (CO), and three parallel currencies in the Material Ledger. With the changing global economic environment, the concept of functional currency has achieved significant importance in addition to local currency (commonly referred to in an SAP system as company code currency) and consolidation (alias group) currency. Many companies have changed operating structures, have expanded internationally, and therefore, transact business in multiple global currencies. The term functional currency comes into relevance based on the currency of the principal economic environment in which the entity operates.
Multinational organizations may consist of entities operating in a number of geographies or economic environments and dealing in a large number of foreign currencies. For such companies operating internationally, one of the key financial reporting needs is to adopt proper accounting for foreign currency matters.
Determining the appropriate functional currencies, accounting for foreign currency transactions, and converting the financial statements of subsidiaries into the parent company’s currency to present a consolidated financial statement are all guided through accounting frameworks prescribed in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Rules for foreign currency measurement and translations are defined in ASC 830, Foreign Currency Matters when a reporting entity conducts transactions in more than one currency and prepares financial statements in a single reporting currency.
The process of handling multiple currencies and updating values in these currencies in real time in a ledger using defined currency translation logic is a standard functionality in SAP ERP. As a first step to understanding the multicurrency architecture in the SAP system, you need to understand some of the key terms associated with different currencies and their definitions (Table 1).
|Business explanation or context
|SAP terminology or definition
|Organizational unit in FI for which a complete and balanced trial balance can be drawn up for external reporting.
||Usually referred to as company code in the SAP system. If for any reasons company code does not represent a legal entity in the SAP system, then there is another term called company. Individual company codes make up the legal entity that is grouped under the company.
||The currency in which a business transaction is processed and booked
||Any globally traded currency identified by the International Organization for Standardization (ISO) currency codes. The SAP system automatically converts the transaction currency to other parallel currencies using specified exchange rates.
|Company code currency (alias local currency)
|Generally used to represent the currency of the country in which the entity is physically located or operates. Generally, local currency sets of books are used for reporting financials in compliance with local ledgers (country statutory Generally Accepted Accounting Principles [GAAP]) and tax reporting purposes.
||Assigned at the company code level (first currency).
|Currency in which the group balance sheet is displayed. Generally used for consolidation in the SAP system.
||Assigned at the client (highest) level. You can specify it as a parallel currency (additional local currency) for a company code.
|Controlling (CO) area currency
||Currency used for cost accounting purposes, currency in which cost centers, internal orders, and projects are managed and reported.
||This currency is set up when the CO area is created. The best practice recommendation is to set this to group currency especially in a multicurrency scenario.
|A currency defined in the master record of a CO object (cost center, internal order, and so on).
||Automatically sets to company code currency 1 (defined as local currency) by default.
|Global company currency
|Generally used for consolidation in the SAP system. Assigned at the company level that can be used to group company codes into a hierarchy.
||You can specify it as a parallel currency (additional local currency) for a company code. You need to store the global company currency in the detail screen for the corresponding company.
Country-specific currency stipulated in certain countries with high inflation for tax returns. Assigned at the country level.
|You can specify it as a parallel currency (additional local currency) for a company code if it is specified as index currency in the detail screen for the corresponding country.
|Hard currencies are used in countries with high inflation to improve the value of transaction. Assigned at the country level.
||You can specify it as a parallel currency (additional local currency) for a company code if it is specified as hard currency in the detail screen for the corresponding country.
A list of key currency types in the SAP system
In most cases, company code (local) currency is the external reporting currency in which a legal entity prepares its financial statements for US GAAP or International Financial Reporting Standards (IFRS) reporting. However, it’s possible that local currency might not be acceptable for US GAAP or IFRS reporting if the cash flows are generally transacted in a currency other than the local currency. In these cases, a functional currency is assigned and US GAAP or IFRS reporting must be conducted in the functional currency.
In the next section I explain in more detail the concept and business definition of functional currency in line with ASC standards.
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