If a business uses multiple currencies, it must correctly account for foreign currency transactions in its financial statements.

In FirstBIT ERP, the company can have the following two special currencies:

• Accounting Currency: Generally, it is the currency in which all the transactions are recorded and the company's financial statements and reports are presented. For each transaction, that uses a currency other than the accounting currency, all the amounts are also calculated in the accounting currency.
• National Currency: The currency of the country where the company's business is located. For all other currencies, the exchange rates are specified with respect to the national currency. For most small and midsize companies, the national currency also serves as the accounting currency.

Note, that in FirstBIT ERP the same accounting currency is used by all the entities if multiple entities are enabled and created.

National and accounting currencies can be selected on the Administration > Settings > Money form.

Generally, the exchange rates that measure the amounts of foreign currencies in terms of the accounting currency change over time, and the company must periodically revalue its assets and liabilities by using actual exchange rates.

Defining Exchange Rates

You can enter the actual exchange rates for all currencies with respect to the national currency on the Money > Master Data > Currencies form by using the Currency Rates link on the top of the form. For more details, see Adding an Exchange Rate.

In case when accounting currency is not the national currency, you will need to determine the exchange rate of a transaction currency with respect to the accounting currency  (that is, cross rate) based on two other exchange rates:

• Exchange rate of transaction currency to the national currency
• Exchange rate of the accounting currency to the national currency

Example. An American company is located in Dubai and has the US Dollar as its accounting currency. The national currency is Dirham, AED.

The current exchange rates for EURO to AED is 4.5 and for US Dollar to AED is 3.6.

To calculate the transaction amount of 1000 EURO in the accounting currency (which is the US Dollar), you need to perform the following operations:

1. Calculate the cross rate of the EURO to the accounting currency (US Dollar).
   4.5/3.6 =1.25
2. Multiply the transaction amount, 1000, by the cross rate, 1.25. The resulting amount is $1250.

Calculation Modes

The gains or losses resulted from fluctuations of exchange rates (that is, exchange differences) can be calculated in the following two modes:

• On posting of each new transaction and during the month-end closing process.
• Only during the month-end closing process – the calculations performed for each new transaction during the period will be skipped.

To switch between these calculation mode, you can use the Calculate Exchange Rate Differences on Month Closing Only option on the Administration > Service Settings > Money form.

Month-End Calculation

Month-end calculation of exchange rate differences is performed in both calculation modes.

To include the revaluation for foreign-currency accounts and calculation of gains and losses due to exchange rate fluctuations in the month-end closing process, you need to select the Calculate Exchange Rate Differences option on the Accounting > Service Tools > Month-End Closing form. You can review the results of the calculation and corresponding journal entries in the generated Month-End Closing document when you click the button. For more information on month closing, refer to Month-End Closing Service Tool. 

During month-end closing process, balances of GL accounts maintained in foreign currencies (other than the accounting currency) are revalued by using the current (month-end date) exchange rates. For example, revaluation involves GL accounts in the following sections:

• The Cash and Cash Equivalents section of COA: cash and bank accounts, the PDCs Received account.
• The Trade and Other Current Receivables section of COA: the Current Trade Receivables from Customers account, the Deposits Paid to Suppliers account.
• The Trade and Other Current Payables section of COA: the Current Trade Payables and Deposits from Customers accounts.
• The Staff Settlements (Liability) section of COA: the Staff Salary Settlements and Unpaid Employee Business Expenses accounts, the PDCs Issued account.
• The Staff Settlements (Assets) section of COA: the Prepaid Employee Business Expenses account.

Your organization may have foreign currency accounts in other sections of COA which also will be revalued.

The following example demonstrates how a bank account is revalued  during the month-end closing.

Example. 

On June 30, the bank account had a balance of 23,000 EURO; the exchange rate with respect to the accounting currency (UAE Dirham) was 4.40. The balance in the accounting currency is 101,200 Dirham.

On July 10, the organization received a lump sum of 15,000 EURO for a completed project. The exchange rate actual on July 10 was 4.42. The received sum in the accounting currency was recorded as 66300Dirham. Current balance in the accounting currency becomes equal to 167500 Dirham.

During month-end closing process, the account balance is revalued in the accounting currency with the exchange rate of 4.45 in effect on July 30. The balance in the accounting currency is 169,100 Dirham.

The gain of 1600 Dirham is recorded. The gain is calculated as follows:
169,100 - 167500 = 1600
___________________________________

Notice that the data to GL bank and cash accounts are posted with the following information:  Entity / Bank (Cash) Account / Currency. Records posted to GL accounts in the Payable and Receivable sections of COA are structured as follows: Entity / Company / Contract /  Document.  Thus, for Payables and Receivables, the revalued balances and gains/losses are calculated at the document level. For accounts from other sections of COA, the structure of the account balances depends on the COA section.

Gain or loss resulted from exchange rate fluctuations for a document is calculated as follows:
1. The document amount is revalued based on the exchange rate of the foreign currency with respect to the accounting currency on the date of month end.
2. Gain or loss is determined as the difference between the document amount in the accounting currency on the month-end date and the document amount on the last revaluation date that can be the transaction date if the document was posted during the current month or the previous month-end closing date if the document was posted earlier. If the difference is greater than 0, the gain is recorded; otherwise, the loss is recorded.

Realized gains (losses) for transactions that were paid during the period are also calculated during the month-end closing, using the exchange rate on the date of payment.

Calculation during the current period

If the Calculate Exchange Rate Differences on Month Closing Only option is not selected on the Administration > Settings > Money form, the exchange rate differences are calculated additionally during the period as follows:

• For each new foreign currency transaction, the amounts are also recorded in the accounting currency by using the exchange rate effective on the transaction date. If this calculation is initiated for instance by an Invoice or Invoice Received, no exchange differences are calculated for the particular document. However, simultaneously, all the foreign currency transactions associated with the related contract, balances of GL accounts (involved in the transaction) are revalued based on the actual rate, and this date becomes the last foreign currency revaluation date for the transactions that were adjusted.

• If the calculation is initiated by an outgoing or incoming payment, for instance Cash Receipt or Cash Payment, the amounts of exchange differences are calculated for the particular document if the exchange rate on the date of payment differs from the rate on the date of original transaction (sales or purchase). Again, simultaneously, all the foreign currency transactions associated with the related contract, balances of GL accounts (involved in the transaction) are revalued based on this rate, and this date becomes the last foreign currency revaluation date for the transactions that are adjusted.

Default GL Accounts

If the total amount of gain or loss (incurred due to exchange rate differences) is in the interval (-0.005, +0.005) no gain or loss is registered.

If the resulting sum is equal or greater than 0.005, the sum is posted to the default account selected in the Gains on Exchange Differences column on the Accounting > See Also > Default GL Accounts form. You can use the same default "Gain" account for all entities, or you can select separate accounts for entities.

If the resulting sum is equal or less than -0.005, the sum is posted to the default account selected in the Losses on Exchange Differences column on the Accounting > See Also > Default GL Accounts form. You can use the same default "Loss" account for all entities, or you can select separate accounts for entities.