Foreign Currency Revaluations - AP and AR accounts

Background

When migrating financial data, accurately handling foreign currency revaluations for open Accounts Receivable (AR) and Accounts Payable (AP) balances is crucial. At the end of each month, companies often have outstanding balances owed by customers or to vendors in multiple currencies. The exchange rates used to calculate the value of these outstanding receivables and payables may have changed since the invoices were originally issued.

To account for these fluctuations, a foreign currency revaluation process adjusts the value of all outstanding receivables and payables based on the current month-end exchange rates. This results in adjustments to the AR and AP balances and corresponding postings to the Profit and Loss (P&L) statement under unrealized foreign exchange gains or losses.

Best Practices for Migration

When loading transactions into a new system during migration, it's best practice to:

• Load Transactions with Original Dates and Exchange Rates: This ensures that AR and AP reports in the target system remain consistent with those from the source system.

• Match Month-End Exchange Rates: Ensure that the month-end exchange rates in the target system match those in the source system.

• Run Foreign Currency Revaluation in the New System: After loading the outstanding balances, run the foreign currency revaluation process to verify that the results match exactly with the source system.

Challenges

This approach can present challenges, especially in scenarios involving company acquisitions or mergers. Combining multiple subsidiaries makes it difficult to confirm that the foreign currency revaluation process has produced the correct results due to the complexity of merged financial data.

Alternative Approaches

Depending on whether the situation involves an acquisition or a merger, different strategies can be employed:

Asset Acquisitions

In acquisitions where only assets are purchased, open balances can be loaded with each invoice using the month-end exchange rate. This simplifies the reconciliation process, making it easier to confirm that balances match between the source and target systems. However, it's essential for the finance team to confirm that this method aligns with accounting policies and regulatory requirements.

Mergers

For mergers involving the consolidation of P&Ls, consistency in postings to unrealized gains and losses is necessary. Running the foreign currency revaluation in the target system for imported transactions can be challenging because it's difficult to isolate which revaluation entries relate to the migrated transactions.

In this case, consider the following steps:

1. Create a Saved Search in the Source System: Generate a report that details what the revaluation amounts should be based on the source transactions.

2. Load Transactions at Original Exchange Rates: Import transactions into the target system using their original dates and exchange rates to maintain historical accuracy.

3. Adjust AR/AP Balances with a Journal Entry: The AR and AP account balances on the imported opening balance trial balance will differ from the imported transactions since the trial balance reflects month-end rates. Load a journal entry to adjust for this difference, similar to the reversal journal the system would create if you had run the foreign currency revaluation process.