I’ve done a lot of work with currency accounting from a systems perspective. Now that I’m working in NAV, I thought it would be useful to explain how NAV works with foreign currency amounts in a series of posts.
In this series, I’ll cover the following topics:
- General Ledger Setup
- Currency Setup
- Exchange Rate Setup
- Entering a Foreign Currency Sales Invoice
- Revaluation (i.e. revaluing the open amount at period end)
- Receiving Cash Against a Foreign Currency Receivable.
In this post, I’ll cover the first three topics: how to set up the general ledger, currency and exchange rates.
I’ll use Cronus Mexico for all my examples.
But before we begin, a couple of clarifying notes:
- With currency, you need to determine if you are transacting in a foreign currency (i.e. billing customers and paying bills in a foreign currency) or whether you are consolidating multiple entities across currencies. Transacting is the more common scenario—companies typically sell across border before they set up legal entities in other countries.
- In this series, I’m focusing on debits and credits. While there are many ways of posting, I’m going to stick with the most common methods. This is a blog post, not a training manual, so I won’t drill into every detail. But if you get stuck, or have a question, please let me know.
By the way, if you’re a little shaky on the topic of currency accounting more generally, you might want to start by reviewing these posts:
- Introduction to Our Series on Complex System Accounting Challenges
- Understanding Currency Accounting: Exchange and Revaluation
- Understanding Currency Accounting: Revaluation and Translation
- Understanding Currency Accounting: A Few Additional Pointers.
Now let’s get started with currency in NAV.
General Ledger Setup
In General Ledger Setup, we need to specify the local currency we’ll be using. (Local currency is the currency of your financial reports in the home country of your company.)
In this example, our local currency (LCY) is MXP:
LCY is an important abbreviation if you’re doing any reporting. You’ll see it in many table column descriptions.
There’s another option in General Ledger Setup for Additional Reporting Currency—but that’s not relevant because we’re just transacting at this point.
Cronus Mexico is setup with currency code “MXP.” But the current ISO standard code for the Mexican peso is “MXN.” (This was changed 23 years ago, but let’s not rush.) It’s important to use current ISO codes if you’re going to work with outside services. (And beyond that, it’s good practice.)
You can find more on the topic of currency codes in Wikipedia.
So, we can see that the system is set up to work in Mexican pesos. But now we need to tell NAV how other currencies relate to it.
We start by navigating to Currencies. And in Cronus Mexico, we see this:
Let’s focus on setting up two currencies: the euro (EUR) and Japanese yen (JPY):
This screen shows a combination of setup data for the currency and the latest exchange rate date (i.e. the last time you updated the rate). The basic currency setup data is pretty stable. The rate data changes as often as your company thinks is necessary (often daily).
Let’s look at the basic currency data. With EUR highlighted, click “Edit”:
And we come to this screen:
The fields we care about are the unrealized gains, realized gains, unrealized losses and realized losses.
Unrealized gains and losses accounts are used at month end when payables and receivables are revalued to the month ending exchange rates. So, if your invoices were entered at any other rate, you’ll get an entry updating the difference.
Realized gains and losses accounts are hit when cash is received against an invoice. A realized gain/loss reflects the difference between how much the invoice was worth in your currency when you issued it and how much it is now worth when currency rates have changed.
I advise you to setup different accounts for each currency you use. This may seem like a pain. But people make mistakes in currency. And the faster you can trace a mistake to a currency, the faster you can find fix it. And having different accounts for each currency makes this process much, much easier.
Rounding amounts and similar things work like other tolerances in NAV. You will often have rounding issues as currency rates are quoted to multiple decimal places while most currencies have two decimal places.
On a side note, notice that Cronus Mexico isn’t set up entirely correct. Look at JPY:
Amount Decimal Places tells the system the maximum and minimum number of decimals to use when storing a currency amount. But Japanese yen don’t use decimals because one yen isn’t worth that much itself. So, you’d probably want to set this to 0:0.
Exchange Rate Setup
Once we have the currencies established, we need to have rates. Back on the currencies screen, we click exchange rates:
Which takes us to the exchange rates page:
Let’s explain how this works.
Currency Code is the currency code you enter on your transaction. In this example, we’re entering a purchase invoice in EUR.
Relational Currency is the currency you want to calculate. If you leave the field blank, the local currency for the company is assumed (in this case, MXP).
Next, we need to enter Exchange Rate and Relational Exchange Rate.
If we want to multiply the foreign currency amount by a rate, we enter “1” in the exchange rate and the appropriate multiplier in the relational exchange rate.
So, in the example above, 1 EUR becomes 13 or so MXP.
In other words, we can think of the rate as 1 EUR = 13 MXP, which works.
But what if we think of it as .07 Euros = 1 MXP?
Then we’d enter “.07” as the exchange rate and “1” as the relational exchange rate, as demonstrated below:
Fix Exchange Rate Amount
You can actually change exchange rates when you enter transactions in NAV. But generally, you should only do this when you absolutely have to. (For example, when you have to post a wire transfer that was converted at a given rate.)
Usually, you should choose Currency if Exchange Rate Amount is set to 1. And choose Relational Currency if Relational Exchange Rate is set to 1. This method leaves it to the user to adjust the other rate.
Exchange Rate Amount vs. Relational Exchange Rate Amount
Exchange Rate Amount is used when you enter your transactions.
Relational Exchange Rate Amount is used at month end when you revalue (or adjust, in NAV terminology) your exchange rate.
Now, let’s return to the main list and click refresh. We then see something interesting:
The screen shows the new exchange rate—but it’s showing it in terms of foreign currency to local currency (even though we entered it the other way around).
Now we’ve completed the setup.
In my next post, we’ll get to transactions.