Conversion components

Currency conversion involves many components that determine how one currency is translated into another currency. Components can differ based on regulatory rules and industry segment where a company is doing business:

• Period, or point in time, is important because it determines which exchange rate applies.
• Local currency is the currency typically associated with the geographical location of the organizational unit. For example, New York uses USD, Paris uses EUR, London uses GBP, Vancouver uses CAD, etc.
• Exchange rate is the value that is multiplied (or divided) by the local currency amount to produce an equivalent amount in another currency. Exchange rates must be entered for each period in the fiscal year. If there is more than one exchange rate set, exchange rates must be entered for each rate set.
• Exchange rate set is the collection of exchange rates for the fiscal year. Each rate set reflects a different version of exchange rates typically used for currency impact reporting (for example, Actual Rate or Budget Rate).
• Rate type is assigned to a schedule line to support line-by-line translation. For each exchange rate set, there is one exchange rate per period for each rate type (for example, Average Rate, Period End Rate, Historical Rate).
• A translation method is the mathematical equation used with the exchange rate to calculate a currency amount. There are four main translation methods, listed here. Data is stored as periodic (as opposed to year-to-date) and translates the values, as follows:
  • Period End translates at the current rate for the period and is used for balance sheet or profit and loss lines. This method uses this equation:

    Periodic value = (local periodic value for current period) * exchange rate

  • Year-to-Date @ Current Month translates profit and loss lines using an average rate for the year (including the current period rate). This translation method first computes the untranslated year-to-date (YTD) amount for the current period. It then translates that amount by the average exchange rate. Finally, it calculates the translated periodic amount for the current period by subtracting the previous period's translated year-to-date amount from the current period's translated year-to-date amount. This method uses these equations:

    YTD local value = (local periodic value for current period) + (local YTD value for previous period)
    
    YTD translated value = (local YTD value for current period) * (YTD average exchange rate)
    
    Periodic translated value = (YTD translated value for current period) - (YTD translated value for previous period)

  • No Translation should be used for lines that should not be translated, such as volumes or ratios.
  • Historical Balance Forward safeguards historical data that should not be translated at today's rate but must hold the translation from a previous historical period (such as acquisitions). This is typically done by using a beginning or opening balance that pulls the data from the previous period for both local and translated data. This ensures that the data is always equal to the historical translation and is not re-translated at the current rate.