Managing Future Rate Agreements

Outcome

An agreement is made with the company's bank regarding which currency and rate to use when completing the transaction with the customer or supplier. This agreement is formalized in a future rate agreement.

The agreement is registered in M3 as belonging to one of two types: Purchase agreement or sales agreement. It can be reviewed in 'Future Rate Agreement. Open' (RMS120). Any invoices pertaining to the transaction are connected to the agreement and followed up. Use this registered information to keep your profit and loss reporting updated.

As an outcome of this process, the registered agreements are saved in the future rate agreements file (CFUEXC). For all invoices connected to a future rate agreement, the agreement number is stored per invoice in the accounts receivable detail file (FPLEDX) and the corresponding accounts payable file (FSLEDX).

Before You Start

• The financial system must be configured as described in the following:

• You must have identified the possible risk factors for the transaction(s): The foreign currency exposure, how much of your earnings are coming from abroad, against how much is your expenditure going abroad.

Follow These Steps

1. Make a Contract with Customer or Supplier

   Agree to sell or buy goods at a certain price in a certain currency, specifying the payment date.

2. Enter into a Future Rate Agreement with Your Bank

   Contact the bank and enter into a future rate agreement stating that a certain rate is to be used when the payment is exchanged, among other things. You can ask for an agreement for the next day or the next week, for example.

   Record the sales or purchase agreement in 'Future Rate Agreement. Open' (RMS120). You can then connect all invoices pertaining to the transaction to this agreement in the entry programs in a separate field.

3. Follow Up the Future Rate Agreement

   To monitor the progress, follow up the agreement and the invoices that are connected to it:

   • Review a summary of the current situation displayed per agreement in (RMS120)
   • Review customer and supplier invoices with or without agreements in via 'Future Rate Agreement. Open' (RMS120)
   • Review the currency exposure and how much of the amount that is secured through a future rate agreement in the sub-ledgers and the general ledger. You do this by creating a report in 'Currency Exposure. Print AR/AP' (RMS560) and 'Currency Exposure. Print GL' (RMS565) respectively.

4. Exchange Payment into the Agreed Currency and Rate

   When you receive the customer payment in a foreign currency or it is time to pay your supplier in a foreign currency, let your bank exchange the payment using the agreed rate.

Example of Using Sales Agreements

• You sell goods to a customer in another country. The agreed price is 3.250.000 in the foreign currency FCUR and payment should be made three months afterwards. The current exchange rate on the date of the agreement is 21.03 LCUR (your local currency) per 100 FCUR. That is, your balance is 683,475 LCUR.
• Since you suspect that this country might devaluate its currency or that the FCUR currency is otherwise unstable, you contact your bank in connection with the agreement and ask for a future rate agreement.
• You commit yourself to deliver FCUR 3.250.000 to the bank on the agreed payment date. In return the bank is committed to exchange the payment to LCUR using the rate 20.75 LCUR per 100 FCUR. This means that the bank will deliver you 674.375 LCUR on the same payment date.
• The difference between the agreed price with the customer and the amount delivered to you by the bank is 9.100 LCUR. This amount is expected to cover the previously estimated interest difference between your country and the customer's country as well as the bank fee. Consequently, the difference can be either negative or positive.