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How do we determine what currencies to use for our ledgers?

Accounting regulations like FASB52 and IAS21 (see regulatory limitations below for details) does not put many limitations on us. Neither does the Oracle R12 ledger setup – at least not evidently according to the FCG (see references section below for acronyms).

FASB52 and IAS21 generally allows us to use a functional currency based on the country (local currency) or the business environment. The currency of the business environment can be influenced by the primary trade (like an oil business would often operate in USD) or the corporate structure.

The R12 Oracle Financials Concepts Guide (FCG), Release 12.1 states: "we recommend that the primary currency of a primary ledger be the local business currency". However, "recommend" is that really strong enough? Do we have a choice?

With R12, we have flexible primary and reporting ledgers in multiple currencies, so are there any limits and many do’s and don’ts?

For most small implementations, it is apparent to use the local currency as the functional currency however when it comes to multinationals it can get quite complicated.

For example, a British oil company could use USD or GBP as the functional currency. Most transactions would be in USD and if stocks were listed in the US, the quarterly reporting would be in USD. On the other hand, as the legal entity is British, statutory reporting is required in GBP as well as payroll and local expenses would be in GBP.

In addition to the business environment there could also be business requirements influencing the decision like need to drive certain functionalities by currency.

In addition, regional or country specific legal requirements may also influence the decision.

In general, to avoid any problems and customizations, follow the FCG recommendation: use local currency as your primary ledger functional currency. Any other currency like a corporate reporting currency should be maintained using a secondary ledger.

Still considering? Well the devil is in the detail – read below…

Oracle Limitations

The actual limitations vary by module can vary with patches and later releases so be sure to check this for each implementation.

In addition, this is not an exhaustive list so be sure to check if any other modules or considerations apply to your implementation. Feel free to contact me know if you have something to add.

General Ledger – GL

• GLUG: page 2-24: "If your funds check level is set to None, you can assign any Currency and a budget entry Type of Entered to the account range. If your funds check level is set to Absolute or Advisory, you must assign your ledger’s primary currency and a budget entry Type of Entered to the account range".
  Therefore, Absolute or Advisory budget control only works in the functional currency hence this may drive the need to use another currency than the local currency as the primary ledger currency.

Payables – AP

• Domestic foreign currency invoices (see regulatory limitations below): In Invoice Workbench the user exchange rate field will be greyed out. This issue can only be fixed by customizing the Invoice Workbench hence; this drives the need to have functional currency as local currency.

Fixed Assets – FA

• Assets entered in the asset workbench are always entered in corporate asset book currency, which is the primary ledger currency. Only AP and mass additions allow foreign currency assets to be entered whilst retaining the historical exchange rate for depreciation. If using mass additions then the FA_MC_MASS_RATES table must be populated or historical rates must be defined. This may be critical for local statutory reporting if functional currency is different from local currency especially during data conversion.
• FAUG page 2-39: "Payables sends line amounts entered in foreign currencies to Oracle Assets in the converted ledger currency. Since Oracle Assets creates journal entries for the ledger currency amount, you must clear any foreign currency invoices manually in your general ledger".
  Therefore, if you have high volumes of foreign currency AP invoices with asset lines, consider building a mass allocation to clear the amounts.
• FAUG page 9-61: "When setting up a Tax book that is linked to a Secondary ledger, the chart of accounts and currency must be the same as the Primary ledger, which is linked to the Corporate book".
  Therefore, this dictates that if you need statutory tax depreciation in a secondary ledger, your primary ledger should be in local currency. Oracle has released a patch (Doc ID 1303067.1) to remedy some of this. Another solution is not to use FA for tax depreciation.
• FIG page 3-68: "If using Oracle Assets, fixed asset transactions are transferred to specific ledgers based on the ledger you assigned to each Asset Book. For example, if you assigned the primary ledger to the Corporate Book and the secondary ledger to the Tax Book in Oracle Assets, the asset transactions for each book will only be reflected in the respective ledgers. Thus, the corporate Book transactions will only be reflected in the primary ledger and the Tax Book transactions will only be reflected in the secondary ledger".
  Therefore, subledger level secondary ledger created for currency reporting purposes will not receive asset transactions and hence should be avoided. If reporting currency is needed then use journal or balance level secondary ledgers.

Cash Management – CE

• CEUG page 3-8: "Multiple Currencies Allowed: If you do not enable the Use Multiple Currencies Payables option, then Payables does not allow you to change this value. If you select your ledger currency as your bank currency, then you can enable the Use Multiple Currencies Payables option and use this bank account to pay foreign currency invoices. If you select a different currency than your ledger currency in this field when you define Payables Payment Documents, then you will only be able to select payment formats that you define in that currency. Also, you will only be able to pay invoices that you enter in this foreign currency".
  Therefore, foreign currency invoices will always be paid from a bank account defined in functional currency. This is worth considering in case your functional currency is different from the local currency.

Receivables – AR

• Domestic foreign currency invoices (see regulatory limitations below): In Invoice Workbench the exchange rate pop-up windows will not show. This issue can be fixed by customizing the Invoice Workbench or the invoice print hence; this drives the need to have functional currency as local currency.

E-Business Tax – ZX

• EBRG page 3-4: European sales listing does only work with the primary ledger hence this should be the local currency as the report does not have ledger as a report parameter.
• Financial Tax Register does support reporting from a secondary ledger.

Inventory – INV

• INVUG 20-95: Intrastat – The movement statistics report does only work with the primary ledger hence this should be in local currency to avoid customisations.

Cost Management – CM

• CMUG chapter 4: To avoid customisation the costing should be in local currency. If you do not have your functional currency as your local currency the standard cost may vary by the exchange rate hence the standard cost is essentially broken and cannot be used for tax reporting.

Projects – PJ

• No direct issues reported as the project functional currency can be independent of the ledger functional currency however you may have to consider when PJ budgets are integrated with the GL budgets for budget control.

Regional and Regulatory Limitations

Accounting standards are regularly updated so be sure to check this for each implementation.

In addition, this area only captures some general rules and local requirements may supersede these.

Europe

• VAT reports are required in local currency.
• If intra-EU shipping is significant, then note that the "European Sales Listing (ESL)" and "Intrastat/Extrastat" reports are required in local currency.
• Domestic foreign currency invoices: Many countries allows domestic invoices to be in foreign currency as long as an official fixed exchange rate is applied however this may cause problems in case the foreign currency is the same as the functional currency as the exchange rate functionality in Oracle subledgers will be limited.

India

• Indian localizations require the primary ledger to be in local currency due to the complex local taxes, which are implemented in Oracle using non-standard modules. I have no direct references but this is experience from a recent project.

Statement of Financial Accounting Standards No. 52 – FASB52 says

The Functional Currency

77. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.

78. The Board believes that the most meaningful measurement unit for the assets, liabilities, and operations of an entity is the currency in which it primarily conducts its business, assuming that currency has reasonable stability.

International Accounting Standard 21- IAS21 says

Functional currency

9. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entity considers the following factors in determining its functional currency:

(a) the currency:

(i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and

(ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.

(b) the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).

Ledger and currency definitions

Primary Ledger: According to Oracle General Ledger Implementation Guide (IAG): "The primary ledger acts as the main record-keeping ledger"

Secondary Ledger: According to IAG: Used to represent your primary ledger’s accounting data in another accounting representation that differs in one or more of the following from the primary ledger:

• Chart of accounts
• Accounting calendar/period type combination
• Currency
• Subledger accounting method
• Ledger processing options

Functional Currency: R12 this is the currency of the ledger. For the purpose of this article it is only used for the primary ledger currency.
FASB52/IAS21: "An entity’s functional currency is the currency of the primary economic environment in which the entity operates".

Reporting Currency:
FASB52: "The currency in which an enterprise prepares its financial statements.
GLIG page 1-112 (better detailed than in FCG page 4-6): "Reporting currencies are additional currency representations of primary or secondary ledgers". Reporting currency can be one of the following concepts:

• Balance Level: "The Balance level reporting currency is maintained only for GL account balances by using translation to convert the balances from the ledger currency to the reporting currency. Balance level reporting currencies can be assigned to primary and secondary ledgers". Note: you cannot use this in a ledger set.
• Journal Level: "The Journal level reporting currency is maintained for GL journal entries and balances when you post journals in your primary or secondary ledger".
• Subledger Level: "The Subledger level reporting currency is maintained for primary ledgers only. They maintain a currency representation of the primary ledgers’ subledger journals, journal entries, and balances".

Local Currency: According to FASB52: "The currency of a particular country being referred to".

Foreign Currency: According to FASB52: "A currency other than the functional currency of the entity being referred to".

Transaction Currency: According to FCG page 4-5: "Transaction currency is the currency of denomination for a transaction document. We sometimes refer to this as the entered currency".

Primary Currency: According to FCG page 4-5: "The currency used for accounting and reporting in a ledger is called "the ledger primary currency", although it is often referred to as the ledger’s accounting currency".

References

FCG: Oracle Financials Concepts Guide – E13424-03

FIG: Oracle Financials Implementation Guide – E13425-05

GLUG: Oracle General Ledger User Guide – E13627-04

GLIG: Oracle General Ledger Implementation Guide – E13425-05

FAUG: Oracle Assets User Guide – E13586-04

CEUG: Oracle Cash Management User Guide – E13483-04

INVUG: Oracle Inventory User Guide – E13450-04

CMUG: Oracle Cost Management User Guide – E13635-05

EBRG: Oracle E-Business Tax Reporting Guide – E13630-03

FASB52: Statement of Financial Accounting Standards No. 52

IAS21: International Accounting Standard 21

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