Ledger and sub ledger part 2: what about foreign currencies in D365FO?

After publishing my previous article about the link between ledger and sub ledger in D365FO, multiple people commented that extra articles about this relation would be helpful. One of the questions was how to configure or operate with foreign currency balances between the ledger and sub ledger. In this article I focus on that topic.

In this article first some explanation about the currencies of the ledger. Then I show an example of a sub ledger posting in a foreign currency, including the link with the ledger and the impact on ledger and sub ledger of the foreign currency revaluation process. And at the end same remarks about the foreign currency revaluation of the ledger and how to deal with the wish to change a ledger currency.

Currencies in the ledger setup:

To understand the process, first some explanation about currencies of the ledger. In the ledger setup of a legal entity you can setup the Accounting currency and the Reporting currency. In this article I use the Microsoft Contoso environment legal entity DEMF. In the ledger setup you can see that both currencies are entered:

What do they mean?

Accounting currency: This is the monetary currency used for recording transactions in the local company general ledger. Mostly this is the currency of the local country where the company operates and needs to declare their (official) financial statements. Setup of this currency is mandatory in D365FO, without this setup you can’t post any ledger transaction.

Reporting currency: This is the company internal reporting currency where the company wants to report their ledger postings in. By example you can have a EUR accounting currency for a Dutch company which is part of a US holding where USD is used. Then the reporting currency can be USD, so that all ledger postings are registered in EUR (accounting currency) and USD (internal reporting currency). Setup of this currency is optional.

When you have a legal entity with a different accounting and reporting currency, the trial balance will have columns for both currencies where all posted amounts are presented in:

The transaction currency in sub ledger postings

In the ledger setup you define the accounting currency and reporting currency. Also in each transaction you have to define the currency of the transaction. I think a lot of them will be in the accounting currency most of the time, but by example a vendor invoice can be in a different currency based on the location of the vendor. So in company DEMF (accounting currency EUR and reporting currency USD) I enter a vendor invoice of 1.000 GBP. The transaction has the value 1.000 GBP. In the form you can see that this value is automatically recalculated into 1.2029 EUR and 1.575,55 USD:

This recalculation is done based on the entered currency exchange rate. In each ledger transaction all used currencies are posted and presented. In this case, based on the fact that the transaction is made in GBP, the accounting currency is EUR and the reporting currency is USD, three different amounts are presented in the Voucher transactions form:

Amount in transaction currency: GBP

Amount: EUR (accounting currency)

Amount in reporting currency: USD

You only see the currency 'GBP' mentioned in the transaction, because this is the transaction currency. The amounts of the accounting currency and reporting currency are presented, but the currencies itself can be found back in the ledger setup. They are not visible in this form.

Impact of exchange rate change on ledger and sub ledger

Everyday the exchange rate of currencies changes and you have to decide what the moments are when you want to update the exchange rate in D365FO as well. Because of the changed rates it can be that the conversion between two currencies in a transaction in D365FO needs to be recalculated to get an actual conversion amount between the used currencies. To be able to have the currencies available to calculate in D365FO, you can enter the new Currency exchange rate value in a currency relation:

(this can me done manually or automatically based on an import provider, but I will not focus on that in this article)

By example at period end closing it can be that you need an actual calculation of the transactions in foreign currency, based on the changed exchange rates. To get that actual calculation you can run the 'Foreign currency revaluation' option that is available for Accounts Payable, Accounts Receivable, Bank and General ledger.

Example:

With the mentioned invoice from earlier in this article, change the exchange between EUR and GBP from 83,14 to 85,00. After that change, the foreign currency revaluation of Accounts payable is performed. With that action, both the ledger and sub ledger are updated based on the new exchange rate.

In the vendor transactions of the used vendor, a new transaction is added for the difference in the exchange rates:

Where does this amount of EUR 26,32 come from?

Used conversion between EUR and GBP by posting invoice: EUR 100 / GBP 83.14 = 1,20279047

Used conversion between EUR and GBP after change exchange rate: EUR 100 / GBP 85.00 = 1,17647059

Difference between both conversions: 1,20279047 / 1,17647059 = 0,02631988.

Posted exchange rate difference: GBP 1000 * 0,02631988 (difference between the conversions)= EUR 26,31988. With two decimals EUR 26,32, the amount posted as exchange rate difference. Now the sub ledger transaction is updated with the actual currency exchange rates.

The link between ledger and sub ledger by foreign currencies

Based on the standard link between ledger and sub ledger, with the (sub ledger) foreign currency revaluation also a voucher is created to update the ledger. This is the voucher related on the extra created transaction on the vendor of the invoice. In this voucher the vendor balance is corrected based on the exchange rate change and the offset account is posted as Exchange rate gain.

The main accounts used for posting type exchange rate difference can come from the 'Currency revaluation accounts' option, or from the ledger setup.

Foreign currency revaluation in the ledger

In the General Ledger module it is possible to run the foreign currency revaluation for ledger transactions only (no sub ledger involved). When you use this option, main account transactions in foreign currency will be revaluated if on the main account is selected that it needs to be revaluated:

In this case, be aware that only the ledger is revaluated. So if the postings that needs to be revaluated are related to sub ledger postings (like vendor invoices, customer invoices, foreign currency banks), you can run the revaluation in the concerning module to be sure that sub ledger and ledger are both updated.

When it comes to revaluation of the ledger, know that the recent feature 'Awareness between ledger settlement and year-end close' has impact on the foreign currency revaluation of the ledger: Settled transactions will not be taken into the opening balances of the new year. Foreign currency revaluation in the new year now will only run for transactions that have the status ‘not settled’. I have written more about this feature in this article.

Changing of the currencies

Sometimes I get the question if you can change the Accounting currency or the Reporting currency. In earlier versions there were some options, at the moment you only can change when you haven't post any transaction in the legal entity. When at least one transaction is posted you have to make a new legal entity if you really want to change them. Microsoft has created a specific Learn page about this question where you can find more info about this.