AP: Exchange Gain/Loss Setup

This is a very basic setup of Forex Gain/Loss calculation and requires User entered Rate. First Let’s see what is Gain/Loss on Exchange Rate.

What is Exchange Gain/Loss?: The idea behind Gain or Loss on exchange rate is simple. It comes in when you are dealing in Multiple Currencies. Let’s take an example, suppose that you are purchasing some goods or services from another country. There must some currency exchange rate, say the base currency is PKR and transaction is carried out in USD and the exchange rate between the two is 80.25 . You ordered a server which was $37,500.00. The liability recorded on the day the shipment was confirmed was in PKR which was 3,009,375.00 (37500*80.25).  It was informed by the vendor that the shipment will take 8 weeks. After 8 weeks or so you received the server and now you have to pay. The exchange rate on the day of payment was 81.86 and you paid Rs.3,069,750.00. The amount you had to pay in PKR was more than the liability recorded at the time of confirmed shipment. The Loss you had to bear due the fluctuation in forex rate was Rs.60,375.00. Similarly had the Dollar rate on the day of payment was 79.20, then you had to pay Rs.2,970,00.00 and the Gain on exchange you enjoyed was Rs.39,375.00

How does it work in Oracle Payables?: Oracle AP calculates this Gain or Loss automatically based on Exchange Rate from Invoicing to Payment.

Here are setup steps or pre-requisites for this functionality:

1. Enable the currency in General Ledger in which you want to do the transaction. USD is enabled by default.
2. Define Exchange Rate, but I have not used the predefined rates, I am using User Entered rates.
3. Define Currency Payables Option. Here you define the account code combination which will be used during the transaction.
4. Define a multi-currency Bank Account from which the payment will be made.

After performing the above steps, the Exchange Gain/Loss functionality is enabled. The exchange rates will be entered by user at the time of Invoice Entry and at the time of Payment, which will calculate the gain or loss on the transaction.

There is another need of calculating Unrealized Gain/Loss on the exchange which I have discussed in another Post.

If you have any queries feel free to contact me at atif.syd@gmail.com

That’s All. :)