What is an exchange rate?

An exchange rate is the cost of buying one kind of currency unit with another kind of currency unit.

For example, if a Canadian dollar (CAD) "costs" 68 U. S. cents (.68 USD), the USD-to-CAD exchange rate is .68. A United States dollar "costs" 145 Canadian cents, so the CAD-to-USD exchange rate is 1.45.

Why are exchange rates important?

Costpoint compares the rates entered with the original transaction to the rates used for payment of the voucher. Any difference is a gain or a loss for your company. On large transactions, this gain or loss can be substantial.

Where do exchange rates come from?

The numerous sources for exchange rates include newspapers, Internet sites, and update services. All legitimate exchange rates are based on the market close rates of recognized exchange boards. These exchange boards are similar to the stock market.

The advantage of using published rates, even when you are unable to obtain the exact rate, is that they are universally recognized and are easily obtained by any company anywhere in the world.

How are exchange rates used in Costpoint?

After you set up currencies in Costpoint on the Manage Currencies screen, you can set up and maintain exchange rates for those currencies.

The first step is to identify your exchange rate sources on the Manage Exchange Rate Sources screen. For flexibility, Costpoint allows more than one rate source.

You then use the Manage Exchange Rate Groups screen to create groups of exchange rates that use rate information from a common source. These groups consist of exchange rate sources (created on the Manage Exchange Rate Sources screen) and combinations (to-from pairs) of currencies to be exchanged. For an exchange rate group, you can limit the rate change allowed when new exchange rates are entered. You can also specify whether or not employees entering accounts payable and purchase order can override the default rates during transaction entry.

In addition, you can use the Currency screen of the Vendor User Flow to restrict use of both the transaction and pay currencies for particular vendors. This can prevent use of the wrong currency for vendors with multicurrency transactions.

Daily rates or period rates?

You can maintain exchange rates on a daily or periodic basis.

Enter daily rates on the Manage Exchange Rates by Date screen and the Manage Daily Exchange Rates screen. You can set up a daily rate without an ending date. In that case, the rate remains the current rate until you enter an ending date. This enables you to use the same daily rate for one or two weeks, for example. If you set up both daily and period rates, Costpoint uses the daily rates by default.

Enter period rates on the Manage Exchange Rates by Period screen and the Manage Period Exchange Rates screen. Period rates are defined for the accounting periods set up in Costpoint. You can use period rates in two ways:  as the period average or the end-of-period. The period average rate is used for the entire accounting period, except the last day. The end-of-period rate is used only on the last day of the selected period. If you set up both daily and period rates, Costpoint uses the daily rates by default for transactions screens, (for example, Accounts Payable Vouchers and journal entries).

Costpoint uses the period rates when there are no available daily rates and you select the Use period rate, if available check box on the Configure Multicurrency Settings screen.

Period rates are always used for Consolidations and must be set up when you need to run Consolidations for companies with different functional currencies, regardless of the status of the Use period rate, if available check box.

Where are exchange rates used?

Exchange rates are mainly used in the Exchange Rates subtasks located in several Costpoint Accounts Payable and Purchasing screens (Manage Purchase Order Vouchers, Manage Accounts Payable Vouchers, and so on). Costpoint retrieves the applicable exchange rates from the daily or period rates based on the rate date used in the subtask. In addition, Costpoint users can override some exchange rate fields in the Exchange Rates subtask.

By selecting the Freeze Rate check boxes in the Exchange Rates subtask, you can ensure that the rate current on the date the accounts payable or purchase order transaction is entered will continue as that transaction's rate through payment of the voucher. This Freeze Rate option cannot be bypassed unless you clear Freeze Rate before posting the voucher or disable it on the Edit Voucher Payment Status screen after posting the voucher.

Living in the past

Since we cannot predict the future, all exchange rates are entered in Costpoint after the close of business for that day or that period, so how can you keep your accounts payable vouchers' exchange rates current when the vouchers were entered last month?

Before making any payments on the voucher, make sure the "newer" exchange rates have been entered in one of the four exchange rates screens (Manage Exchange Rates by Date, Manage Daily Exchange Rates, Manage Exchange Rates by Period, Manage Period Exchange Rates), and then run the Update Open Accounts Payable Exchange Rates process. Costpoint will then recognize those newer rates for your vouchers.

If you are using the Pay When Paid feature, run the Update Pay When Paid Voucher History process before running the Update Open Accounts Payable Exchange Rates process.

Gain or loss?

Depending on the foreign exchange fluctuations between the time you posted the accounts payable voucher (or saved the purchase order) in Costpoint and the date the item is selected for payment, your company may have a gain or loss on the foreign currency.

When you close a period, you may have vouchers scheduled for payment in the next period. Costpoint helps you calculate and recognize the gain or loss on these payments when you close the period. (If you selected the Freeze Rate check boxes in the Exchange Rates subtask, no gain or loss is calculated for that voucher.)

Run the Update Open Accounts Payable Exchange Rates process, and then run the Compute/Post Unrealized Gains/Losses process. (If you have vouchers marked as Pay When Paid, run the Update Pay When Paid Voucher History process before the Update Open Accounts Payable Exchange Rates process.)

This procedure posts the unrealized gain or loss to the general ledger. An unrealized gain or loss is the change in value of your vouchers before payment is made. (After either full or partial payment, the gain or loss is realized.) Once you compute and post gains and losses, print a Voucher Unrealized Gain/Loss Report for your audit trail.