Changing Exchange Rates in Visual ERP in these Uncertain Times

Just as Covid-19 is changing people’s habits to keep safe, changing the exchange rates in Visual ERP now may also be a good idea to keep your numbers safe.

Last week during our Controller’s Crash Course, we were talking about the frequency of changing the exchange rates. Speaking from experience, I can say most clients change the rates at month-end, unless ….  as I told my students- there was an extreme change. Well, here we are. The rates between US to CAD have changed from 1.34 at the end of February to 1.42 a few weeks later. I would say that is extreme.

You can change the exchange rates now. There are no extra steps to take in Visual ERP other than changing the rate in Currency – Exchange Rate Maintenance.  I hope that you are taking advantage of Visual’s revaluation entry to automatically calculate the exchange gain/loss in the system.  If not check back on my prior blog on this topic.

Here are the two options:

1. Do not change the exchange rate and thus keep the activity for the rest of March at February’s month-end rate of 1.34. At month-end change to the new rate. Here is the impact:
   • US Sales
     • Posted for the month at 1.34.
     • Exchange gain on Accounts Receivable would be recorded with the new month-end rate.
   • US Purchases
     • Purchases will be recorded at 1.34.  This is applicable to actual cost databases only.
     • At month-end there would be an exchange loss on Open Accounts Payable.  (Again, assuming the exchange rate is greater than 1.34)
     • Purchase Order Accrual would be valued at 1.34.  You can negate this by recording the AP invoices for these purchases and thus recording the exchange loss.
     • Inventory purchases in March would be valued at 1.34.  This would mean that the value of your inventory is understated. 
     • Usage of the March’s inventory would be at 1.34. If the rates remain high, then the cost of sales would be understated in subsequent months.
2. Change the exchange rate to current rate.  Let’s say 1.42.
   • US Sales
     • Posted for the rest of the month at 1.42.
     • Exchange gain would be recorded with the new month-end rate for Accounts Receivable from prior to rate change.  Assuming the rate remains at 1.42, there would be no exchange gain/loss on the Accounts Receivable for the last part of the month.
   • US Purchases
     • Purchases for the rest of the month will be recorded at 1.42
     • At month-end, there would be no exchange gain/loss on Open Accounts Payable recorded after the rate changes assuming month-end rate is 1.42. 
     • Purchase Order Accrual for purchases for the last part of the month would be valued at 1.42.  If you record the AP invoices for these purchases, these will end up in Accounts Payable and would be revalued to the month-end rate.
     • Inventory purchased in the last part of March would be valued at 1.42.
     • Usage of this inventory would be at 1.42.  The cost of sales would reflect the 1.42 rate in subsequent months. 

Oh, I wish I had a crystal ball to foresee what will happen over the next few weeks or even months.  Will the rate climb higher than 1.42 or will it come back to what we are used to seeing? I would say this falls into one of these extreme situations, where you would want to consider changing your rates. Part of the decision making would be how much US exposure you have. 

A few other random and hopefully useful thoughts about exchange rates:

1. If you want your sales to be reported based on the average exchange rate for the month, you could run revaluation on Sales accounts. 
   • The accounts would need to be flagged in the Accounting Window.
   • When creating the revaluation entries, the average rate used in this window can be calculated by Visual or you can override the rates. 
2. If you have not yet changed your rate but want to retroactively apply the rate to purchases since the middle of March, you could enter the rates with an 3/17 date (or whatever date you pick).  When the Accounts Payable invoice is recorded, the inventory will be updated using the new rate.  This applies to the following scenarios:
   • Actual Costing databases
   • If the Receipt Exchange Rate is set to “Use Invoice Date” in Accounting Entity Maintenance – Costing Tab.
3. You may want to run Reset Standard Costs to pick up the exchange rates.  I might just wait a month or so to see how things settle out.
4. If you are using Visual’s Standard Costing and do not change standard costs here is something to consider:
   • If the rates are changed, this means your Purchase Price Variance will increase and the exchange loss on Accounts Payable revaluation will be minimized.
   •  If the rate is not changed, the Purchase Price Variance would be recorded based on the 1.34 and there would be a larger exchange loss. 
   • The former would allow you to analyze the impact of the exchange change based on the commodities purchased whereas the latter is one value in the General Ledger.

I hope I have given you sufficient information to help in your decision making. 

If you would like to share what your business is doing, others may find it helpful.  Some of the thoughts I have heard so far are:

• We will be reviewing our exchange rates weekly.  If it has moved more than 3 points, we will change it.
• Starting in April, we will change our rates every week to the average rate from the prior week.
• We will be looking at forward contracts to negate some of the exchange rate swings.

Of course, every business is different and you will have to make the decision on their circumstances.  Hope everyone stays safe and healthy during these uncertain times.