If you use Costpoint Multicurrency and process transactions in currencies other than your firm’s functional currency, Costpoint provides the features you need to comply with Generally Accepted Accounting Principles (GAAP) standards for the United States for the following:
Revaluation of balance sheet account balances based on fluctuations in currency exchange rates
Disclosure of gains or losses resulting from revaluation of accounts as part of comprehensive income
Balance sheet revaluation is the process of adjusting the balances of balance sheet accounts to reflect fluctuations in currency exchange rates, so that you can disclose the resulting gains or losses on your financial statements. Firms that process transactions in currencies other than their functional currency typically perform revaluations at the end of each period for accounts for which the account balance is made up—all or in part—by foreign currency transactions. For example, a firm could purchase goods and services from a vendor in a foreign currency or bill a client in a foreign currency. A firm could also maintain a cash account in a currency other than its functional currency.
Costpoint’s Create Revaluation Entry process enables you to comply with GAAP standards for account balance revaluation. When you run the Create Revaluation Entry process, Costpoint does the following:
For each account for which foreign currency transactions exist for the fiscal year, the process calculates a year-to-date total amount for those transactions in the functional currency, based on the original currency exchange rates. It includes both settled transactions and unsettled transactions in these calculations. The functional currency amounts used to calculate the year-to-date totals are those stored when the transactions were entered and are based on the exchange rates that applied on the transaction dates.
The process also calculates a second year-to-date total functional currency amount for each account for foreign currency transactions, based on updated currency exchange rates. For settled transactions, the functional currency amount is based on the exchange rate that applied on the date the transaction was settled. For unsettled transactions, the amount is based on the exchange rate that applied on the end date of the accounting period for which you run the revaluation process.
For each account, the revaluation process then calculates the difference between the first functional currency total, based on the original exchange rates, and the second total, based on the updated exchange rates.
The process creates an adjusting journal entry that adjusts each of the account balances by the amount of the variance between the two year-to-date totals. The offsetting entry for any overall gain or loss for the processed accounts is to the stockholder equity account for other comprehensive income (OCI) that you specify on the Configure General Ledger Settings screen.
The process also creates a second adjusting journal entry for the next accounting period, which reverses this journal entry.
Suppose that at the end of the second period of the year, you have the following for your accounts payable account:
Settled foreign currency transactions for the year with a total original value in your functional currency of 180,000
Unsettled foreign currency transactions for the year with a total original value in your functional currency of 4,000
In addition, you have a cash account with foreign currency transactions for the year with a total original value of 25,000, based on the exchange rates that applied on the transaction dates.
When you run the revaluation process, the following occurs:
Because of earlier favorable exchange rates that applied on the voucher payment dates, the revaluation determines that the total amount of the settled AP transactions in your functional currency is 172,000 (180,000 originally).
Because of an unfavorable shift in rates as of the revaluation date at the end of the second period, the revaluation determines that the total amount of the unsettled AP transactions is 4,200 (4,000 originally).
Because of an unfavorable shift in rates as of the revaluation date, the revaluation determines that the total net amount of the cash transactions for the year in the functional currency is only 23,750 (25,000 originally).
The revaluation results in a 7,800 reduction in the accounts payable balance and a 1,250 reduction in the cash balance, a net gain for your firm of 6,550. As part of the revaluation process, Costpoint creates the following adjusting journal entry for the second period:
|
Account |
Debit |
Credit |
|
Accounts Payable |
7,800 |
|
|
Cash |
|
1,250 |
|
OCI Equity |
|
6,550 |
The process also creates this adjusting journal entry for the third period to reverse the entry above:
|
Account |
Debit |
Credit |
|
Accounts Payable |
|
7,800 |
|
Cash |
1,250 |
|
|
OCI Equity |
6,550 |
|
The gain or loss resulting from the revaluation of balance sheet accounts is considered a component of comprehensive income. As a result, it falls under the financial reporting standards established in Financial Accounting Standards Board (FASB) Statement 130: Reporting Comprehensive Income.
FASB 130 defines comprehensive income as net income plus "other comprehensive income" (OCI). OCI represents changes in stockholders’ equity from events that are recorded directly on the balance sheet and, as a result, bypass the income statement. (Though this topic focuses on income from foreign currency exchange, you can also set up other OCI categories in Costpoint in accordance with your company’s policies and practices.)
To comply with FASB 130, you must report on items that are components of comprehensive income in a financial statement that is equal in "prominence" to your other financial statements. However, the FASB does not require a specific format for that financial statement. Costpoint supports two of the possible formats that the FASB suggests:
Combined statement of net income and comprehensive income
For the combined statement of net income and comprehensive income, Costpoint adds a comprehensive income section at the end of the traditional income statement.
The advantage of this approach is that it discloses both net income and comprehensive income in a single statement. The primary disadvantage is that net income becomes a subtotal on the statement, and comprehensive income becomes the new bottom line. This reduces the prominence of net income as the principle measure of a company’s performance and may cause confusion among some financial statement users about "true earnings." Other possible disadvantages are that Costpoint controls how the comprehensive income information is presented on the income statement, and you cannot add financial statement lines for other categories of OCI.
Separate statement of comprehensive income
A second method for reporting comprehensive income is to disclose it in a separate financial statement. You specify the rows for the OCI detail that you want on the statement and the income statement from which you want Costpoint to retrieve net income. When you generate the statement, Costpoint automatically brings in the net income amount and calculates total OCI and total comprehensive income.
One advantage of this approach is that your income statement is free of potentially distracting disclosures of comprehensive income. Companies that view net income as the more meaningful performance measure can use this approach because it does not change the income statement. Other advantages are that you have much more control of the report layout than you do if you include comprehensive income on the income statement. In addition, you can add lines for OCI categories other than that for gains and losses from balance sheet revaluation. Some firms, for example, add a line for a pension liability adjustment account. The primary disadvantage of the separate statement is that it adds another report to the traditional set of financial statements.
To set up Costpoint for balance sheet revaluation and comprehensive income reporting, complete the procedures listed in this section.
To add a line to your balance sheets for the OCI that results from the revaluation process, complete the following steps:
On the Manage Financial Statements screen, display your primary balance sheet and add a line for the OCI equity account at the appropriate point in the sequence in the Stockholders Equity section of the report. Repeat this procedure for each balance sheet on which you want to see an OCI amount.
Use the Manage Accounts screen to set up the account to which you want Costpoint to post the gain or loss resulting from the revaluation adjustments to balance sheet accounts. Select Stockholders Equity in Account Type. In Financial Statement Line, select the financial statement line from your primary balance sheet on which you want to display this OCI amount.
If you want any balance sheets other than the primary balance sheet to display OCI, display each of those balance sheets on the Manage Financial Statements screen and link the OCI equity account to the appropriate financial statement line.
By default, Costpoint uses historical rates for the revaluation of stockholder equity accounts. However, you can use the Manage Equity Override Accounts screen to specify any stockholder equity accounts for which you want the revaluation process to use the weighted average historical exchange rate for the revaluation date instead of using the historical rate.
For example, you could use this override option for an employee common stock account if there were significant rate increases due to market fluctuations for the period, and you felt that the weighted average rate was more representative.
To select a method for including comprehensive income on financial statements, complete the following steps:
On the Configure General Ledger Settings screen, indicate in Other Comprehensive Income Info whether you want to report on comprehensive income on your income statement or on a separate statement of comprehensive income.
In Account, select the account to which you want Costpoint to post the offsetting entry for the gain or loss resulting from the revaluation of balance sheet accounts (the account you created in Step 1).
In FS Line, specify the financial statement line in the balance sheet on which you want to display the OCI amount (the line created in Step 1).
If you selected OCI on the Income Statement on the Configure General Ledger Settings screen, complete the following steps on the Manage Financial Statements screen:
Display the income statement.
Select Include Unposted OCI Amts if you want to include both posted and unposted entries for the OCI account in comprehensive income. If you do not select Include Unposted OCI Amts, the financial statement only includes entries for the OCI account that have been posted to the general ledger.
Repeat this procedure if you want to disclose comprehensive income on other income statements.
If you selected Separate Statement of CI on the Configure General Ledger Settings screen, complete the following steps on the Manage Financial Statements screen to set up the statement of comprehensive income:
In Financial Statement Classification, select Statement of CI.
In Income Statement Code, select the financial statement code for the income statement that will provide the net income amount.
Add a line for each category of OCI that you want to appear on the statement. For each line, do the following:
In Major Subtotal Title, enter the label for the total comprehensive income amount (for example, Comprehensive Income). If you have more than one line for OCI, enter the same label for each line.
In Group Heading, enter the label for the OCI subtotal amount (for example, Other Comprehensive Income). If you have more than one line for OCI, enter the same label for each line.
In Line Title, enter the label you want the statement to display for the OCI amount (for example, Foreign Currency Translation).
Select Include Unposted OCI Amts if you want the OCI amount to include both posted and unposted entries for the accounts linked to the line.
If you do not select Include Unposted OCI Amts, the financial statement only includes entries for the accounts if they have been posted to the general ledger.
Click Link to Accounts to display the Link to Accounts subtask, and select the accounts that will supply the OCI amounts for the line.
For the line that will display the OCI amount resulting from balance sheet revaluation, select the account that you specified on the Configure General Ledger Settings screen.
To perform the balance sheet revaluation at the end of a period, complete the following steps:
Display the Create Revaluation Entry screen.
In Period to Revalue, specify the period for which you want to create a revaluation journal entry.
In Account, select the balance sheet accounts that you want to include in the revaluation process. (Do not select the equity account that you set up for OCI. Select only the accounts for which you want the process to calculate revaluation entries.)
In Balance Sheet Organization, select the organizations that you want to include in the revaluation process.
In Rate Group ID, select the rate group that you want Costpoint to use to determine the currency exchange rates that apply.
Click the Print Default Report button on the Costpoint toolbar to generate the Balance Sheet Revaluation report so you can preview the results of the revaluation before you actually create the journal entry.
If the results are correct, run the Create Revaluation Entry process for the selected balance sheet accounts and organizations.
When you post adjusting journal entries for the period, the journal entry created by the revaluation process is posted to the general ledger. (If you ran a revaluation at the end of the preceding period, the reversing journal entry created at that time for what is now the current period is posted also.)
For more information on running the revaluation process, see Create Revaluation Entry.
To generate the financial statement that discloses comprehensive income, complete the following steps:
Display the Print Financial Statements screen.
In F/S Code, select the financial statement code for the financial statement that you set up to report on comprehensive income. Depending on how you set up comprehensive income reporting in Costpoint, that financial statement could be an income statement that displays comprehensive income following net income, or it could be a separate statement of comprehensive income.
Enter or select the other reporting options you want.
Click Print Financial Statements on the Action menu to generate the financial statement.
For more information, see Print Financial Statements.