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Aug 09

Currency Translations In Financial Management Historical Rates Versus Dollar Overrides (httpb

One of the best times to look for improvements in your financial management application is during an upgrade. A good place for global companies to start is how the application is handling translations for multiple local currencies. Recent experience has shown me that companies can realize immediate benefits by taking a second look at currency translations and how they are set up.

Hyperion Financial Management, for example, does a great job with out-of-the-box functionality to perform currency translations. Generally, the balance sheet is translated at the end-of-month rate and the income statement using an average rate. Set up is easyassign a currency to your entities, enter the rates, and the system does the translating.

What happens, though, when you run into translation requirements that are outside of the capabilities of the out-of-the-box functionality? For example, accounts primarily in the balance sheet. The activity in these accounts is always translated on the date of the transaction at the spot rate. The translated amount is then added to the translated beginning balance to get the new translated ending balance. These accounts usually have little activitymaybe a few transactions per year if anyhence this type of activity is one that is handled differently.

In my experience, there are two methods available to handle this type of translation:

1.Historical rates
2.Dollar overrides

Historical rates require that you set up additional rate accounts and add rules so that target accounts will use the historical rate accounts during translation. A blended rate is calculated for every point that a translation needs to occur. The blended rate will need to be updated for any transactions that occur.

Dollar overrides require that you set up an account for each one that will require translation at a rate other than the end-of-month rate. Instead of entering a rate in these accounts, the actual amount in dollars is entered. You then need to add rules to override the amount that is translated using the default translation rates with this dollar amount.

So which method is better? Tough to say. However, given the struggles Ive witnessed clients undergo when it comes to updating the blended rates every time an entity hierarchy changes, a new transaction occurs, or when you want to force a translation into dollars at a new point on the hierarchy, my vote stays with the dollar overrides. Heres why: If the hierarchy changes, the dollar override accounts still have the proper amounts that will aggregate and be available wherever the translation is done. You can build the process so that new overrides can be added with only a metadata changeno changes to the rules required. And you can set up overrides so that the override amount will roll from period to period automatically and only be updated when a transaction occurs.

Even though I vote for dollar overrides, Id love to hear any ideas/experience with either option, including what approach others consider to be best practice in financial managementhistorical rates or dollar overrides?

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