Currency Translations in Financial Management — Historical Rates versus Dollar Overrides

Mike Arnoldy

By
March 9th, 2011


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 easy—assign 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 activity—maybe a few transactions per year if any—hence 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 is better? Tough to say. However, given the struggles I’ve 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.  Here’s 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 change, no 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 dollar overrides, I’d love to hear any ideas/experience with either option, including what approach others consider to be best practice in Financial Management—historical rates or dollar overrides?

 


Mike Arnoldy

About Mike Arnoldy

Mike Arnoldy has over 20 years experience in all phases of design, development, and implementation of financial applications. He has exceptional problem-solving and architecting skills with a strong technical background. He specializes in financial consolidation applications that include complex calculations, foreign currency translation, inter-company/equity eliminations and varied reporting requirements to satisfy both external and management reporting needs. Mike is also a Certified Public Accountant.

2 comments on “Currency Translations in Financial Management — Historical Rates versus Dollar Overrides”

  1. Vijay Kumar says:

    Hello…,
    Explantion is nice & Understood way, but could you elobrate the exact needy situations & trasaction…

  2. Vivek Yadav says:

    Its really great post, i was really confuse about translation before reading this post.

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