This option is preset in the standard system. When you clear open items, all amounts in a foreign currency will be translated to the local currency using the current exchange rate. This guarantees that a proper breakdown is made between exchange rate differences and payment differences when payment is made in a currency (for example, the local currency) other than the one in which the invoice was originally received.
Some of the open items in your vendor’s account are kept in local currency, while others are kept in different foreign currencies. You clear all open items using the local currency.
On 01/01/95, you posted an invoice for 1000 DEM, which at that time translated to 580 USD. On 01/23/95, the exchange rate increases from .58 to .63 USD per DEM, and you make a payment to your vendor for 620 USD to clear the invoice.
Transaction | Foreign currency | Exchange rate | Local currency | Amount to be cleared |
01/01/95: Invoice | 1000 DEM | .58 | 580 USD | |
01/23/95: Payment | .63 | 620 USD | 630 USD |
If the open item is cleared using the local currency, the system uses the current exchange rate to translate the foreign currency amount to local currency. It valuates the original invoice for 1000 DEM using the current exchange rate of .63 USD per DEM. The invoice amount for clearing now equals 630 DEM. Payment was made for 620 USD, which means the system would post an unauthorized deduction of 10 USD and an exchange rate loss of 50 USD.
The open item in this example was translated into local currency using the current exchange rate instead of the historical rate. If the historical rate had been used, you would have overpaid by 40 USD, and an exchange rate loss would not have been realized.
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