My query is , what is the accounting entry supposedly passed for forex cancellation? For cancellation -- I am doing 'cash settlement'.
Currently, for accounting symbol(currency swap) I have assigned an expense account.
So right now the entry being passed is
Cancellation Expense Dr./Cr.
Forex Position Dr./Cr.
The amount is the differential inflow/outflow amount in payment currency (based on the spot rate for cancellation).
Now the requirement is , on cancellation-- differential amount and some nominal bank charges entries are passed in the book of accounts.
Is the above listed entries correct? If not, what are the standard entries? How do I take care of the additional charges being posted?
Edited by: Sur Mits on Dec 7, 2009 9:33 AM
Can you please explain what exactly do you mean by forex cancellation?
Intially you have a spot forex transaction created. Have you taken the delivery for the same or you did a cash settlement?
By cancelling you mean to say you are not taking the delivery of this transaction because of various reasons? Then if you do a reversal of contract in SAP then a reversal entriy for every flow in cash flow would be generated. But you cannot add a new flow in other flow.
The scenario is: I have booked a forward cover and I want to cancel it. So that mean that I am settling the contract on spot rate and the differential based on the spot-forward is to be passed into P&L account and also have to pay some nominal bank charges also for cancellation.
Now if I use cash settlement, is it a way to do it? If no, then what is the correct way to have the above scenario.
Also, what will be the accounting entries in books of accounts and what entries can we generate in SAP?
If you have booked forward and you are doing cash settlement means you are actually exercising the forward option without taking physical delivery of it. Since you dont want to take physical delivery you are doing a cash settlemtent. You are not cancelling it.
When you have booked the forward cover you would not have posted any accounting entry at all. There will not be any entry affecting your postion in the balance sheet until you exercise it. When you settle it with a cash settlement based on the spot rate, then the entry should be forex loss account Dr to Bank account Cr. Since you have not taken any position your position is zero.
Your bank charges have to be captured in other flows and the entries you have specified is correct.
Also forward is a 2 way binding contract and not like option where you can allow the option to expire. In the case of forward on the date of exercise, the contract will be exercised and based on the spot rate a gain/loss entry would be generated. In your case since you do not want to take the physical delivery you can do a cash settlement and account for the loss alone because in case of gain you need not cancel the contract.
1) How do I cancel a forward contract, ideally?
2) If I want to proceed with cash settlement, system generates the position entry. How do I carry out your suggestion in the system (generate only profit/loss entry w/o generating any position entry) System makes it mandatory to use accounting symbol 'currency swap' while posting after doing cash settlement?
So in Forex cancellation you are settling before hand. Then you have to use premature settlement which will generate 2 transactions one a reversal transaction for the forward transaction and a spot transaction which you have to cash settle.
When doing cash settlement you have to debit your postion and credit bank. Then you have realize the loss in TPM18 where you have to credit position and debit loss. The net position will be zero which is always the case for forex.
In the SAP documentation says that the account symbol for currency swap need not be assigned any account but I can see that it is asking for a G/L account. Let me check this point alone.
I tried pre-mature settlement. So for one contract, system generates 2 more contracts -- which are opposite in nature (buy/sell). But in TBB1, I can simulate postings for all 3 contracts.
Entries for 1st and 2nd contract are same. 3rd contract is opp to 2nd. I am not sure if am using the premature functionality correctly.
So, continuing with earlier process, if I do cash settlement of original contract, then as you said, through TPM18 I can make the forex position balance zero.
Edited by: Sur Mits on Dec 15, 2009 11:20 AM
Edited by: Sur Mits on Dec 15, 2009 11:21 AM
The premature settlement functionality you are using is correct. The point is for the forward cover suppose the contract date was 20 Jan 2010 and you want to cancel it now, then when you do a premature settlement, then a transaction exactly as opposite to the original forward with same date is generated. Hence when you post these 2 on 20 Jan there will essentially be no gain or loss.
Other than these 2 there is a spot transaction with value date 2 days from today is created. This is what you are going to settle on value date through cash. This transaction you can enter the spot rate and in the liquidity you have to enter the difference between the original contract rate and the spot rate. Thus this contract would be cash settled.
Like you said you can directly do a cash settlement for the original forward itself, but in that case there is no record for the original contract terms. Now in this case if you look at the initial forward option in ftr_edit, under environment object links, you can see the connection between all the 3 contracts.