The decision to utilize Historical Exchange Rate translation vs. US Dollar Overrides in an Enterprise Performance Management (EPM) solution can almost feel like a Shakespearean drama… and strong options prevail on both sides of the debate.
For those not familiar with the issue, most EPMs can be set up to handle the translation of historical foreign currency balances in two different ways. These requirements come from the need to value certain account balances not at the current period exchange rate, but at some historical exchange rate.
For example, Retained Earnings (R/E) is typically valued at the exchange rate that existed during the period when the historical earnings (or loss) was reported. An example is as follows:
Period 1 £ 200 FX = 1.30 = $ 260
Period 2 £ 200 FX = 1.35 = $ 270
R/E £ 400 $ 530
Although each period had earnings of £ 200, the US Dollar equivalent varied based upon the exchange rate witnessed in the period. The question becomes, do you:
- Setup the EPM to allow a historical exchange rate to be entered by the user which thereby translates the £ 400 to $530 (historical exchange rates = 1.325), OR do you
- Setup the EPM to allow a US Dollar Override to be entered by the user which effectively ignores any translation and hard codes the US Dollar amount directly entered into the system.
Both approaches are correct and acceptable. However, it is my opinion that the Historical Exchange Rate approach is the most versatile, and therefore the most desirable method to employ in an EPM solution. The US Dollar Override approach is an all or nothing approach whereby the system always leverages that override value unless a different value is input.
On the other hand, the Historical Exchange Rate approach allows the user greater analytical flexibility to calculate the impact of exchange rate fluctuations over time through constant rate analyses. Furthermore, the ability to access the historical exchange rate can be useful in trend analysis of the exchange rates over an extended period of time.