FX Forward Revaluation in

Oracle Treasury and FASB 52

An Oracle White Paper
February, 2007
Table of Contents

1 Introduction................................................................................................................. 3
2 Generic Revaluation Process ........................................................................................ 3
3 FX Forward Deal Revaluation...................................................................................... 3
3.1 Mark-to-market Revaluation................................................................................. 3
3.2 Revaluation – Setup Process................................................................................. 4
3.3 Revaluation –Example ......................................................................................... 5
3.3.1 FX Forward Deal ............................................................................................. 5
3.3.2 Market Data Set ............................................................................................... 6
3.3.3 GBP Yield Curve ............................................................................................. 8
3.3.4 NIBOR Yield Curve ........................................................................................ 8
3.3.5 Current System Rates setup of the rates assigned to the yield curves .............. 10
3.3.6 Current System Rates setup of the spot rates.................................................. 11
3.3.7 Revaluation .................................................................................................... 13
3.3.8 Sample calculation routine.............................................................................. 14
3.4 Accounting Entries ............................................................................................ 16
4 FASB 52 .................................................................................................................... 18
4.1 Requirement Overview ...................................................................................... 18
4.2 Oracle Treasury Solution.................................................................................... 20

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 2

1 Introduction
Oracle Treasury Revaluation is the process of adjusting the rates and prices of Treasury
financial instruments to reflect the current market value and calculate the realized or
unrealized gain and loss. This document details the Treasury Revaluation Process for
Foreign Exchange Forward Deals.

2 Generic Revaluation Process

In Oracle Treasury, financial instruments are revalued using either mark-to-market or
currency gain or loss revaluation. Mark to market revaluation calculates the fair value, or
current replacement cost, for the financial instrument. Currency gain or loss revaluation
calculates the value of foreign currency holdings. The method of revaluation used depends
on the type of financial instrument being revalued. The rates that are captured to revalue the
financial instruments (interest rates, bond and stock prices, foreign exchange spot rates, or
volatility rates) are collectively called revaluation rates. Revaluation rates are captured from
the Current System Rates window for the specified revaluation period.

3 FX Forward Deal Revaluation

Foreign Exchange Forward deals in Oracle Treasury can be revalued using both mark-to-
market and currency gain or loss revaluation methods.

3.1 Mark-to-market Revaluation

Oracle Treasury uses the Currency Spot Rates of the Buy and Sell currencies from the
Current System Rates closest to the Revaluation date to revalue the FX Spot Deals.

Oracle treasury uses calculated FX Forward rates, which are derived from the respective
yield curves, for revaluation of FX Forward Deals. The following formula is used for
calculation of FX Forward rates:

Forward Rate (bid) = Spot Rate, bid * (1 + (Interest Rate, quoted currency bid * Day
Count) / (100*Annual Basis, quoted currency)) /
(1 + (Interest Rate, base currency offer * Day Count) / (100*annual basis, base
currency))

Forward Rate (offer) = Spot Rate, offer * (1 + (Interest Rate, quoted currency offer
* Day Count) / (100*Annual Basis, quoted currency)) /
(1 + (Interest Rate, base currency bid * Day Count) / (100*annual basis, base
currency))

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 3

The market data set associated with the FX Forward deal (or the default market data set) is
used for the getting the FX Spot rates / interest rates for the two currencies involved in the
deal. Interest rates are determined from the Yield Curves of both currencies in the Market
Data Set.

The fair value of a Foreign Exchange Forward deal is calculated by discounting the Pay
Amount and the Receive Amount with their respective interest rates and exchanging the
Present Values at the Spot Exchange Rate.

Fair Value = PVC (base amount) * Spot Rate + PVC (contra amount in negative)

Gain (Loss) is calculated as the difference between the Ending Fair Value and the Beginning
Fair Value for the entire duration period of the deal.

Unrealized Gain (Loss) is calculated in each revaluation period that ends after the deal’s Deal
Date but before the deal’s Value Date. Realized Gain (Loss) is calculated in the first
revaluation period that ends after the deal’s Value Date. The sum of all periodic unrealized
gains/losses is equal to the final realized gain/loss.

3.2 Revaluation – Setup Process

In order to achieve the mark-to-market revaluation, the following pre-requisite setup must
be executed:

• Create rate codes for each currency transacted in the FX Forward deal and define
Spot Rates against USD for them in the Current System Rates window;
• Create rate codes for interest rates for each currency transacted in the FX Forward
deal and your Set of Books currency and define interest rates for them in the Current
System Rates window;
• Create yield curves in the Market Data Curves window for each currency transacted
in the FX Forward deal and your Set of Books currency using the previously created
interest rate codes;
• Assign the previously created yield curves to a Market Data Set;
• Select the FX Spot side for the Market Data Set;
• Assign the Market Data Set to the FX Forward deal;
• Select a pricing model for the FX Forward deal as
o 'Market-Deal', if you want the FX spot rate from the Current System Rates to
be used in the forward revaluation rate calculation;
o ‘GL-Deal’, if you want the daily GL FX rate to be used in the forward
revaluation rate calculation;
o ‘Fair Value’, if you want to enter the fair value gain/loss manually for the
deal;
o ‘No Revaluation’, if you want to exclude this deal from the Revaluation
process altogether.

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 4

 • Determine if you want the fair value gain/loss discounted to the Revaluation Date by
setting the Company Parameter “Revaluation – FX Discount Method”;
• Define journal entry actions for FX Forward deals that include the following
combinations related to the Revaluation. Depending on your accounting
requirements, you will need either of the setup options. In the example shown in this
document, we will use both options, since all amount types are always calculated for
all FX Forward deals.

Option 1

Date Type Amount Type Action Code DR/CR

REVAL REAL LOSS DR
REVAL REAL LOSS CR
REVAL REAL GAIN DR
REVAL REAL GAIN CR
REVAL UNREAL LOSS DR
REVAL UNREAL LOSS CR
REVAL UNREAL GAIN DR
REVAL UNREAL GAIN CR

Option 2

Date Type Amount Type Action Code DR/CR

REVAL CCYREAL LOSS DR
REVAL CCYREAL LOSS CR
REVAL CCYREAL GAIN DR
REVAL CCYREAL GAIN CR
REVAL CCYUNRL LOSS DR
REVAL CCYUNRL LOSS CR
REVAL CCYUNRL GAIN DR
REVAL CCYUNRL GAIN CR

3.3 Revaluation –Example

A specific example of an FX Forward deal and all the relevant setup (market data set, yield
curves, current system rates) is given in the following pages:

3.3.1 FX Forward Deal

Note the Pricing Model and the Market Data set.

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 5

3.3.2 Market Data Set

Note the Yield Curves assigned to the Market Data Set and the Market Data Side for FX
Spot.

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 6

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 7
3.3.3 GBP Yield Curve

Note the rate codes assigned to the yield curve.

3.3.4 NIBOR Yield Curve

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 8

Note the rate codes assigned to the yield curve.

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 9

3.3.5 Current System Rates setup of the rates assigned to the yield curves

Note the rate code period, term type, day count basis.

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 10

3.3.6 Current System Rates setup of the spot rates

Note the values of the rate codes for the revaluation date.

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 11

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 12
3.3.7 Revaluation

To start the revaluation process, access the Revaluation window and define the revaluation
period. Then, capture the rates for revaluation. This process takes a snapshot of all the latest
Current System Rates as of the Revaluation period end date.

Then, navigate to the Revaluation Details and submit the concurrent request to calculate the
Revaluation details.

When the concurrent request is complete, review the revaluation rate and the gain/loss
calculation results in the Revaluation Details window.

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 13

3.3.8 Sample calculation routine

The revaluation rate and gain/loss are calculated for the sample deal as follows:

1. If the FX Forward deal value date > Revaluation Period End Date, fetch the latest
spot rates as of the Revaluation Period End Date; otherwise, fetch the latest spot
rates as of the FX Forward deal value date

Revaluation Period End Date 30-Jun-2006

FX Forward Value Date 25-Sep-2006
FX Spot Rate Date 30-Jun-2006
FX Spot Rate Source Current System Rates
USD/NOK Spot Rate Value 6.24242901
GBP/USD Spot Rate Value 1.836873283
GBP/NOK Cross Rate Value 6.24242901*1.836873283=11.46655107

2. Identify the nearest interest rates for the FX Forward deal value date

NOK Yield Curve

Nearest available interest Date 30-Aug-2006
rate before the FX
Forward deal value date Rate Code NOK - 2M
Value 3.14
Day Count Basis 30/360
Nearest available interest Date 29-Sep-2006
rate after the FX Rate Code NOK - 3M
Forward deal value date Value 3.38
Day Count Basis 30/360

GBP Yield Curve

Nearest available interest Date 31-JUL-2006
rate before the FX Rate Code GBP - 1M
Forward deal value date Value 4.71625
Day Count Basis 30/360
Nearest available interest Date 29-SEP-2006
rate after the FX Rate Code GBP - 3M
Forward deal value date Value 4.94375
Day Count Basis 30/360

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 14

3. Interpolate the interest rates for the FX Forward deal value date using the
interpolation method indicated on the yield curve and convert the interest rates to
the Actual/Actual day count basis

NOK Interest Rate for 25-Sep-2006

Interpolated Raw Rate 3.14+(3.38-3.14)*(25-Sep-2006 – 30-
Aug-2006)/(29-Sep-2006 – 30-Aug-
2006) = 3.348
Days to FX Forward Value Date 87
(Actual/Actual)
Days to FX Forward Value Date 85
(30/360)
Interpolated Raw Rate converted to (85*365)/(87*360)*3.348 =
Actual/Actual Day Count Basis 3.316465517

GBP Interest Rate for 25-Sep-2006

Interpolated Raw Rate
Days to FX Forward Value Date
(Actual/Actual)
Days to FX Forward Value Date
(30/360)
Interpolated Raw Rate converted to
Actual/Actual Day Count Basis
4.71625+(4.94375-4.71625)*(25-Sep-
2006 – 31-Jul-2006)/(29-Sep-2006 – 31-
Jul-2006) = 4.9285833333
87
85
(85*365)/(87*360)* 4.9285833333=
4.882161492

4. Calculate the revaluation rate for the FX Forward Deal using the FX spot rate and
the interest rate differential

GBP/NOK Forward Revaluation Rate

Revaluation 11.46655107*(1+3.316465517*87/(100*365))/(1+4.882161492*87/
Rate (100*365)) = 11.424251

5. Calculate the fair value gain/loss for the FX Forward Deal

Fair Value Gain / Loss

Initial Fair Value - NOK 74800 * 11.63010 = 869931.48
Ending Fair Value – NOK 74800 * 11.424251 =854533.97
Gain / Loss in NOK 869931.48 -854533.97 = -15397.51

Fair Value Gain / Loss in Set of Books Currency

USD (Set of Books Currency) Yield 4.3114+(4.5208-4.3114)*(25-Sep-2006 – 03-
Curve: Interpolated Raw Rate Jul-2006)/(29-Sep-2006 – 03-Jul-2006) =
4.5112818182

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 15

 Days to FX Forward Value Date 87
(Actual/Actual)
Days to FX Forward Value Date 85
(30/360)
USD (Set of Books Currency) Yield (85*365)/(87*360)* 4.5112818182=
Curve: Interpolated Raw Rate 4.468790498
converted to Actual/Actual Day Count
Basis
USD/NOK Spot Rate 6.24242901
USD/NOK Forward Rate 6.24242901*(1+3.316465517*87/(100*365)
)/(1+4.468790498*87/ (100*365)) =
6.22546402447996
Gain / Loss in USD discounted to (-15397.51/6.22546402447996)
Revaluation Date /(1+(3.316465517*87)/(100*365))=
-2,453.91

6. Calculate the FX currency gain/loss for the FX Forward Deal

Currency Gain / Loss

GL Daily Rate – GBP/NOK – 24-Jun-2005 11
GL Daily Rate – USD/NOK – 24-Jun-2005 6.5
GL Daily Rate – GBP/NOK – 30-Jun-2006 11.5
GL Daily Rate – USD/NOK – 30-Jun-2006 7
Currency Gain/Loss in USD (74,800*11.5-869931.48)/7 -
(74,800*11-869,931.48)/6.5
= 5860.79

3.4 Accounting Entries

After the revaluation results are calculated and authorized, calculate the accrual results for
and generate Daily Journals for the same batch. The Daily Journals program will produce the
following journal entries for the FX Forward deal.

Date Type Amount Type Action Code DR/CR Amount

REVAL REAL LOSS DR -
REVAL REAL LOSS CR -
REVAL REAL GAIN DR -
REVAL REAL GAIN CR -
REVAL CCYREAL LOSS DR -
REVAL CCYREAL LOSS CR -
REVAL CCYREAL GAIN DR 5,860.79
REVAL CCYREAL GAIN CR 5,860.79

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 16

REVAL UNREAL LOSS DR 2,453.91
REVAL UNREAL LOSS CR 2,453.91
REVAL UNREAL GAIN DR -
REVAL UNREAL GAIN CR -
REVAL CCYUNRL LOSS DR -
REVAL CCYUNRL LOSS CR -
REVAL CCYUNRL GAIN DR -
REVAL CCYUNRL GAIN CR -

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 17

4 FASB 52

4.1 Requirement Overview

The Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting

Standards 52 (FASB 52), Foreign Currency Translation, defines the accounting requirements for
foreign currency revaluation. The complete text of the Statement can be found on the FASB
website http://www.fasb.org.

The revaluation of the FX Forward Deals is described by the FASB 52 as follows:

“Forward Exchange Contracts

17. A forward exchange contract (forward contract) is an agreement to exchange different
currencies at a specified future date and at a specified rate (the forward rate). A forward
contract is a foreign currency transaction. A gain or loss on a forward contract that does not
meet the conditions described in paragraph 20 or 21 shall be included in determining net
income in accordance with the requirements for other foreign currency transactions
(paragraph 15). Agreements that are, in substance, essentially the same as forward contracts,
for example, currency swaps, shall be accounted for in a manner similar to the accounting
for forward contracts.

18. A gain or loss (whether or not deferred) on a forward contract, except a forward contract
of the type discussed in paragraph 19, shall be computed by multiplying the foreign currency
amount of the forward contract by the difference between the spot rate at the balance sheet
date and the spot rate at the date of inception of the forward contract (or the spot rate last
used to measure a gain or loss on that contract for an earlier period). The discount or
premium on a forward contract (that is, the foreign currency amount of the contract
multiplied by the difference between the contracted forward rate and the spot rate at the
date of inception of the contract) shall be accounted for separately from the gain or loss on
the contract and shall be included in determining net income over the life of the forward
contract. However, if a gain or loss is deferred under paragraph 21, the forward contract's
discount or premium that relates to the commitment period may be included in the
measurement of the basis of the related foreign currency transaction when recorded. If a
gain or loss is accounted for as a hedge of a net investment under paragraph 20, the forward
contract's discount or premium may be included with translation adjustments in the separate
component of equity.

19. A gain or loss on a speculative forward contract (that is, a contract that does not hedge
an exposure) shall be computed by multiplying the foreign currency amount of the forward
contract by the difference between the forward rate available for the remaining maturity of
the contract and the contracted forward rate (or the forward rate last used to measure a gain
or loss on that contract for an earlier period). No separate accounting recognition is given to
the discount or premium on a speculative forward contract.

Transaction Gains and Losses to Be Excluded from Determination of Net Income

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 18

20. Gains and losses on the following foreign currency transactions shall not be included in
determining net income but shall be reported in the same manner as translation adjustments
(paragraph 13):

a. Foreign currency transactions that are designated as, and are effective as, economic
hedges of a net investment in a foreign entity, commencing as of the designation
date

b. Intercompany foreign currency transactions that are of a long-term-investment

nature (that is, settlement is not planned or anticipated in the foreseeable future),
when the entities to the transaction are consolidated, combined, or accounted for by
the equity method in the reporting enterprise's financial statements

21. A gain or loss on a forward contract or other foreign currency transaction that is
intended to hedge an identifiable foreign currency commitment (for example, an agreement
to purchase or sell equipment) shall be deferred and included in the measurement of the
related foreign currency transaction (for example, the purchase or the sale of the equipment).
Losses shall not be deferred, however, if it is estimated that deferral would lead to
recognizing losses in later periods. A foreign currency transaction shall be considered a
hedge of an identifiable foreign currency commitment provided both of the following
conditions are met:

a. The foreign currency transaction is designated as, and is effective as, a hedge of a
foreign currency commitment.

b. The foreign currency commitment is firm.

The required accounting shall commence as of the designation date. The portion of a
hedging transaction that shall be accounted for pursuant to this paragraph is limited to the
amount of the related commitment. If a hedging transaction that meets conditions (a) and
(b) above exceeds the amount of the related commitment, the gain or loss pertaining to the
portion of the hedging transaction in excess of the commitment shall be deferred to the
extent that the transaction is intended to provide a hedge on an after-tax basis. A gain or loss
so deferred shall be included as an offset to the related tax effects in the period in which
such tax effects are recognized; consequently, it shall not be included in the aggregate
transaction gain or loss disclosure required by paragraph 30. A gain or loss pertaining to the
portion of a hedging transaction in excess of the amount that provides a hedge on an after-
tax basis shall not be deferred. Likewise, a gain or loss pertaining to a period after the
transaction date of the related commitment shall not be deferred. If a foreign currency
transaction previously considered a hedge of a foreign currency commitment is terminated
before the transaction date of the related commitment, any deferred gain or loss shall
continue to be deferred and accounted for in accordance with the requirements of this
paragraph.”

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 19

4.2 Oracle Treasury Solution

In order to apply different accounting treatment to different categories of FX Forwards, you

need to create at least two Product Types for the Foreign Exchange deal type. Then, create
distinct sets of Journal Entry Actions for each Product Type. Finally, include the General
Ledger revaluation process in your analysis to complete the FX Forward accounting.

Option 1: The following partial Journal Entry Actions setup highlights

revaluation-related amount types that are needed under p. 19 of FASB 52 to account
for forward/forward gains/losses

Date Type Amount Type Action Code DR/CR

REVAL REAL LOSS DR
REVAL REAL LOSS CR
REVAL REAL GAIN DR
REVAL REAL GAIN CR
REVAL UNREAL LOSS DR
REVAL UNREAL LOSS CR
REVAL UNREAL GAIN DR
REVAL UNREAL GAIN CR

Option 2: The following partial Journal Entry Actions setup highlights

revaluation-related amount types that are needed under p. 18 of FASB 52 to account
for spot/spot gains/losses

Date Type Amount Type Action Code DR/CR

REVAL CCYREAL LOSS DR
REVAL CCYREAL LOSS CR
REVAL CCYREAL GAIN DR
REVAL CCYREAL GAIN CR
REVAL CCYUNRL LOSS DR
REVAL CCYUNRL LOSS CR
REVAL CCYUNRL GAIN DR
REVAL CCYUNRL GAIN CR

FX Forward Revaluation in Oracle Treasury and FASB 52 Page 20

FX Forward Revaluation in Oracle Treasury and FASB 52
February 2007

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