Guideline

Currency Conversion in IBM

Cognos Planning
Product(s): IBM Cognos Planning
Area of Interest: Modeling
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Copyright
Copyright © 2008 Cognos ULC (formerly Cognos Incorporated). Cognos ULC
is an IBM Company. While every attempt has been made to ensure that the
information in this document is accurate and complete, some typographical
errors or technical inaccuracies may exist. Cognos does not accept
responsibility for any kind of loss resulting from the use of information
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This document is maintained by the Best Practices, Product and Technology
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Contents
1 INTRODUCTION ............................................................................................ 4
1.1 PURPOSE .............................................................................................................. 4
1.2 APPLICABILITY ....................................................................................................... 4
1.3 EXCLUSIONS AND EXCEPTIONS .................................................................................... 4
2 SELECTED IFRS RULE SUMMARIES............................................................... 4
3 CURRENCY CONVERSION METHODS IN A CENTRALIZED ENVIRONMENT... 6
4 CURRENCY CONVERSION METHODS IN A DE-CENTRALIZED ENVIRONMENT19

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1 Introduction
1.1 Purpose
This document provides best practice guidelines for designing IBM Cognos
Planning models at organizations that have currency conversion requirements.

Increased globalization has resulted in more business organizations with

international operations. This has lead to an increase in the number of
customers who require the ability to plan, budget, and forecast in multiple
currencies. IBM Cognos Planning allows multi-national organizations to
perform bottom-up planning throughout the entire organization with the use of
IBM Cognos Planning Contributor. IBM also provides these organizations with
the ability to perform top-down planning and provide global planning
assumptions through the use of IBM Cognos Planning Analyst. Two
approaches to currency conversion will be presented in this document: 1)
Centralized - which will leverage the top-down planning capabilities of Analyst;
and 2) De-centralized which will leverage the bottom-up capabilities of
Contributor.

1.2 Applicability
IBM Cognos Planning v. 7.3 through v. 8.1

1.3 Exclusions and Exceptions

None identified

2 Selected IFRS Rule Summaries

The International Financial Reporting Standards are not directly applicable to
budgeting, forecasting, or planning data as it is forward-looking and not
subject to the rigors if the IFRS rules for reporting of actual historical financial
reports for public, investor, governmental, and regulatory bodies. This
information is supplied for context and may be relevant if IBM Cognos is an
intermediate source for actual data supplied to the financial reports.

International Financial Reporting Standards (IFRS) represent a set of rules

that publicly held multi-national organizations, and even certain non-public
multi-national companies, must adhere to in order to accurately represent
their financial performance and standing. These rules should be taken into
account when designing multi-currency IBM Cognos Planning models that will
be used as a source for reporting actual financial results. However, the
majority of the time the rule summaries below labeled 2 and 3 will apply to
forward-looking planning, budgeting, and forecasting data. Since there is no
IFRS requirement to provide plan, budget, or forecast data to regulatory
agencies and investors, the IBM Cognos Planning data will fall under the
“Convenience Reporting” IFRS rule if it is included in a financial statement at
all.

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If the IBM Cognos Planning model will not serve as an intermediate or direct
source for reporting actual financial results and the planning data will not be
included in any financial statements issued to regulatory agencies or
investors, then there is no applicability of the IFRS rules on currency
conversion other than to maintain consistency between plan and actual for
better variance analysis.

The following paragraphs are a summary of the IFRS (International Financial

Reporting Standards) issued by the IASB (International Accounting Standards
Board) related to the reporting of currency conversions on financial
statements. These summaries are available at IAS Plus
(http://www.iasplus.com/standard/standard.htm) a website provided by
Deloitte.

1) Translation from the Functional Currency to the Presentation Currency

The results and financial position of an entity whose functional currency is not
the currency of a hyperinflationary economy are translated into a different
presentation currency using the following procedures: [IAS 21.39]

• assets and liabilities for each balance sheet presented (including

comparatives) are translated at the closing rate at the date of that
balance sheet. This would include any goodwill arising on the acquisition
of a foreign operation and any fair value adjustments to the carrying
amounts of assets and liabilities arising on the acquisition of that foreign
operation are treated as part of the assets and liabilities of the foreign
operation [IAS 21.47];
• income and expenses for each income statement (including comparatives)
are translated at exchange rates at the dates of the transactions; and
• all resulting exchange differences are recognised as a separate
component of equity.

Special rules apply for translating the results and financial position of an entity
whose functional currency is the currency of a hyperinflationary economy into
a different presentation currency. [IAS 21.42-43]

2) Disclosure of key sources of estimation uncertainty.

Also new in the 2003 revision to IAS 1, an entity must disclose, in the notes,
information about the key assumptions concerning the future, and other key
sources of estimation uncertainty at the balance sheet date, that have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year. [IAS 1.116] These
disclosures do not involve disclosing budgets or forecasts.

3) Convenience Translations

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Sometimes, an entity displays its financial statements or other financial

information in a currency that is different from either its functional currency or
its presentation currency simply by translating all amounts at end-of-period
exchange rates. This is sometimes called a convenience translation. A result of
making a convenience translation is that the resulting financial information
does not comply with all IFRS, particularly IAS 21. In this case, the following
disclosures are required: [IAS 21.57]

• Clearly identify the information as supplementary information to

distinguish it from the information that complies with IFRS.
• Disclose the currency in which the supplementary information is
displayed.
• Disclose the entity's functional currency and the method of translation
used to determine the supplementary information.

3 Currency Conversion Methods in a Centralized

Environment
Centralized currency conversion is used as the currency conversion method at
the majority of IBM Cognos Planning customers. The benefits of centralized
currency conversion are: 1) Remove currency conversion option as a variable
from end users in order to reduce a source of error; 2) Reduce the size and
complexity of the Contributor model; and 3) Global variables are more
consistently managed at a top level rather than a bottom-up level.

In a centralized approach, currency rate tables are maintained by the Analyst

model administrator and the application of those rates to the various cubes and
dimensions are also controlled by the Analyst model administrator. The currency
conversion rates are pushed down to an assumptions cube to each hierarchical
node in the model. A dimension that holds at least 3 items (Local Currency,
Exchange Rate, and Reporting Currency) is required to convert the Local
Currency to the Reporting Currency. The calculation option should be set to
“Force to Zero” (or Weighted Average) for the Exchange Rate so that parent-
level nodes do not display or use aggregated exchange rates. Also, the
Reporting Currency can contain the calculation that either multiplies or divides
the Exchange Rate (depending on numerator/denominator currency used to
develop the exchange rates) against the Local Currency to calculate the
Reporting Currency. Finally, the calculation priority for the Reporting Currency
calculation should be set to “Low”, otherwise the conversion calculation can
potentially override other dimensional calculations and produce undesired results

An example of the currency conversion calculation dimension is shown below:

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The application of the currency conversion dimension is usually done on the

reporting cube or summary cube. Detailed data collection cubes in a
Contributor model usually do not need to be converted to a reporting
currency.

An example of a reporting/summary cube that has had the currency

conversion dimension applied to it is shown below:

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In the above example, the currency conversion calculation dimension was

applied directly to a summary/reporting cube. However, the currency
conversion dimension can also be applied to an intermediate calculation cube
and linked to a non-calculating reporting cube.

The currency exchange rates are typically contained in a dedicated

assumptions cube, an example of which is shown below:

The exchange rates may be used by several models in an enterprise-wide

deployment of IBM Cognos Planning, so this table would be a good candidate
for storage in a common library.

Populating exchange rates for forward-looking planning, budgeting, and

forecasting models is usually an exercise in estimates. “There is no reliable
method available to forecast exchange rates. Paul Krugman and Maurice
Obstfeld write in their book "International Economics: Theory and Policy"
(New York, HarperCollins:1994): If exchange rates are asset prices that
respond immediately to changes in expectations and interest rates, they
should have properties similar to those of other asset prices, for example,
stock prices. Like stock prices, exchange rates should respond strongly to
"news," that is, unexpected economic and political events; and, like stock
prices, they therefore should be very hard to forecast.”

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The graph above illustrates the challenges in developing an accurate forecast

for exchange rates for the currency rates table in the IBM Cognos Planning
Model. Since there is such variability and lack of precise predictability, any
plan that utilizes exchange rates will inevitably have a variance from actual
performance due to the exchange rate variances. This variance can be
isolated in order to analyze the actual-to-plan variance due to controllable
factors (efficiency, price of inputs, etc.). Options for reporting on variance
due to foreign exchange will be discussed in a separate document.

Once the currency conversion rate table has been established, the next step
is to link this to the currency conversion rate dimension item in the cubes that
have been identified for currency conversion.

Several options exist to set-up this link. If the geographic dimension of the
planning model is stable and there is only the need to covert from a local
currency to a single reporting currency then a D-Link from the currency table
to the e-list (a geographic dimension, in this example) could be used. This
link could be Analyst-to-Analyst or Analyst-to-Contributor. A simple example
is shown below:

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If there is a need for more dynamic switching between reporting currencies

then a D-Cube Allocation Link can be used in conjunction with a D-Cube
formatted D-List. This will allow the Analyst model administrator to switch
reporting currencies on the geographic dimension easily vis-à-vis a drop-
down currency list selection. An example of a currency conversion D-Link
using a D-Cube Allocation is shown below:

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Since this is a centralized approach to currency conversion and these links will
be run by the Analyst model administrator, remember that if this model
library is the basis for a Contributor application, do not to add these links to
the Update Links Table for the target D-Cube when asked.

With this approach, the following results occur when selecting the CAD
currency for Australia and running the links:

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The flow of a currency conversion model can be from a Contributor

application that was designed purely for local currency input to a separate
Analyst model that was designed to take those Contributor local currencies
and run the conversion. From there the converted data can either be sent
back to a summary/reporting cube in the Contributor model or to a separate
reporting model. This is illustrated in the diagram below:

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The benefits of this approach are:

• Less complex and lighter Contributor model
• Standard and consistent application of currency rates
• Model administrator has sole accountability for currency rates

Another centralized approach to currency conversion is to simply link the

exchange rates from a dedicated exchange rate cube in a library that is
separate from the Contributor model’s basis library. This approach differs
from Option 1 (above) in that the currency conversion calculation occurs in
the Contributor model. This approach is illustrated in the diagram below:

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This option may be considered more of a hybrid between centralized and de-
centralized, since the calculation is occurring on the Contributor grid. In this
scenario, the Contributor user does not choose a currency; one is assigned to
the user based on the Analyst model administrator’s criteria.

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An example of a Contributor model built with this approach is presented in

the screenshots below:

1) The Total Company Aggregation of January in Local Currency:

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2) The Total Company Aggregation of January in Local and Reporting

Currencies:

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3) An individual Contributor (Australia) can enter data in Local Currency and

see the results in Reporting Currency (note that the Contributor User has no
control over the Exchange Rates or the currency assignments):

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4) Each hierarchical e-list node is totaled correctly as shown below where the
Europe node correctly aggregates the Local and Reporting currencies:

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5) A European child node (England) is shown below:

The benefits of this approach to currency conversion are:

• Exchange rates for all models can be maintained in a single library
location
• Model administrator maintains control over currency assignments and
exchange rates
• End users can see the reporting currencies as they view the
summary/reporting cubes in the Contributor model.

4 Currency Conversion Methods in a De-Centralized

Environment
In a de-centralized approach to currency conversion, Contributor users are given
more control over the details of the currency conversions of their specific planning
data. These approaches can vary from: allowing the Contributor user to choose the
specific reporting currency; to having the Contributor user input the currency
conversion rates to be used for the conversion calculation. In general, the more de-
centralized the approach, the more variability the results will be. As most
organizations employ bottom-up enterprise-wide planning to capture the variations in
performance across the organization, one could suppose that an organization may
also want to capture different outlooks on future exchange rates. However, most

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organizations prefer to have centrally controlled global variables such as: exchange
rates, inflation rates, interest rates, etc. set by the top of the planning organization
rather than at the lower levels. If global variables are changed at the individual
contributor level, comparisons between and among the various plans become
difficult.

For various reasons, some organizations may want to allow plan contributors to have
some control over the currency conversion for their plans. The diagram below shows
the data model flow of a de-centralized currency conversion approach:

This flow is fairly simple as the calculations and currency rate tables are held within
the Contributor model. Rate tables are created as assumption cubes and any
exchange rate changes would be made by the Analyst model administrator. This is a
level of control still maintained by the administrator in this de-centralized/hybrid
approach. A fully de-centralized approach would allow end users to input exchange
rates as well as decide on individual currencies for the conversion calculation.

Below are some screenshots of a Contributor application that takes this approach in
it’s design:

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1) This model includes an assumptions cube that is populated by the Analyst model
administrator. QTR-1 totals can be hidden using an Access Table as they are not
used in any calculations.

2) The end user has the ability to choose which currency rate to apply when
calculating the Reporting Currency.

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3) Planning hierarchy calculations are correctly totaled in the de-centralized/hybrid

approach:

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4) As more control is given to end users in the de-centralized approach, more errors
can occur making the plans difficult to compare across the organization.

The benefits of this approach to currency conversion are:

• End users have more control over the currencies used for conversion to
Reporting Currency
• Model administrator maintains control over exchange rates
• End users can see the effect of different currencies as they view the
summary/reporting cubes in the Contributor model.

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