Best examples of adjusting for foreign currency in financial statements

Why examples of adjusting for foreign currency in financial statements matter

Foreign currency isn’t some side note in the footnotes anymore. For many global companies, more than half of revenue comes from outside the home country. When the dollar, euro, or yen moves a few percent, reported earnings can swing sharply even if the underlying business is steady.

Investors, auditors, and boards expect finance teams to:

• Apply the right exchange rates (spot, average, historical, closing) in the right places.
• Separate economic performance from currency noise.
• Explain why equity moved because of FX, even when cash didn’t.

That’s where examples of adjusting for foreign currency in financial statements help. Seeing how translation and remeasurement work in real scenarios is far more useful than memorizing definitions.

Real-world examples of adjusting for foreign currency in financial statements

Let’s start with realistic situations you’d actually see in a multinational group. Each example highlights different rules under U.S. GAAP (ASC 830) and IFRS (IAS 21).

Example 1: Translating a European subsidiary’s financials into U.S. dollars

Imagine a U.S. parent with a French subsidiary that uses the euro (EUR) as its functional currency. The group reports in U.S. dollars (USD).

At year-end:

• The French subsidiary’s local trial balance is in EUR.
• The EUR/USD rate at the balance sheet date is 1.10.
• The average rate for the year is 1.08.

Under ASC 830 and IAS 21, because the euro is the functional currency, you translate, not remeasure:

• Assets and liabilities: translated at the closing rate (1.10).
• Income and expenses: translated at the average rate (1.08), unless a specific transaction rate is required.
• Equity (share capital and historical reserves): translated at historical rates.

The difference between:

• Equity based on historical rates, plus
• Translated net assets at the closing rate

is recorded in Other Comprehensive Income (OCI) as a cumulative translation adjustment (CTA).

This is one of the cleanest examples of adjusting for foreign currency in financial statements: cash hasn’t moved, but equity changes on the consolidated balance sheet purely due to exchange rates.

Example 2: Remeasuring a U.K. branch that keeps books in GBP but has USD functional currency

Now flip the situation. A U.S. company has a U.K. branch that:

• Keeps its accounting records in British pounds (GBP), but
• Has USD as its functional currency (because it sells mainly into the U.S., prices in USD, and is funded in USD).

Here, you remeasure the branch’s GBP trial balance into USD, because the functional currency is different from the recording currency.

Remeasurement rules:

• Monetary items (cash, receivables, payables, loans): closing rate.
• Non-monetary items (fixed assets, inventory at cost): historical rates.
• Income statement items: average rate, except for those related to non-monetary items (e.g., depreciation of a fixed asset remeasured at a historical rate uses that same historical rate).

Any remeasurement gain or loss hits profit or loss, not OCI.

This provides a sharp example of adjusting for foreign currency in financial statements where FX movements directly affect earnings, because the functional currency is USD and currency risk is part of ongoing operations.

Example 3: Foreign-currency loan at the parent level

A U.S. parent borrows EUR 100 million at the start of the year when EUR/USD is 1.05. At year-end, EUR/USD is 1.15.

On day one:

• The loan is recorded at USD 105 million.

At year-end:

• The same EUR 100 million liability is now USD 115 million.
• There is a USD 10 million FX loss on remeasurement of a monetary liability.

Under both IFRS and U.S. GAAP, that FX loss goes through the income statement, unless the loan is part of a net investment hedge of a euro functional currency subsidiary. If it’s designated as such, the effective portion of the FX loss goes to OCI to offset the translation adjustment.

This is a very common example of adjusting for foreign currency in financial statements for treasury teams: they intentionally borrow in the same currency as their foreign net investment to stabilize equity and reported results.

Example 4: Hyperinflationary subsidiary and USD functional currency (2024–2025 context)

In some emerging markets, inflation is so high that local currency financial statements become meaningless. Under IAS 29 (and ASC 830’s hyperinflation guidance), you may:

• Restate for inflation, and/or
• Change the functional currency to a more stable one (often USD).

Suppose a U.S. company operates in a hyperinflationary economy where the local currency weakens rapidly. In 2024–2025, several countries have flirted with or entered high-inflation territory, forcing companies to reassess functional currency and disclosure.

If management concludes the functional currency is USD, but the books are kept in local currency, every reporting period you:

• Remeasure local-currency balances into USD using closing and historical rates.
• Recognize large FX gains/losses in profit or loss.

Investors then see a volatile income statement, even if local operations are stable in local terms. This is one of the more painful examples of adjusting for foreign currency in financial statements, because the accounting faithfully reflects the economic instability.

For background on hyperinflation and economic data, many companies monitor central bank and IMF publications; in the U.S., macro trends and policy analysis often refer to sources like the Federal Reserve and academic research from institutions such as Harvard University.

Example 5: Intercompany sales and unrealized FX gains in inventory

A U.S. parent sells inventory to its Brazilian subsidiary:

• Parent functional currency: USD.
• Subsidiary functional currency: Brazilian real (BRL).

The parent sells goods for BRL 10 million when the BRL/USD rate is 5.0, so it records revenue of USD 2 million. The subsidiary records inventory in BRL, which translates to USD at the parent level using the appropriate rate.

By year-end, the Brazilian subsidiary still holds half the inventory. The FX rate has moved to 5.5 BRL/USD.

In consolidation, you eliminate the intercompany profit on the unsold inventory. But you also need to consider FX:

• The unrealized intercompany profit is eliminated.
• Any FX gains or losses arising from that inventory and intercompany balances need to be aligned with the group’s currency treatment.

This scenario gives a more complex example of adjusting for foreign currency in financial statements, where FX interacts with consolidation eliminations, not just standalone translation.

Example 6: Cash flow statement translation and FX reconciliation

Investors increasingly scrutinize cash conversion. But when you have multiple currencies, the consolidated cash flow statement can confuse them unless FX effects are clear.

Assume:

• A Canadian subsidiary (functional currency CAD) generates CAD 50 million of operating cash.
• The average CAD/USD rate for the year is 0.75.
• The closing rate is 0.78.

Operating cash flows are translated at the average rate (0.75), so the group shows USD 37.5 million of cash from operations. But the cash and cash equivalents line in the balance sheet is translated at 0.78.

The result:

• The change in cash on the cash flow statement doesn’t match the change in the cash balance without an FX line.

So you present a separate line such as “Effect of exchange rate changes on cash and cash equivalents”. This is a subtle but important example of adjusting for foreign currency in financial statements that affects how analysts reconcile cash.

For guidance on cash flow presentation and foreign currency, many practitioners refer back to the standards themselves—see the FASB Codification for U.S. GAAP and resources from organizations like the IFRS Foundation.

Example 7: Currency disclosures in 2024–2025 earnings reports

In the last few years, you’ve probably seen large U.S. tech and consumer companies breaking out:

• “Constant currency” growth versus reported growth.
• FX impacts on revenue, operating income, and EPS.

While non-GAAP constant currency metrics are outside the core accounting standards, they rely on the same mechanics as these examples of adjusting for foreign currency in financial statements:

• They take prior-period local-currency amounts.
• Translate them at current-period exchange rates.
• Show how much of the change is pure FX versus underlying volume/price.

Regulators like the U.S. Securities and Exchange Commission (SEC) pay close attention to how non-GAAP measures are presented and reconciled. For broader financial reporting and regulatory context, see resources from the U.S. Securities and Exchange Commission.

How to think about the mechanics behind these examples

The best examples of adjusting for foreign currency in financial statements all revolve around three core questions:

1. What is the functional currency?

The functional currency is the currency of the primary economic environment where the entity operates. It drives whether you:

• Translate (functional currency ≠ group reporting currency, but books are already in functional currency), or
• Remeasure (recording currency ≠ functional currency).

In 2024–2025, reassessing functional currency is a live topic in:

• High-inflation economies.
• Jurisdictions where supply chains, pricing, and funding have shifted to USD or EUR even though local books are kept in domestic currency.

2. Which rates apply to which items?

Across the examples of adjusting for foreign currency in financial statements, you’ll see the same pattern:

• Closing rate for assets and liabilities.
• Average rate for income and expenses (unless linked to non-monetary items measured at historical cost).
• Historical rates for equity and non-monetary items carried at historical cost.

Getting this wrong doesn’t just annoy auditors—it can distort margins, leverage ratios, and even covenant calculations.

3. Does the FX impact hit profit or loss, or OCI?

This is where the economic story shows up:

• Translation adjustments for foreign operations with a different functional currency typically go to OCI (CTA within equity).
• Remeasurement gains and losses generally go to profit or loss.
• Net investment hedges can shift certain FX effects from profit or loss to OCI to align with translation adjustments.

Understanding which bucket you’re in is the difference between explaining a one-time FX swing in equity versus a hit to EPS.

Common pitfalls seen in real examples of adjusting for foreign currency in financial statements

Even experienced finance teams trip over the same patterns:

Misidentifying the functional currency

A subsidiary might:

• Invoice in USD,
• Borrow in USD,
• Pay suppliers in USD,

but still keep books in local currency. Treating that local currency as functional can produce misleading FX results. Reassessment is especially important in regions where dollarization is growing.

Mixing translation and remeasurement logic

It’s easy to:

• Use translation rules (all assets/liabilities at closing rate) when you should be remeasuring, or
• Forget that non-monetary items in remeasurement use historical rates.

Those mistakes show up as strange FX gains/losses that don’t reconcile to treasury’s exposure analysis.

Ignoring tax effects of FX movements

FX gains and losses can have current and deferred tax consequences. For example:

• FX movements on foreign-currency loans may affect taxable income.
• Translation adjustments in OCI can interact with deferred taxes when subsidiaries are disposed of.

Tax and accounting teams need to be aligned on how these examples of adjusting for foreign currency in financial statements flow through both the income statement and the tax provision.

FAQ: examples of adjusting for foreign currency in financial statements

Q1: Can you give a simple example of adjusting for foreign currency in financial statements for revenue?
A U.S. parent has a German subsidiary that sells €10 million of products. During the year, the average EUR/USD rate is 1.10, so consolidated revenue is reported as USD 11 million. If last year’s average rate was 1.05, analysts might say revenue grew 5% in reported terms, but “constant currency” growth is lower because part of the increase is just FX.

Q2: What are typical examples of FX gains and losses that hit profit or loss?
Common examples include remeasurement of foreign-currency loans, trade receivables and payables denominated in a currency different from the entity’s functional currency, and FX on cash balances when the functional currency is not the same as the cash denomination. All of these are standard examples of adjusting for foreign currency in financial statements where the impact is visible in operating or financial income.

Q3: How do translation adjustments show up in equity?
When you translate a foreign subsidiary’s financial statements into the group reporting currency, differences between historical rates (for equity) and closing rates (for net assets) accumulate in a separate component of equity, often called the cumulative translation adjustment (CTA). This doesn’t affect profit or loss until you dispose of the subsidiary or otherwise realize that investment.

Q4: Is there an example of when FX effects are deferred in OCI instead of profit or loss?
Yes. A classic example is a net investment hedge. If a U.S. company borrows in euros to hedge its euro-denominated net investment in a European subsidiary, the effective portion of the FX gains or losses on that borrowing can be recorded in OCI, offsetting the translation adjustment on the subsidiary.

Q5: How do regulators view non-GAAP “constant currency” examples?
Regulators like the SEC don’t prohibit constant currency metrics, but they expect clear labeling, reconciliations to GAAP/IFRS numbers, and no cherry-picking. In practice, companies build constant currency examples of adjusting for foreign currency in financial statements by re-translating prior-period local-currency results at current-period rates and showing the difference transparently.

Foreign currency accounting isn’t about memorizing rules in isolation. It’s about understanding how each decision—functional currency, rate selection, hedge designation—shows up in real examples of adjusting for foreign currency in financial statements and ultimately in the story you tell investors about performance, risk, and cash.