This year's local revenue at last year's exchange rates, the bridge from reported to constant currency, and the same method used to split a budget variance into trading and FX.
Constant currency growth restates this year's revenue at last year's exchange rates and compares it with last year's reported revenue. An illustrative group that reports 868.80 million against 840.00 million has grown 3.43 per cent as reported; at last year's rates this year is 881.40 million, so growth in constant currency is 4.93 per cent, and currency took 1.50 points off. Against budget the same method splits a 34.75 million shortfall into 10.57 of trading and 24.18 of currency.
Worked in full in Financial Planning and Analysis by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The point of the restatement is to separate what management did from what the exchange rate did. Neither number is the "real" one: the reported figure is what the shareholders own in dollars, the constant currency figure is how the business performed. Board packs show both, and the bridge between them is the currency effect.
| Region | Prior year local | Rate | Current year local | Rate | Budget local | Budget rate |
|---|---|---|---|---|---|---|
| US (USD) | 400.0 | 1.00 | 420.0 | 1.00 | 430.0 | 1.00 |
| Europe (EUR) | 300.0 | 1.05 | 318.0 | 1.02 | 315.0 | 1.08 |
| UK (GBP) | 100.0 | 1.25 | 102.0 | 1.22 | 105.0 | 1.27 |
One average rate a year keeps the arithmetic visible. In practice each month is translated at its own average rate and the restatement is done month by month, because a currency that moved in the fourth quarter should not be applied to January's sales.
1. Prior year reported = 400.00 + 300.0 × 1.05 + 100.0 × 1.25 = 400.00 + 315.00 + 125.00 = 840.00
2. Current year reported = 420.00 + 318.0 × 1.02 + 102.0 × 1.22 = 420.00 + 324.36 + 124.44 = 868.80
3. Current year at prior year rates = 420.00 + 318.0 × 1.05 + 102.0 × 1.25 = 420.00 + 333.90 + 127.50 = 881.40
4. Reported growth = 868.80 ÷ 840.00 − 1 = 3.43%
5. Constant currency growth = 881.40 ÷ 840.00 − 1 = 4.93%
Excel: =SUMPRODUCT(CY_Local,PY_Rate)/SUMPRODUCT(PY_Local,PY_Rate)-1
The bridge is 840.00 plus 41.40 of growth at constant rates, less 12.60 of currency, to 868.80. Of the 12.60, Europe accounts for 9.54, from a euro 2.86 per cent weaker, and the UK for 3.06, from a pound 2.40 per cent weaker.
| Region | Local growth | Reported in USD | Prior year weight | Currency effect |
|---|---|---|---|---|
| US | 5.00% | 5.00% | 47.62% | 0.00 |
| Europe | 6.00% | 2.97% | 37.50% | −9.54 |
| UK | 2.00% | −0.45% | 14.88% | −3.06 |
| Group | 4.93% | 3.43% | 100.00% | −12.60 |
The group's constant currency growth is each region's local growth weighted by its share of prior year revenue in dollars, not a plain average. The plain average of 5.00, 6.00 and 2.00 is 4.33 per cent, and it is wrong because the UK carries 14.88 per cent of the revenue, not a third.
In FP&A the same restatement is done against the budget rates. Translate actual local revenue at the rates the budget used, and the difference from budget is trading; the difference from the reported figure is currency.
Budget = 430.00 + 315.0 × 1.08 + 105.0 × 1.27 = 903.55
Actual at budget rates = 420.00 + 318.0 × 1.08 + 102.0 × 1.27 = 892.98
Operating variance = 892.98 − 903.55 = −10.57, or −1.17%
FX variance = 868.80 − 892.98 = −24.18
Total variance = −34.75, or −3.85%
Of a 34.75 million miss, more than two thirds is the budget's exchange rates. The trading miss, 10.57 million, is the US 10.00 and the UK 3.81 behind plan, partly offset by Europe 3.24 ahead. The budget's rates were set higher than last year's, which is a forecast of currency, not of the business, and the variance report should say so in a separate line rather than let it fall on the regional managers. The same discipline is applied to volume in the flexible budget variance.
| USD per EUR | Reported revenue | Reported growth | Constant currency | FX effect |
|---|---|---|---|---|
| 0.98 | 856.08 | 1.91% | 4.93% | −3.01 pts |
| 1.02 | 868.80 | 3.43% | 4.93% | −1.50 pts |
| 1.05 | 878.34 | 4.56% | 4.93% | −0.36 pts |
| 1.08 | 887.88 | 5.70% | 4.93% | 0.77 pts |
| 1.12 | 900.60 | 7.21% | 4.93% | 2.29 pts |
Constant currency growth does not move with the rate; reported growth swings from 1.91 to 7.21 per cent. At 1.05, last year's euro rate, a small effect remains from the pound.
The usual error is to restate the wrong year. Translating last year at this year's rates gives 828.00 and growth of 4.9275 per cent, close to the 4.9286 above but not equal, and the two conventions drift apart as the currency moves further or as the mix changes. Pick one, write it in the reporting manual and apply it every period. The second error is to restate revenue but not costs: a margin in constant currency needs both lines translated at the same rates.
One quarter read against five different comparisons, and why each answer is correct, is in the free workbook for this case.
Reported growth uses each year's own exchange rates; constant currency uses the same rates for both years, so it shows growth with the currency effect removed. On an illustrative group, revenue of 868.80 million against 840.00 is 3.43 per cent reported, and 881.40 at prior rates is 4.93 per cent in constant currency.
Translate actual local revenue at the budget's exchange rates. The gap between that and budget is the operating variance; the gap between that and actual reported revenue is FX. Here 892.98 at budget rates against a 903.55 budget is minus 10.57 of trading, and 868.80 reported is minus 24.18 of currency.
No. Weight each region's local growth by its share of prior year revenue in the reporting currency. Local growth of 5.00, 6.00 and 2.00 per cent on weights of 47.62, 37.50 and 14.88 per cent gives 4.93 per cent; the plain average, 4.33, gives the smallest region a third of the vote.
This article is one calculation from Financial Planning and Analysis. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: corporate finance, valuation and markets → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.