Month-End FX Revaluation Process: Practical Checklist to Record Unrealized Gains and Losses

Why Month-End FX Revaluation Matters for Your Startup

Your startup just landed its first international customer or paid a key overseas contractor. That balance of euros in your Stripe account or dollars in your US bank account feels like a win. But as the month closes, a new question emerges: what is that foreign cash actually worth? Exchange rates fluctuate daily, creating a reporting challenge that can distort your financial statements and make your cash runway look different from reality.

Getting this right is not just an accounting exercise. It is about maintaining a clear, accurate view of your company’s financial health as you begin to operate globally. This process ensures your financial reporting is accurate, which is critical for investor confidence and strategic decision making. For a deeper look at managing currency risk, see our hub on FX hedging strategies for early-stage startups.

When to Prioritize FX Revaluation

At the heart of this process is your company's functional currency. This is the main currency of the economic environment in which you operate, typically the local currency where your startup is based. For a US company, it is the US dollar (USD); for a UK company, it is the British pound (GBP).

The core rule is straightforward. "The revaluation process is necessary when a company holds assets or liabilities denominated in a currency other than its functional currency." This means you need to restate the value of any foreign currency held on your balance sheet at the end of each reporting period, such as a month or quarter.

However, you don't need to over-engineer this from day one. For most Pre-Seed to Series B startups, the approach can be more pragmatic. A good rule of thumb is that "The revaluation process should be formalized when foreign currency transactions exceed 5-10% of monthly volume." Until you cross that threshold, the impact of currency fluctuations is likely immaterial. Once you do, these movements can create significant noise in your financials, making a formal foreign currency month end process essential.

How to Revalue Foreign Currency Balances at Month End: A 3-Step Guide

Closing your books with foreign currency doesn't have to be a source of anxiety. By breaking it down into a repeatable, three-step process, you can ensure consistency and accuracy. This walkthrough will turn a complex task into a manageable checklist for handling your multi-currency accounting.

Step 1: Identify All Foreign Currency Balances

First, you need to identify which accounts on your books are affected. Critically, this process applies only to certain accounts on your balance sheet, not your Profit and Loss (P&L) statement. "Revaluation applies to foreign-currency balance sheet items, including cash, accounts receivable, and accounts payable."

Look for the following monetary items:

• Foreign Currency Bank Accounts: A USD account held by a UK company or a EUR account held by a US company.
• Accounts Receivable (AR): Invoices you have sent to customers in their currency that have not been paid yet.
• Accounts Payable (AP): Bills from suppliers or contractors in their currency that you have not paid yet.

It is crucial to distinguish this from P&L items like revenue or expenses. When you bill a customer in euros, you record that revenue in your functional currency using the exchange rate on the day of the transaction. That historical value does not change. The part that *does* change is the value of the unpaid invoice, the AR balance, sitting on your balance sheet.

Step 2: Calculate the Unrealized Gain or Loss

Once you have a list of foreign balances, the next step is to calculate the adjustment. This adjustment is called an unrealized gain or loss because you have not actually converted the money; it's a paper gain or loss reflecting its current worth in your functional currency.

To do this, you need a specific exchange rate. As a rule, "The exchange rate required is the 'spot' or 'closing' rate on the last day of the month." Using this rate ensures consistency across all your revaluations. You can find guidance on selecting appropriate rates in ASC 830. For defensible, audit-proof reporting, use established sources. "Defensible sources for exchange rates include OANDA, XE, Bloomberg, or the country's central bank."

With the rate in hand, you apply a standard calculation.

Formula for Unrealized Gain/Loss: (Foreign Currency Balance × Month-End Exchange Rate) - (Book Value in Functional Currency)

Worked Example: A US SaaS Startup

Let’s walk through a common scenario. A US-based SaaS company with a USD functional currency has €10,000 in a European bank account from customer payments.

1. Establish Original Book Value: The payments totaling €10,000 were received throughout the month at an average exchange rate of 1 EUR = 1.05 USD. The original value recorded on the balance sheet is $10,500.
2. Find the Month-End Rate: On the last day of the month, the closing rate on OANDA is 1 EUR = 1.08 USD.
3. Calculate the New Value: Revalue the foreign balance using the closing rate: €10,000 × 1.08 = $10,800.
4. Determine the Gain or Loss: Apply the formula: $10,800 (New Value) - $10,500 (Book Value) = $300 Unrealized Gain.

Your €10,000 is now worth $300 more in US dollars than when you first recorded it.

Step 3: Record the Adjusting Journal Entry

The final step is to record this $300 gain in your accounting software. This adjusting entry updates the asset's value on your Balance Sheet and recognizes the non-cash gain on your P&L. For a gain, you increase the asset's value (a debit) and record the gain as other income (a credit). Using our example, the journal entry would be:

• Debit: Euro Bank Account (Asset) for $300
• Credit: Unrealized FX Gain (P&L) for $300

If the exchange rate had decreased, this would be an unrealized loss. You would credit the asset account to decrease its value and debit an "Unrealized FX Loss" account. In software like QuickBooks, you can post this using the 'Journal Entry' function. In Xero, this is handled via 'Manual Journals' in the Accounting menu.

Understanding the Business Impact of Unrealized FX Gains and Losses

While recording these adjustments is a mechanical process, understanding their impact is strategic. One of the top pain points for founders is "Recording unrealised FX gains and losses accurately so that P&L, cash runway, and investor KPIs aren’t distorted."

An unrealized FX gain makes your P&L look better, but it is not cash and does not help you make payroll. Conversely, an unrealized loss can make a profitable month look like a losing one, creating the noise of currency fluctuations. You can sometimes reduce this exposure through methods like natural hedging.

When discussing financials with your board or potential investors, it is critical to separate operating performance from currency volatility. Be prepared to explain your core profitability, such as EBITDA, and then bridge the gap to your final net income by highlighting the non-cash FX adjustment. This shows you have a firm grasp of the underlying health of your business. This principle of separating signal from noise applies universally, though specific reporting terminology may differ between US GAAP and UK FRS standards.

From Spreadsheets to Automation: When to Upgrade Your Process

For a startup with one foreign customer, a simple spreadsheet is often enough to manage the month-end revaluation. As your international footprint grows, however, manual work becomes a significant source of risk and inefficiency. Manually reconciling foreign-currency bank balances and ledger entries can easily lead to errors that derail an audit or due diligence process.

So, when should you move on from spreadsheets? A scenario we repeatedly see provides clear indicators. "Triggers for moving from spreadsheets to dedicated tools include having more than 2-3 foreign currency bank accounts or over 20-30 foreign currency invoices/bills per month." At this stage, the time spent on manual calculations and the risk of error outweigh the cost savings.

Modern accounting platforms like QuickBooks Online and Xero have robust multi-currency features designed for this. When enabled, they can automatically pull closing rates and post unrealized gains and losses for you, turning a manual task into a quick review. The key is to ensure they are configured correctly with the right functional currency from the start. You should also review your payment processor settings, such as in Stripe multi-currency, to reduce operational friction.

Key FX Accounting Best Practices

Successfully managing multi-currency accounting comes down to a few core principles. As you scale internationally, keep these practical takeaways in mind to maintain financial clarity.

1. Know Your Threshold. You don't need a complex system from day one. Implement a formal foreign currency month end process only when these transactions consistently represent 5-10% or more of your monthly activity.
2. Be Consistent. Implement the 3-step process diligently every month. Identify the correct balance sheet items, use a reliable closing rate source to calculate the change, and record the adjusting journal entry. This discipline prevents errors and builds a clean audit trail.
3. Communicate the Impact. Be ready to explain to investors how non-cash FX gains or losses affect your P&L. Clearly separating your core operational performance from currency market movements demonstrates financial maturity and control over your business.

Frequently Asked Questions

Q: What is the difference between realized and unrealized FX gains or losses?

A: An unrealized gain or loss is a "paper" adjustment on assets or liabilities you still hold at month-end. A realized gain or loss occurs only when you actually convert the foreign currency into your functional currency, for example, by transferring funds between a EUR and a USD bank account.

Q: Do I need to perform the currency revaluation process every single month?

A: Yes, if you have material foreign currency balances. For accurate financial reporting, revaluation should be part of your standard month-end close process. This ensures your balance sheet reflects the true value of your assets and liabilities at that point in time and that gains or losses are recognized in the correct period.

Q: Can I use an average exchange rate for the month instead of the closing rate?

A: No, for balance sheet revaluation, accounting standards require using the closing "spot" rate on the balance sheet date. Average rates are sometimes used for P&L items like revenue over a period, but the month-end revaluation itself must use the rate from the last day of the reporting period for accuracy.