Revenue FX adjustments.

When forecasting revenue, we should consider how FX has the potential to impact both current and forecast revenue growth. Revenues in global businesses are affected by effects as they will generate revenues in a number of different currencies. Currency exchange rates are constantly changing and this will impact on the revenues reported by a company. For example, if a UK company generates some of its revenues in the US and the US dollar weakens against the pound, then all else being equal, this will result in the company reporting lower revenues. To help us understand the impact of FX on reported revenues global companies. Usually provide constant exchange rate, that's CER, or constant currency disclosures. This table shows an example of the disclosure provided by Burberry in its 2015 annual report. The first and second columns show reported revenues for 2015 and 2014. The third column along shows the reported change in revenues in 2015 versus 2014. That's an 8% increase in total revenues. However, the fourth column along shows us that the underlying increase in revenues. That's the increase in revenues excluding FX, was in fact 11%. So volume and price increases in the year were 11% and this was offset by a minus 3% FX impact.

When we're forecasting revenues, we usually view FX rate changes as a non-recurring price change meaning that the current FX rates are the rates that our forecasts are based on. This means that our growth rates will be forecast at a constant currency. We therefore need to focus on historic constant currency growth when trying to understand historic revenue growth. So why don't we try to predict FX changes in our revenues if it has the potential to materially impact on revenue? The reason is that currency moves for stable economies are extremely difficult to predict. They are the results of lots of different factors demand and supply global capital flows and changing expectations of monetary and fiscal policy. Analyst don't usually try to forecast currency moves therefore and instead use current rates in their models. One further issue with FX is that forecast for the current fiscal year will be affected by any currency swings which have occurred since the start of the year. We therefore need to ensure that the forecast for the current fiscal year are updated to reflect these currency swings. But how can we do this? Well, let's take the example of a UK company which generates 50% of its revenues in the US.

Shortly after the start of 2016 the pound to US dollar FX rate has fallen by 10 percent. So 1 pound will now buy fewer US Dollars. This means that the US Dollars strengthened against the pound. So the company's us revenues be worth 10% more when translated to pounds sterling. But how can we quantify the impact on our revenue forecasts? Well, if the company's us revenues are worth 10% more and the company generates half its revenues in the US. This will result in a 5% increase in reported revenue. However, the analyst here was already forecasting revenue growth in constant currency terms of 6%. When we combine this with the FX gain, this will give combined revenue growth of 11% for 2016.

When forecasting 2017 revenues we don't need to make any further adjustments to our growth assumptions as 2017 revenues are forecast by growing 2016 revenues which now reflect the FX change. So for 2017 the analyst would continue to forecast constant currency revenue growth and make no further adjustment for FX.