Accounting Away FX Risk For Canadian Businesses
By: Dhriti Rawat
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The USD Still Runs the Show
Despite growing discussion around de-dollarization, global markets are not abandoning the United States dollar (USD). The USD continues to dominate global finance, accounting for roughly 88% of foreign exchange transactions and over half of international payments.
For Canadian investors and businesses, this means USD exposure remains embedded in trade, commodities, and global investment flows. In practice, the dollar is less of a choice and more of a structural requirement. However, rising inflation, repeated U.S. debt ceiling disputes, aggressive monetary tightening, and heightened geopolitical tensions have increased concerns around overreliance on the dollar and brought discussions on de-dollarization to the forefront.
The response to rising currency risk has not been shifting away from the dollar but changing how exposure is managed. Rather than replacing the USD with a single alternative currency, central banks and institutions are diversifying across assets. For example, gold has recently surpassed U.S. government bonds as the world’s largest reserve asset for the first time in over three decades, reflecting a structural reallocation toward assets that are not tied to any single government or monetary system.
This trend is reinforced by geopolitical events, such as the freezing of Russian dollar reserves in 2022—where Russia was blocked from accessing Rubles held in Western banks—which highlighted that even dominant reserve currencies can carry political and policy risk. Gold and silver, therefore, are not replacing the USD, but functioning as complementary hedges in a more fragmented monetary environment. Accordingly, central bank gold purchases have exceeded 1,000 tonnes annually in recent years, marking record levels and signalling increased demand for assets outside sovereign currency systems.
Dethroning the Dollar: A Difficult for Canadian Businesses
But, even where alternatives exist, large-scale replacement of the USD is constrained by liquidity, infrastructure, and coordination challenges. Efforts such as Canada’s RMB (¥) trading hub and bilateral trade agreements, which use local currencies, demonstrate that bypassing the dollar is possible. However, these efforts remain limited and difficult to scale across global markets.
For Canadian businesses that remain structurally exposed to the USD, this problem is especially acute.
Exchange-rate volatility has become a material consideration for firms navigating global markets, especially since shifting monetary conditions and external demand uncertainty affect pricing and planning decisions. This is evident in Canadian firms such as Shopify, which discloses exposure to foreign exchange fluctuations in its annual reports, as well as Suncor Energy, whose USD-denominated revenues are directly impacted by movements in the Canadian dollar. For businesses, this risk is not just market-driven but shaped by how currency exposure is recorded and reported.
In response, many exporters and international companies have adopted more active risk management strategies, including the use of forward contracts and currency options to hedge foreign exchange exposure. While such tools cannot eliminate currency risk, they reflect a shift toward more deliberate and transparent management of exchange-rate exposure rather than passive reliance on favourable currency movements.
An Accounting-First Approach to Managing USD Exposure
For Canadian businesses, a more deliberate approach could also lie in their approach to accounting. Most Canadian businesses who have business operations internationally cannot meaningfully reduce their reliance on the USD, as exposure remains embedded in global markets. So, while central banks have responded to rising currency risk through diversification into assets such as gold, this approach is not directly transferable to businesses. Firms must manage currency risk within their existing operations, rather than reallocate away from the dollar.
As a result, the most effective response is not to reduce exposure, but rather to control how that exposure affects financial performance. This means a shift from passive exposure to intentional structuring through accounting, operational alignment and financing.
Foreign exchange risk is often framed as an external shock driven by exchange rate movements. However, for businesses, its impact can also arise from how it is recognized in financial statements under International Financial Reporting Standards (IFRS).
IAS 21 requires monetary items, including foreign currency receivables, payables, and debt, to be re-measured at the closing rate each reporting period, with gains and losses recorded in profit or loss. In contrast, non-monetary items such as inventory and capital assets recorded at historical cost are not revalued.
For example, consider a Canadian exporter that earns revenue in USDs but holds most of its debt in Canadian dollars. If the USD depreciates, the firm’s revenues decline when converted into CAD, while its debt remains unchanged. Even if the firm’s underlying operations remain stable, this mismatch creates losses in reported earnings. Conversely, if the firm instead holds USD-denominated liabilities, the impact of exchange rate movements is offset, reducing volatility in financial results. This illustrates how FX risk is driven by how exposures are structured and recorded.
This creates a structural source of volatility. Even when firms are economically balanced, unmatched monetary exposures cause exchange rate movements to be reflected in earnings. FX risk should therefore be understood as a function of accounting classification and balance sheet structure, not just market conditions.
Solution #1: Natural Hedging on the Balance Sheet
The most effective way to reduce FX volatility is to minimize the firm’s net foreign-currency monetary position, which determines the magnitude of gains and losses reported in earnings.
Natural hedging achieves this by aligning foreign currency inflows and outflows. Firms generating USD revenues can offset exposure by holding USD-denominated costs or liabilities, allowing exchange rate movements to affect both sides of the balance sheet and reduce net impact.
As currency volatility becomes a material concern for Canadian firms, many exporters have shifted toward more deliberate risk management strategies. Unlike derivatives, natural hedging does not introduce additional complexity or cost, making it a practical and scalable solution.
This approach is reflected in practice. Canadian firms with significant U.S. exposure, such as FLYHT Aerospace Solutions and Tree Island Steel, have reported that fluctuations in the USD directly affect revenues and earnings, highlighting how currency mismatches can introduce. As a result, aligning USD revenues with USD-denominated costs or liabilities becomes critical in stabilizing financial performance, a strategy also emphasized in industry guidance.
Solution #2: Accounting for USD Debt
USD-denominated debt is often used as a hedge, but its effectiveness depends on accounting alignment.
As debt is a monetary item under IAS 21, it is remeasured each reporting period. When used to finance non-monetary assets, this creates an accounting mismatch: the liability fluctuates with exchange rates, while the asset remains fixed at historical cost, introducing earnings volatility.
USD debt is effective only when it offsets other monetary exposures or is designated as a net investment hedge. In these cases, IFRS allows foreign exchange gains and losses to be recognized outside of profit, reducing earnings volatility.
The effectiveness of a hedge, therefore, depends not on the instrument itself, but on whether its accounting treatment aligns with the exposure it offsets.
Solution #3: Using Accounting Standards to Control Volatility Placement
Firms can further control where FX volatility appears within their financial statements. IFRS 9 enables hedge accounting, allowing gains and losses on hedging instruments to align with the underlying exposure, reducing timing mismatches. Net investment hedging allows firms to offset translation effects in equity rather than earnings, particularly relevant for firms with U.S. operations.
IFRS 7 also requires disclosure of currency risk exposure, increasing transparency and reinforcing the need for consistent risk management practices. These tools do not eliminate FX risk, but ensure that reported performance reflects underlying economic reality rather than accounting mismatches.
Conclusion
In a global system where the USD remains dominant but increasingly exposed to risk, the question is no longer whether reliance on the dollar is safe, but whether firms are equipped to manage that risk. At the macroeconomic level, responses to this currency risk have focused on diversification into assets like gold rather than shifting away from the USD entirely. However, these strategies operate at the portfolio or reserve level and do not address firm-level earnings volatility.
For Canadian firms in particular, USD exposure is structural and unavoidable, embedded in trade and capital markets. As a result, resilience depends on how that exposure is structured internally, rather than avoided. As such, the challenges these businesses face is not asset allocation, but how currency exposure is structured within operations and reflected in financial reporting.
The primary solution remains internal: structuring currency exposure through accounting, an alignment of operations and financial reporting choices. By aligning revenues, costs, and financing, and applying accounting tools to control how volatility appears, firms can reduce earnings instability without predicting currency movements.
Editor(s): Danae Pepelassis
Researcher(s): Liangray Li
