Unlocking the Black Box of FX Accounting

/ FX / By

The Problem: When Millions of FX Movements Go Unexplained

When I first joined Wise, my role as a margin assurance controller plunged me into a world of complex financial dynamics. We were a fast-growing fintech, processing billions of transactions in over 50 currencies across dozens of legal entities. From day one, it was clear that Foreign Exchange (FX) was a “black box” — a powerful force driving millions in monthly gains or losses that were difficult to explain, manage, and reconcile.

The core issues were a perfect storm of technical complexity and a lack of consistent understanding:

  • Engineering vs. Accounting: The automated accounting solution, built by engineers, tracked FX exposure across transactional, functional, and group-level balances. However, this logic was opaque to non-engineers, and we constantly needed engineering time to validate new financial flows.

  • Assurance Gaps: Analysts performed assurance on a limited number of accounts, but without a complete view, it was impossible to be sure we were capturing all the risks. We didn’t have a clear, consistent understanding of which FX accounting approach was applied to which general ledger account.

  • Opaque Reporting: Our FX reports were often high-level, attributing massive fluctuations to vague explanations like “driven by cash, offset by liabilities” or “USD depreciated against EUR.” This made it impossible for management to make informed decisions.

  • Operational Risk: These massive, unpredictable FX gains and losses directly impacted critical daily processes, such as the extraction of regulatory-required profits. This introduced a significant level of risk to our liquidity, pricing, and profitability. It even created potential blind spots for fraud.

The result was a situation where FX was not explainable, not manageable, and not aligned across the business.

My "Aha!" Moment and the Solution-Finding Journey

My journey to solve this started with a simple philosophy: “eat the elephant one piece at a time.” But before that, I had to understand the pieces. My approach was to:

  1. Challenge the Status Quo: I constantly asked “why?”—at least five times—to get to the root of a problem. For example, why was our accounting system only handling FX for AP & AR, but not the rest of our accounts?

  2. Collaborate Relentlessly: Solving this required negotiating with and bringing together diverse teams—accounting, tax, assurance, controllers, reporting, analysts, engineers, and treasury.

  3. Create a New Reality: Sometimes, the existing tools weren’t enough. We had to create new attributes and models to solve the puzzle. This meant stepping up and making decisions when ownership was unclear.

  4. Iterate and Improve: We didn’t try to solve everything at once. We worked in iterations, building solutions piece by piece, and even rotating engineers to get fresh perspectives.

The Outcome: Clarity, Confidence, and Scalability

Through this effort, we were able to transform the situation from a chaotic black box into a transparent, manageable system. The results were tangible:

  • Engineering Time Freed: We freed up significant engineering hours on routine FX tasks by standardizing configurations and creating automated alerts for missing or incorrect data.

  • New Explain Models: I led the implementation of analytical models that could recalculate FX treatments top-down, providing a new level of insight and confidence. These included a market movement model, a CTA FX model, and an exposure recalculation model.

  • Improved Assurance: Our assurance processes now covered the full universe of accounts, allowing us to proactively identify and manage FX risk.

  • Knowledge Democratization: I created countless internal documents and videos to educate the team, ensuring the knowledge wasn’t held by just a few individuals.

  • Clearer Ownership: We redefined ownership of FX tasks, assigning technical accounting to IFRS treatment, controllers to posting logic, and operations to configurations.

Ultimately, this work laid the groundwork for our Net Investment Hedge and Accounting Exposure Hedge projects, giving us a clear understanding of what was being hedged by treasury and what was causing the residual fluctuations.

A Final Thought Before We Begin

The funny thing about FX is that the math isn’t overly complicated, but the interpretation of regulatory requirements can be. Whether to use EOD rates or exact spot rates, or how to treat FX exposure – based on net or gross turnover on account — IFRS and local GAAPs often leave room for interpretation. And then there’s the human element: people tend to trust the smaller number. For years, treasury’s FX costs were a few hundred thousand, while accounting’s were in the millions. Both were technically “correct” in their own frameworks, but the difference caused a huge disconnect.

In this blog series, we’re going to bridge that gap. We’ll start by breaking down the fundamentals of FX risk and then, step-by-step, we will build a comprehensive, audit-proof, and regulatory-compliant FX accounting and reconciliation model, using my journey at Wise as a practical guide.

Let’s begin with Post 1, where we’ll dive into the fundamental question: What is FX Risk and why is it so important?

Let's Chat