Case 8–3: BellSouth Corporation BellSouth Corporation invested in two wireless c

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Case 8–3: BellSouth Corporation

BellSouth Corporation invested in two wireless communications operations in Brazil in the mid-1990s that are being accounted for under the equity method. The following note is taken from BellSouth Corporation’s interim report for the quarter ended March 31, 1999:

Note E—Devaluation of Brazilian Currency We hold equity interests in two wireless communications operations in Brazil. During January 1999, the government of Brazil allowed its currency to trade freely against other currencies. As a result, the Brazilian Real experienced a devaluation against the U.S. Dollar. The devaluation resulted in the entities recording exchange losses related to their net U.S. Dollar-denominated liabilities. Our share of the foreign exchange rate losses for the first quarter was $280.These exchange losses are subject to further upward or downward adjustment based on fluctuations in the exchange rates between the U.S. Dollar and the Brazilian Real.

In a press release announcing first quarter 1999 results, BellSouth Corporation provided the following information (as found on the company’s Web site):

BellSouth Corporation (NYSE: BLS) reported a 15-percent increase in first quarter earnings per share (EPS) before special items. EPS was 46 cents before a non-cash expense of 14 cents related to Brazil’s currency devaluation.

Required

Given the disclosure provided by BellSouth Corporation, answer the following questions:

1. Why did the company report a foreign currency loss as a result of the devaluation of the Brazilian real?

2. What does the company mean when it states: “These exchange losses are subject to further upward or downward adjustment based on fluctuations in the exchange rates between the U.S. Dollar and the Brazilian Real”?

3. What is the company’s objective in reporting “Normalized Net Income”? Do you agree with the company’s assessment that it had a 15 percent increase in first-quarter earnings per share?

BELLSOUTH CORPORATION Normalized Earnings Summary ($ in millions, except per share amounts) (unaudited) Quarter Ended 3/31/98 $892 3/31/99 %Change $615 280 Reported Net Income (31,1%) Foreign currency loss (a Gain on sale of ITT World Directories (b) (96) $796 $0.45 $895 12.4% Reported Diluted Earnings per Share (28.9%) $0.32 0.14 Foreign currency loss(a Gain on sale of ITT World Directories(b) (0.05) $0.40 Normalized Diluted Earnings per Share $0.46 15.0% Represents our share of foreign currency losses recorded during first quarter 1999 as a result of the devaluation of the Brazian Real during January 1999 Represents the after-tax gain associated with additional proceeds received in first quarter 1998 on the July 1997 sale of ITT World Directories

Explanation / Answer

1) As per US GAAP & IFRS , the companies have to report the foriegn currency loss in books and showm separately in the financial statements so that stakeholder's would come to knoe that how much company get loss due to exposure in foriegn currency. it is mandatory for the companies to show and provide for foriegn currency loss due to decline in prices.

2) By this line company means that this is the net impact of change in exchange rates between US dollor and brazilian real. there are upward change in currency rates and downwards change in currency rates and this figure shown in financial statement is net impact of both the cases happen during the year and that result in huge foriegn currency loss.

3) These Losses and gains are abnormal/ non-recurring items that means that are not of recurring nature. these items are happen very rarely so these are not normal operating items. so company shows there stock holders normalised net income by reducing effect of these items because they are not of recurring nature for business. this would show the stakeholeder;s what are the real net income for the companies wether there is increase or decrease in the net income from last year and in this part of balance sheet it is correctly shown that there is increase in net income of the company from the normal activities of the company.

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