Bell South Analysis
Exchange rates have variations of value from one country to another based on the variations of market conditions. (Exchange rates and interest rates, 2011) Fluctuations in currency result from comparing the Brazilian real to the U.S. Dollar. Losses result when the Brazilian real is lower in value than the U.S. Dollar. Gains will result when the Brazilian real is higher in value than the U.S. Dollar. Because the market conditions fluctuate on a continual basis, the exchange rates will also fluctuate on a continual basis because the exchange rates are based on the market conditions.
Normalized income is earnings adjusted for cyclical ups and downs in economy or, on the balance sheet, earnings are adjusted to remove unusual or one time influences. (Normalized Earnings) As exchange rates fluctuate and cause gains or losses, earnings are also adjusted. The normalized income amount is the amount that is adjusted due to the changes in the exchange rates. The exchange rates will change the amount of normalized income each time they fluctuate and cause an adjustment to the amounts.
Note E. explains that the Brazilian real had a period of devaluation. Compared to the U.S. Dollar the Brazilian real was less value than the U.S. Dollar. When currency experiences a devaluation in value, it means the valuation of the currency is less than the currency in the company’s home country. The devaluation period actually means the Brazilian real had a period of decline in value compared to the U.S. Dollar. Each time it declines, it will cause more losses to earnings until the final adjustment is made on the settlement date.
The statement about the further upward and downward adjustments comes from the fact that exchange rates will continue to fluctuate as the market conditions continue to have ups and downs in the value of goods, services, and currency. The amounts in the normalized income and the amounts for the losses can go upward or downward based on the exchange rate fluctuations. “Gains and losses must be reported at both the end of the accounting period and when the company finishes the transaction.” (McBride) Gains and losses are recorded at the transaction date, the balance sheet date, and the settlement date. The amounts are adjusted at each of these dates and where the Brazilian real was in the devaluation period, it would cause losses. If the Brazilian real was to go up in value, more than the U.S. Dollar, there would be a gain.
The objective in reporting normalized income is to indicate there are adjustments to the income. As the exchange rates have to be adjusted, the income will also adjust. Gains will add to the income where losses will reduce the amount of income. The Brazilian real was in a period of devaluation, meaning that the adjustments would reduce the income each time an adjustment is made when the Brazilian dollar goes down in value. Adjustments would increase the income when the Brazilian dollar goes up in value.
Bell South is showing a 15% increase in the earnings per share for the first quarter compared to the first quarter for the previous year. The earnings per share for the quarter in 1998 is $0.40 and the earnings per share for the quarter in 1999 is $0.46. When you figure the percentage from one year to the next year, 0.40 divided by 0.46 minus 1.0, the percentage actually comes out to 0.13, or 13%. The percentage of increase is actually overstated by Bell South.
Exchange rates and interest rates. (2011, Sept). Retrieved from European Commission: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Exchange_rates_and_interest_rates
McBride, C. (n.d.). Accounting for Foreign Exchange Gains and Losses. Retrieved from ehow: http://www.ehow.com/facts_6728729_accounting
Normalized Earnings. (n.d.). Retrieved from Investopedia: http://www.investopedia.com/terms/n/normalizedearnings.asp#axzz1to9vf7TU