Exchange differences and published accounts

(1) Universal Electric (UE), a diversified US company with interests ranging from aero engine production to financial services, has extensive operations outside the USA. In the statement of changes in shareholders’ equity in its x9 consolidated accounts, it reports the following balances at yearend

(amounts are in US$ million):

x9 x8 x7 Cumulative translation adjustment 279 (180) (127)

Required Did the US dollar, UE’s reporting currency, strengthen or weaken overall relative to the currencies of countries where UE has operations:

(a) in x8,

(b) in x9? What assumptions underlie your answer?

(2) Geosonic, a large Japanese consumer electronics group, sold 80% of its stake in ACM, a US entertainment company, to Bourbon, a Canadian drinks group, in May x5 for US$5.7 billion. It had acquired its stake in ACM for US$6.1 billion five years earlier. However, because the yen had appreciated by more than 35% against the dollar since that date, it recorded a loss of ¥165 billion

(then equivalent to US$1.9 billion) on the sale. ACM was an autonomous unit of Geosonic for foreign currency translation purposes.

Required

(a) Why did Geosonic recognise a foreign exchange loss of ¥165 billion in its income statement (for the year to 31 March x6), given that ACM was an autonomous unit of Geosonic?

(b) Geosonic’s net assets declined by less than ¥165 billion as a result of the sale. Why?

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