Case 83: 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 Corporations interim report for the quarter ended March 31, 1999:

Note EDevaluation 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 companys 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 Brazils 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 companys objective in reporting Normalized Net Income? Do you agree with the companys 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