Exchange differences and published accounts
(1) Universal Electric (UE), a diversified US company with interests ranging from aero engine produc- tion 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 year- end (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?