Q1) In its 1999 annual report, Coca-Cola explains impact of foreign exchange on its operations as follows:
"Our international operations are subject to certain opportunities and risks, including currency fluctuations and government actions. We closely monitor our operations in each country and look to adopt suitable strategies which are responsive to changing economic and political environments and to fluctuations in foreign currencies. We utilize approximately 60 functional currencies. Due to our global operations, weaknesses in some of these currencies are frequently offset by strengths in others. In 1999, 1998, and 1997, weighted-average exchange rates for foreign currencies, and for certain individual currencies, strengthened (weakened) against U.S. dollar as follows:
| Year Ended December 31, |
1999 |
1998 |
1997 |
| All currencies |
Even |
(9%) |
(10%) |
| Australian dollar |
3% |
(16%) |
(6%) |
| British pound |
(2%) |
2% |
4% |
| Canadian dollar |
Even |
(7%) |
(1%) |
| French franc |
(2%) |
(3%) |
(12%) |
| German mark |
(2%) |
(3%) |
(13%) |
| Japanese yen |
15% |
(6%) |
(10%) |
These percentages don't include effects of our hedging activities and, hence, don't reflect actual impact of fluctuations in exchange on our operating results. Our foreign currency management program mitigates over time portion of impact of exchange on net income and earnings per share. Impact of stronger U.S. dollar reduced our operating income by approximately 4 percent in 1999 and by approximately 9 percent in 1998.
Exchange gains (losses)-net amounted to $87 million in 1999, ($34) million in 1998 and ($56) million in 1997, and were recorded in other income-net. Exchange gains (losses)-net comprises re-measurement of certain currencies into functional currencies and costs of hedging certain exposures of our balance sheet."
Questions:
1. Which translation methodology or methodologies does Coca-Cola use? What information given helped you draw a conclusion (if you did draw a conclusion)?
2. Given methodology it uses, would you expect it to have translation gains or losses in 1997? In 1998? In 1999? Based on data in the table, describe whether you expected actual gains or losses in each of those years? Were your answers consistent with what actually occured to Coca-Cola in those years?
3. Describe how Coca-Cola could use translation methodology that it does and still have exchange gains and losses that show up in income as described in last paragraph above.