Question

Summative Case 3 Foreign Currency fluctuations and Revenue Chikennella has considerable non-US operations. The Table below shows. Chikennella 2015 revenue by geographic segment along with related exchange rates at the beginning and end of the year. The exchange rates represent the foreign current equivalent of $1. USD exchange rate 01/01/15 12/31/15 Year ended December 31, 2015 ($ millions) Asia, other than China Europe China ..... Middle East.... Oceania .. Canada Africa - Latin America and Caribbean Total non-U.S. revenues. United States ...... Total revenues.... . Revenue $13,433 12,248 12,556 10,846 2.601 1,870 1,398 1.875 56,827 39,287 $96,114 0.7543 0.8266 6.2025 3.6729 3.5046 1.1618 11.5642 14.7414 0.7063 0.9203 6.4952 3.6729 4.3044 1.3847 15.5159 17.2494 Required a. Most Chikennelle's contracts are denominated in $US. Assume instead that Chikennella wrote contracts for its international customers in their respective domestic currencies. For simplicity, assume the contracts were written on January 2, 2015, and revenue was collected and recognized in December 31, 2015. Use the exchange rate information in the table to calculate the effect on Chikennella's 2015 revenue if contract had been denominated in the various foreign currencies. b. How would the foreign exchange gain or loss that was computed affect net income? c. How could Chikennella treat such a foreign exchange gain or loss in any non-GAAP disclosures the company may make? d. How should we as analysis, treat such a foreign exchange gain or loss?

please provide explanation

Answer 1

ANSWER:-

Part - a

Computation of revenue from foreign operations assuming exchange rate on 01/02/2015 is same as 01/01/2015 and we have made the contract in foreign currency denomination equivalent to $ revenue as on 31st December, 2015.

Particular $ millions

Asia, other than China

(13,433*0.7543/0.7063) 14345.9039

Europe

(12248*0.8266/0.9203) 11000.9745

China

(12556*6.2025/6.4952) 11990.1758

Middle East

(10486*3.6729/3.6729) 10486.0000

Oceania

(2601*3.5046/4.3044) 2117.70853

Canada

(1870*1.1618/1.3847) 1568.97956

Africa

(1398*11.5642/15.5159) 1041.9474

Latin America& Caribbean

1602.37253

(1875*14.7414/17.2495)

Total revenue

54154.0622

Total revenue in dollars contract

56827.0000

Loss due to foreign currency contract

2672.9378

Part -b

As a result of foreign currency denomination contract Boeing Corporation has suffered a foreign exchange loss of $2672.9378 millions that affect company net income by such amount and company's net income will decrease by $ 2672.9378 millions.

Part- c

Ad per GAAP the company's required to follow Generally Accepted Accounting Principles and make financial reporting according to such principles. In non GAAP disclosure some common practices is that organisation's made adjusted earnings, EBIT, EBITDA and in this disclosure Boeing Corporation can treat such exchange loss as adjustment or others that is suitable for Boeing Corporation.

Part - d.

As a analyst we should treat such foreign exchange loss as non operating and non controllable. However it can be reduced or minimise by the help of derivatives market taking hedge.

THANK YOU, if any queries please leave your valuable comment on comment box......