68 Understanding the Numbers
part of net income. With the other method, the translation adjustment will be
reported as part of other comprehensive income.^38
Foreign-currency gains and losses can also result from the use of various
currency contracts, such as for wards, futures, options, and swaps, entered into
for both hedging and speculation. It is not uncommon to observe foreign ex-
change gains and losses year after year in a company’s income statement. The
amounts of these items, however, as well as whether they are gains or losses are
often very irregular, making them candidates for nonrecurring classification.
To illustrate, a portion of a note titled “foreign currency translation” from
the 1993 annual report of Dibrell Brothers Inc. follows:
Net gains and losses arising from transaction adjustments are accumulated on a
net basis by entity and are included in the Statement of Consolidated Income,
Other Income—Sundry for gains, Other Deductions—Sundry for losses. For
1993, the transaction adjustments netted to a gain of $4,180,000. The transac-
tion adjustments were losses of $565,000 and $206,000 for 1992 and 1991, re-
spectively, and were primarily related to the Company’s Brazilian operations.^39The gains and losses disclosed above appeared as adjustments, ref lecting either
their noncash or nonoperating character, in the operating activities of Dibrell’s
statement of cash f lows. The effect of the 1993 currency exchange gain is also
referenced in Dibrell’s MD&A as part of the comparison of earnings in 1993
to those in 1992.^40
While appearing in each of the past three years, Dibrell’s foreign-
currency gains and losses were far from stable—two years of small losses fol-
lowed by a year with a large gain. One way to gauge the significance of these
exchange items is to compute their contribution to the growth in income before
income taxes, extraordinary items, and cumulative effect of accounting
changes. This computation is outlined for 1993 in Exhibit 2.24.
EXHIBIT 2.24 Contribution of foreign-currency gains to pretax income
from continuing operations: Dibrell Brothers Inc.,
years ended December 31.
Pretax income from continuing operations
1993 $58,259,560
1992 43,246,860
Increase $15,012,700
Foreign-currency gains and losses
1993 gain $ 4,180,000
1992 loss 565,000
Improvement $ 4,745,000
Contribution of the improvement in foreign currency results to 1993
pretax income from continuing operations:
$4,745,000/$15,012,700 32%