Coca-Cola (US)
In its 1999 annual report, Coca-Cola describes the 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 seek to adopt appropriate strategies that are responsive to changing economic and political environments and to fluctuations in foreign currencies. We use approximately 60 functional currencies. Due to our global operations, weaknesses in some of these currencies are often offset by strengths in others. In 1999, 1998, and 1997, the weighted-average exchange rates for foreign currencies, and for certain individual currencies, strengthened (weakened) against the U.S. dollar as follows:
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Year Ended December 31,
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1999
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1998
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1997
|
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All currencies
|
Even
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(9%)
|
(10%)
|
|
Australian dollar
|
3%
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(16%)
|
(6%)
|
|
British pound
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(2%)
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2%
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4%
|
|
Canadian dollar
|
Even
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(7%)
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(1%)
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|
French franc
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(2%)
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(3%)
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(12%)
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|
German mark
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(2%)
|
(3%)
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(13%)
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|
Japanese yen
|
15%
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(6%)
|
(10%)
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These percentages do not include the effects of our hedging activities and, therefore, do not reflect the actual impact of fluctuations in exchange on our operating results. Our foreign currency management program mitigates over time a portion of the impact of exchange on net income and earnings per share. The impact of a 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 includes the re-measurement of certain currencies into functional currencies and the costs of hedging certain exposures of our balance sheet."
Question
1. Which translation methodology or methodologies does Coca-Cola use? What information provided helped you draw a conclusion (if you did draw a conclusion)?
2. Given the methodology it uses, would you expect it to have translation gains or losses in 1997? In 1998? In 1999? Based on the data in the table, explain whether you expected actual gains or losses in each of those years? Were your answers consistent with what actually happened to Coca-Cola during those years?
3. Explain how Coca-Cola could use the translation methodology that it does and still have exchange gains and losses that show up in income as explained in the last paragraph above.