More is More for Google’s FX Disclosures
George Gutowski at Financial Skeptic complained about what he called Google’s FX Fixation. I have italicized some of his comments, which I follow with my response in normal type.
“Google maintains that FX rates had an inconsequential effect on
sequential international growth. Then they go on to say that if FX
rates had stayed the same from Q1 2005 to Q1 2006 international
revenues would have been $65 million higher. Having your cake and
eating it also.”
Not really. There is a real difference between sequential and year/year comparisons. For one thing, one would expect the volatility of exchange rates to have a smaller effect quarter-to-quarter than year-to-year. Generally the rates will fluctuate less over a shorter period of time. Still, if there were a currency shock that affected results on a sequential basis it would be good to know about it.
“FX rates can, do and will fluctuate. Trying to figure out and actually
report what would have happened if the rates had not changed seems
naive.”
The fact that rates fluctuate is exactly why the impact should be reported. As an analyst, I want to separate the effect of how the company is doing based on its operating model from the somewhat random wiles of the currency markets. When Xerox (XRX) was showing flat revenues in 2004, it was important to know that there would have been a decline had they not been helped by currency movements. Likewise, when Google (GOOG - Annual Report) shows enormous growth it is interesting to see that it would actually have been better with stable exchange rates. And trying to figure out what would have happened if the rates had not changed is far from naive – it is simple division. When a company is paid in foreign currencies all they need to do is look at the change in foreign currency revenue to make the adjustment. It is actually the translation to dollars that is something of an accounting fiction, as usually the firm does not actually bring the money back home but rather reinvests it in the foreign operations.
Recommended reading:
References:
Financial Statement Analysis : A Global Perspective
The Analysis and Use of Financial Statements (Analysis and Use of Financial Statements)
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