Statement of Shareholders' Equity

Hi All,

I am a newbie here. Would appreciate could someone explain to me the item "Exchange Translation Reserve" in the Shareholders' Equity Statement.

I am currently looking into Drybulk Shipping company since they are in the down cycle now. I noticed that this company is trading below its book value.

But I noticed that under "Exchange Translation Reserve" for retained earning there is a minus factor there and it almost wiped out the whole year profit. This wiped out is a huge amount and I don't understand what is this accounted for.

Attached is a snapshot of the Annual Report. If someone can explain really appreciate. Thanks

(14-03-2013, 11:30 AM)sbanpjman8 Wrote: Hi All,

I am a newbie here. Would appreciate could someone explain to me the item "Exchange Translation Reserve" in the Shareholders' Equity Statement.

I am currently looking into Drybulk Shipping company since they are in the down cycle now. I noticed that this company is trading below its book value.

But I noticed that under "Exchange Translation Reserve" for retained earning there is a minus factor there and it almost wiped out the whole year profit. This wiped out is a huge amount and I don't understand what is this accounted for.

Attached is a snapshot of the Annual Report. If someone can explain really appreciate. Thanks

I know nothing about the company

Comprehensive income/loss due to exchange translation will be credit/debit to Exchange translation reserve. It should be a non-cash income/loss which may due to difference between reporting and operating currency, or substantial oversea operations.

To put into the context, it seems that the retained earning is mainly contributed by translation gain? The company profit is largely due to appreciation of RM over a currency, but don't know which one?

Feel free to comment.

Thanks, CITYFARMER FOR YOUR PRECIOUS REPLY.

1) Does it mean that the management is actually conservatively writing down there Equity (if this is a NON_CASH item)?

2) Can we say that it is actually not affecting the Intrinsic Value as long as in the future no loss making, and that previous retained earning write down is just an accounting entry?

Thanks.

Translational FX gains and losses arises from foreign assets being translated into reporting currency.

So simplistically if you are an investor domiciled in the reporting currency, the gains and losses are real to you. If you buy US stocks and SGD appreciate 20%, the FX impact is not just an accounting entry.

People have a misconstrued impression of non cash items or one offs being inconsequential which are propagated by equity analysts. If a company buys an asset $100m last year and this year writes down to $20m, don't tell me that is one off non cash item when it was paid with cash prior. Management incompetence costs money. We have to understand how the numbers translate reality rather than be fixated by numbers game.

(14-03-2013, 12:14 PM)sbanpjman8 Wrote: Thanks, CITYFARMER FOR YOUR PRECIOUS REPLY.

1) Does it mean that the management is actually conservatively writing down there Equity (if this is a NON_CASH item)?

2) Can we say that it is actually not affecting the Intrinsic Value as long as in the future no loss making, and that previous retained earning write down is just an accounting entry?

Thanks.

I wouldn't say it is conservative, but a requirement in accounting. It should not view as write-down, but a accounting entry to hold the specific profit/loss.

As in specuvestor's posting, the gain is non-cash, but it doesn't mean it is not real.

From AR 2010:

Whilst 2010’s attributable profit added RM238.4 million to the Group’s shareholders’ equity, shareholders’ equity nevertheless posted a 5.7% decline over 2009. This is due to the dividend payout in 2010 which appropriated RM150 million of the reserves, and a strengthening Ringgit against USD which further reduced reserves by RM190 million. The Ringgit ended the year (2010) with a 10% appreciation against the USD as compared to the start of the year. As MBC Group’s functional currency is USD, all its assets including shipping assets are denominated in USD. Translating these assets and investments into a stronger Ringgit will inevitably impact reserves.

For ar2011, read note 2.13 carefully.

I did not go thru the FR. For a listed company with huge exposure to FX risk, the CFO should have hedged it with derivatives. It is a common practice.

Not sure it is hedged?

donmihaihai, appreciate to highlight note 2.13. but after few rounds of reading still cant fig it out. Can you illustrate a scenario so that we can have a better understanding how it affect the valuation of a company in future. Appreciate in advance

Using MBC as an example

MBC is a company by itself. And it hold many subsidiaries directly or indirectly(note 12). In MBC case, the financial statements show group and company income statements, statements of financial position, statements of changes in equity and statements of cashflows.

Each company has it own financial statements and draft up using the currency that reflect the main trading currency of the company. This is call functional currency.

Functional and presentation currency
The individual financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to the
entity (the functional currency). The Company has identified United States Dollar (USD) as its functional currency as the Company operates in an international market where the functional currency is mainly USD. The financial statements are presented in Ringgit Malaysia (RM).

At individual level, where USD is the main currency, company does deal with other currencies. foreign currency gain or loss will be recorded in income statement when transcation completed. ie realised. In case of outstanding items, it will be reflected in statement of financial position. These item will be translated into USD at the end of the financial year and recorded in the income statement. It is base on monetary and non monetary item but there is no need to go into that detail.

(ii) Foreign currency transactions
Transactions in foreign currencies are measured in the respective functional currencies of the Company and its subsidiaries and are recorded on initial recognition in the functional currencies at exchange
rates approximating those ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the reporting date. Non-monetary items denominated in foreign currencies that are measured at historical cost are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items denominated in foreign currencies measured at fair value are translated using the exchange rates at the date when the fair value was determined.

Exchange differences arising on the settlement of monetary items or on translating monetary items at the reporting date are recognised in profit or loss except for exchange differences arising on monetary items that form part of the Group’s net investment in foreign operations, which are recognised initially in other comprehensive income and accumulated under foreign currency translation reserve in equity. The foreign currency translation reserve is reclassified from equity to profit or loss of the Group on disposal of the foreign operation.

On group level or consolidated financial statements(there is a need to understand the different between group and company level), MBC is the holding company, so all subsidiaries have to translate their financial statements into the functional curreny of MBC during year end. ie into USD from maybe SGD, RM etc. As the exchange rate move during the financial year and this is not realised so it will be reflected in foreign currency translation reserves. Only when it is realised, eg on disposal of subsidiary then it will removed from this reserves and reflected in income statement.

This is explain as below (note that below also include foreign operation, eg foreign branch but it it is the same)

(iii) Foreign operations
The assets and liabilities of foreign operations are translated into RM at the rate of exchange ruling at the reporting date and income and expenses are translated at exchange rates at the dates of the
transactions. The exchange differences arising on the translation are taken directly to other comprehensive income. On disposal of a foreign operation, the cumulative amount recognised in other comprehensive income and accumulated in equity under foreign currency translation reserve relating to that particular foreign operation is recognised in profit or loss.

There is another step involved, as the MBC decided that while its functional currency is USD, it want to present the financial statement in RM(due to all kind of reasons). And this is call presentation currency(read 2.13 (i)), As the same with translation of subsidiaries financial statements into functional currency of holding company, this translation will resulted in a unrealised translation gain/loss and recorded together in the foreign currency translation reserves.

So exchange translation reserves usually arises from consolidation of foreign subsidaries and operation. In MBC case(quite uncommon), from translation into presentation currency.

On company level, usually will not have a translation reserves except
1) translation into presentation currency(this can be applied to both company level and group level.
2) loan to subsidiary(read latest financial statements of Pan pacific for example)
3) fair value from eg available for sale financial assets but this will reflected in fair value reserves rather than exchange translation reserves.


Hope my explation is clear enough. And it is ok if you are not able to understand it fully(I don't too). From personal experience, I seldom met someone who has a clear understanding on the whole thing about foreign currency and how it is presented in the financial statements. Which is why comments are confusing due to lack of understanding

Lastly, I include translation reserves when looking at Equity or NBV but exclude it when measure performance.