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Strategies & Market Trends : Value Investing
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To: Madharry who wrote (10095)3/2/2000 6:38:00 PM
From: Michael Burry  Read Replies (4) of 78659
 
This makes sense. You buy some of your equity (a balance sheet item of course) in a foreign currency. Then you suffer a 2:1 devaluation of that currency relative to your native currency. That portion of your equity is halved. It shows up in the reconciliation of equity, and in the adjustments to net income if the company is progressive about accepting the FASB ruling on the subject. But that adjustment doesn't show up in the standard reported P&L. It's just in the notes to the financial statements.

So where is it in cash flows? Well you've already spent the money on acquiring that equity. That equity is now halved in value. But then the cash was already spent. So cash flow isn't affected. So it is an illuminating but potentially irrelevant accounting maneuver. For instance, if Equifax from here on operates in Brazil cash-flow positive, all the maneuver does is hyperinflate true return on equity.

The adjustment I was referring to was really just balance sheet-based. As far as ongoing expenses and revenues of the enterprise, then that is dependent on changes in the currency exchange rate in the future. Basically, though, my question is answered for these foreign-currency adjustments to equity: no effect on cash flow, keep it in invested capital, and make sure to add it back in as an equity-equivalent.

Right?

Mike
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