Financial Education

Global Payments is a leading payment processing and consumer money transfer company. The risk factors section of their 10-K notes the following:

We are exposed to foreign currency risks because of our significant card processing operations in Canada, the Czech Republic, and those in the Asia-Pacific region, as well as our significant electronic money transfer operations in the U.S. and Europe.

We have significant operations in Canada which are denominated in Canadian dollars. In addition, we have significant operations in the Asia-Pacific region, the Czech Republic and Spain. We are subject to the risk that currency exchange rates between these regions and the United States will fluctuate, potentially resulting in a loss of some of our revenue and earnings when such amounts are exchanged into U.S. dollars.

We also have significant money transfer operations in the U.S. and Europe which subject us to foreign currency exchange risks as our customers deposit funds in the local currencies of the originating countries where our branches are located, and we typically deliver funds denominated in the home country currencies to each of our settlement locations.

Global Payments’ revenue and net income for the three years ending May 31, 2007 are summarized below.

However, turning to the statement of shareholder equity we see that there were significant other components of “total comprehensive income.”

The most significant adjustment is the foreign currency translation adjustment, which results from the net assets of foreign subsidiaries being translated into dollars at current exchange rates. Since the amount is positive in all periods, if the subsidiaries have positive net assets the amount reflects strengthening foreign currencies (a weaker dollar.) The adjustment does not flow through the income statement unless the gains or losses are realized. However, it does reflect the underlying economic position and investors may also want to adjust the statements for better comparison to firms that translate foreign operations using the temporal method.

All one needs to do is replace net income with total comprehensive income.

Since the currency adjustments were positive in all three years, profit margin based on comprehensive income were higher in all three years. Had foreign currencies weakened against the dollar, margins would have been reduced. In addition, the profit margins were much more volatile when based on comprehensive income – rising 440 basis points in 2006 rather than 200, then falling by 290 basis points in 2007 rather than 30.

Furthermore, net income growth patterns are markedly different from the growth in comprehensive income. Net income grew at double digit rates in both 2006 and 2007. Comprehensive income, however, rose faster in 2006 and actually declined in 2007.

For more information, see all articles on: Accounting, Adjusting Reported Financial Statements, Common Size Analysis, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis

See also:

Translating a Foreign Subsidiary Income Statement Using the All-Current Method

Comprehensive Income

Translation Gains and Losses

Clean Surplus Accounting

Translating A Foreign Subsidiary’s Results into the Parent Company’s Currency