Every time Venezuela introduces a new, weaker currency exchange rate, some of the world's largest companies face the decision of whether or not to adopt it. If they eventually do switch to the less favorable rate, it can result in multimillion-dollar charges that drag down balance sheets and earnings statements.
At least 46 S&P 500 companies, about 10 percent of the total index, have told investors about potential exposure to Venezuela's currency in the past year, according to a search of company filings compiled by Bloomberg.
Venezuela currently has three legal exchange rates that are pre-set by the government, and companies that operate there have to decide which one they should use to value net monetary assets and report sales. The rates are currently at 6.3, 12 and 196.95 bolivars per dollar. The first two rates (called the Cencoex rate and the Sicad rate) are allowed for transacting government-authorized priority goods including food, medicine and car parts. The third rate, known as the Simadi rate, was just introduced in February. It can be used by those who don't receive authorization to buy dollars at the first two preferential rates.
Some companies have been holding out for months, hoping to exchange bolivars at the promised, preferential rates. Others that do adopt the new rates for accounting purposes can find them quickly outdated and be forced to use even less favorable ones soon after.
When companies use the preferential rates of 6.3 and 12 for valuation and translation it can make their revenues and assets look far more valuable than what they'd be worth at a weaker rate. For example, monetary assets of $481 million DIRECTV said it had in Venezuelan bolivars at the end of last year using the Sicad rate would only be worth $29 million if the company switches to the weaker Simadi rate -- a potential hit of $452 million.
And even as some companies are beginning to revalue Venezuelan assets using the new Simadi rate, many had only just finished adjusting to the earlier Sicad rate. The currency, meanwhile, continues to plunge on the black market where one dollar currently fetches about 272 bolivars. It's lost 36 percent of its value this year alone.
Here's a selection of the comments made recently by U.S. companies about Venezuela's currency:
The Coca-Cola Co:
During the three months ended April 3, 2015, the Company recorded net charges of $135 million related to our Venezuelan operations. These charges were a result of the remeasurement of the net monetary assets of our Venezuelan subsidiary using the SIMADI exchange rate, an impairment of a Venezuelan trademark due to higher exchange rates, and a write-down of receivables from our bottling partner in Venezuela.
During the first quarter, the SICAD II exchange rate of VEF 50 to the U.S. dollar was eliminated and replaced with a new system known as SIMADI. The SIMADI rate was approximately VEF 192 as of the end of the quarter. As a result, we recorded $49 million of devaluation charge during the first quarter.
Included in foreign currency losses, net for the fiscal 2015 periods presented was a foreign currency remeasurement loss of $23 million related to our Venezuelan subsidiary due to the continued “highly inflationary” designation of the Venezuelan economy in accordance with ASC 830, Foreign Currency Matters; the introduction of currency exchange legislation in Venezuela in February 2015 to create a new foreign exchange mechanism known as SIMADI; and the remeasurement of certain assets and liabilities of our Venezuelan subsidiary pursuant to the SIMADI rate, which we determined, based upon our specific facts and circumstances, was the most appropriate for the reporting of our Venezuelan subsidiary’s Bolivar based transactions and net monetary assets in U.S. Dollars. We incurred a $111 million loss during the fiscal 2014 periods presented for generally similar reasons.''
If, at the end of the first quarter of 2015, we had used the SICAD exchange rate, which was 12 bolivars per U.S. dollar as of that date, to remeasure the net monetary assets that are currently recorded at the fixed exchange rate, we would have incurred a net charge of approximately $160 million. If, at the end of the first quarter of 2015, we had remeasured all net monetary assets of our Venezuela businesses at the SIMADI exchange rate, which was approximately 177 bolivars per U.S. dollar as of that date, we would have incurred a net charge of approximately $480 million.
And here's a longer list of S&P 500 companies that have mentioned Venezuela's currency in regulatory filings in the past year:
American Airlines Group Inc
Baker Hughes Inc
Cameron International Corp
The Clorox Co
The Coca-Cola Co
Discovery Communications Inc
Delta Air Lines Inc
EI du Pont de Nemours & Co
The Estee Lauder Cos Inc
Ford Motor Co
General Electric Co
General Mills Inc
General Motors Co
The Goodyear Tire & Rubber Co
Level 3 Communications Inc
Mead Johnson Nutrition Co
Merck & Co Inc
Mondelez International Inc
Newell Rubbermaid Inc
The Procter & Gamble Co
Sealed Air Corp
Time Warner Inc
Twenty-First Century Fox Inc
The Walt Disney Co
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