American companies tired of seeing their earnings badly hurt by Venezuela’s crumbling bolivar currency system, can – with the stroke of a pen – get rid of much of the problem.
But it means writing down the value of their Venezuelan businesses to nothing or next to nothing. And that can come with a big one-time charge.
Ford Motor Co, wrote off its entire investment in Venezuela last month when it took an $800 million pre-tax write down, the company said in response to questions from Reuters. That means no matter how much worse things get in Venezuela it shouldn’t have to take further impairment charges.
By taking the hit all at once, it allows Ford to avoid the drip-drip of losses from Venezuelathat have hurt the earnings of some of the biggest American companies in the past year. It also means the automaker keeps a foothold in what was once a promising market – unlike some other US companies who have fled the country altogether.
The slow torture of operating in Venezuela led PepsiCo to report last week a $105 million charge to remeasure assets at its Venezuelan operations. PepsiCo also prepared investors for more charges, saying it was “watching developments closely” to see if more currency changes are needed.
Devaluation
The Venezuelan problem was fully illustrated on Thursday night when the nation’s government disclosed a new free-floating exchange rate, which began trading at a rate of 170 bolivars to the dollar and moved to about 174 on Friday, very close to the black market rate, of about 188. The new rate is more than three times an auction rate of about 52 bolivars that it replaced, representing a massive effective devaluation of about 70 percent.
The government also has a fixed official exchange rate at 6.3 bolivars and another auction rate at 12 bolivars, but it allows only limited transactions at those levels.
Other companies have signaled they are considering deconsolidating. 3M Co, the consumer and industrial products company that makes Post-it notes, said last Friday it may need to deconsolidate operations in Venezuela because of an inability to exchange bolivars.
The move, though, is very rare. Strict accounting rules nearly always require companies to consolidate or include any majority-owned subsidiaries in the parent’s financial results.
The situation in Venezuela could fall under a narrow exception, allowing deconsolidation when government-imposed uncertainties are so severe that the parent’s ability to control the subsidiary is in doubt, said Robert Willens, an independent corporate tax and accounting adviser.
“It’s not something that’s mainstream, but the situation in Venezuela is really a morass,” said Jack Ciesielski, president of investment research firm R.G. Associates.
