By Dena Aubin
NEW YORK (Reuters) - 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 Venezuela that 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 U.S. 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.
Diaper and tissue maker Kimberly Clark in January said it took a $462 million charge for revaluing Venezuelan assets. And it isn't only American companies that are taking a hit - a similar revaluation on Monday led Spanish telecoms company Telefonica SA to cut the value of its net assets in Venezuela by 2.84 billion euros ($3.23 billion).
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.
SEC CONSULTED ON MOVE
Ford said in a statement that it continues to own the Venezuelan operations, but is valuing the investment at zero because currency controls restricted the subsidiary's ability to purchase parts and pay dividends. In a filing last month, Ford said it was making an accounting change that would isolate the Venezuelan operations so that they would no longer flow through to the parent company’s financial results.
The company said it consulted the U.S. Securities and Exchange Commission before making the move. An SEC spokeswoman declined comment.
Though Ford did not use the term, accounting experts said it appeared to be deconsolidating, or removing its Venezuelan subsidiaries from its financial results by taking advantage of a rarely used U.S. accounting rule.
Under that rule, subsidiaries' assets are marked to market value and reported on the balance sheet as an investment instead of under core assets and liabilities. On the income statement, the operations typically would no longer be part of the parent’s financial results.
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.
He and other accounting experts said they could not recall the last time a company removed, or deconsolidated a subsidiary that it owned from its results for currency reasons.
"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.
MORE CHARGES EXPECTED
Once a bright spot for U.S. multinationals, Venezuela has turned into a dark cloud of recurring currency devaluations, an inflation rate of 68.5 percent, shortages and mounting government controls. Labor laws make it difficult to fire workers, and companies have trouble getting parts and keeping plants running.
In its latest annual report released on Feb. 4, General Motors Co signaled it could make a similar radical accounting change in the future. The automaker said it is consolidating Venezuela’s results for now, but at some point may be unable to “maintain a controlling financial interest” and could record up to a $900 million charge.
Most companies that deconsolidate because of a loss of control will likely value their Venezuelan operations near zero, said Kenneth Miller, a partner in the U.S. national office of PricewaterhouseCoopers. "What is the value of a business you can't control?" Miller asked.
The alternative, though, is to continue to take large charges to revalue bolivar assets.
Kimberly-Clark's recent charge came after it revalued its Venezuelan assets from 12 bolivars to the auction rate of about 52.
Now that part of the currency system has been replaced with the free-floating platform, companies using the 52-bolivar rate may have to take another charge. Changing from 52 to 174 bolivars would cut the dollar value of their assets by more than two thirds.
A move to 174 would nearly wipe out $7.1 billion of Venezuelan monetary assets currently held on the books of 10 large American companies, according to a Reuters analysis.
The alternative for some may be to flee the country altogether, but that also has a price. Cleaning products maker Clorox Co last September discontinued its operations Venezuela, saying it expected to book about $70 million to $80 million in exit costs.
Clorox said its Venezuela business was not viable and it planned to sell its plants. Then in November, Clorox said the government had expropriated its Venezuelan assets and "foreclosed the possibility of an asset sale."
(Reporting by Dena Aubin; Additional reporting by Bernie Woodall in Detroit and Brian Ellsworth in Caracas; Editing by Martin Howell)