P&G’s erstwhile headquarters in Venezuela – is there a “For Sale” sign on that thing yet?
Yesterday was not a good day for businesses operating inside Venezuela.
First, the government decided to expropriate significant parts of Polar, Nestle, Coca-Cola, and Pepsi. The government claims the factories and distribution centers, located in Caracas’ working-class district of La Yaguara, were built on land they need for public housing. Never mind that the government is broke and no public housing will be built (just across the street, much-ballyhooed public housing projects have languished for years). Never mind that these companies are big-time employers for the area’s inhabitants. The government wants them out.
Then we learn Procter & Gamble has decided to write off Venezuela – as in, they will no longer keep their Venezuela unit in their books, but as a separate entity. They announced a whopping, massive $2.1 billion charge due to Venezuela’s exchange rate nuttiness. So, basically, they have given up on us. It doesn’t take a genius to figure out what that’s going to do to the availability of shampoo, toothpaste, and laundry detergent in the country.
But it didn’t stop there. Colgate-Palmolive and Goodyear have suggested they, too, will “deconsolidate” Venezuela from their books. Meanwhile, Mattel has announced that they are thinking of saying “buh-bye” to Venezuela altogether (hold on to your old Barbie dolls – there’s a black market for them brewing). Pharmaceutical giant Merck has also decided – you gessed it! – to write off Venezuela, to the tune of a $715 million loss.
Venezuelan companies are taking a massive hit as well. Yesterday we learned that both Movistar and Digitel, the two largest private cellular providers in the country, claim they are not receiving currency and will have to restrict international calls. And Fresenius Medical Care, leading provider of dyalisis equipment, is bailing on Venezuela altogether.
But don’t fret. It’s not all bad news. Uruguay has announced it will sell the government 235,000 tons of food stuff … And we all know what a positive impact that has.
Caracas Chronicles 
All this( in essence) was clearly announced to the public since Chavez took office for those with ears to hear ; and those with eyes to see noticed his countenance and could imagine.
The rest were and still are, taken for a ride ….
None of this can be understand without a deep analysis of why this is so, and that will not be by discussing numerical details.Ask any good advertising company for advice.
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As I understood it, it was Ford that pioneered this accounting practice: treating their Venezuela operations like a lottery ticket that might imaginably one day pay off but whose “profits” couldn’t possibly be kept on the books.
Ford’s accountants were seen like dangerous radicals in the local MNE scene when they did that last year. Now, the practice is spreading.
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What they are doing is pretty common when there is exchange instability. It just seems esoteric because it is unusual for a country to fall this far down the well. I mentioned this would be their endgame scenario last summer.
The nice thing about being an accountant for these companies is that there is no uncertainty…you pick which economic reality (or unreality, for those booking at a lower exchange rate) that you want and which holds the best benefit for this and next quarters. The cat is not alive and dead, but in the state you want it to be.
The troubling thing is, as you mention, that they are taking the less optimal choice for themselves, which means they are surrendering the market.
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I doubt they had a choice. They are international, public corporations. Their accounting practices have to meet strict standards to be allowed to be listed (traded) on the big exchanges (remember Arthur Andersen?). They were probably instructed to cut the smoke and mirrors with their Vzla. assets and take the hit.
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Yes…and no.
If the currency was floating, it would be fairly straightforward. This is covered under ASC 830, and while I am a bit fuzzy on the specifics, companies are allowed to report the transactions, when there are multiple pegged exchange rates, at the rate they select and at which they reasonably believe they will translate/repatriate the local currency. This was discussed by the FASB specifically regarding Venezuela back in 2010, and no decision was made at that time (or since).
This is why, for the past several years, the MNCs have had great accounting out of Venezuela. They capture the 6.3 rate, even when it became apparent that they would never repatriate dividends or receivables at that rate. The constant “discussions” with the government, were to some extent I think, merely a smokescreen to keep booking at that rate. Thus, net income looks stellar, even when it isn’t.
Another fun part of the GAAP is that, when accounting in a high inflation environment, the balance sheet is calculated at a stable currency rate (dollar) while translations of those losses (or gains) on the balance sheet are reported in net income. Hence, writing down your receivables on your balance sheet directly translates (no pun intended) to a lower net income and will directly impact the EBIT for the company as a whole.
For tax purposes, an epic writedown comes in handy to offset great gains on your net income. That’s why this becomes a lottery ticket, as Mr. Toro notes above. If the government pays out at anywhere near the book rate and you’ve been charging for your product somewhere between the parallel rate for your prand SIMADI/SICAD/etc, you walk away with billions on the arbitrage, even if you are taxed at the 35% rate on your repatriated funds. Alternately and simplified, say you take a $2 billion write down against your real and phantom profits/receivables (remember, charging at a higher rate) in country that you didn’t expect to pay out anyway and apply it to $2 billion in profits from your other markets for the corporation and you walk away with about $700 million give or take a bit in tax savings. It doesn’t hurt that there’s carryforward either. Notice the prominency of “Pretax” in the title.
Limited downside, huge upside. Brinks did this last year (and come to think of it, are armored cars safe anywhere in Venezuela now?) This is part of why the MNCs haven’t abandoned the country sooner. That they are says much for what they see coming down the pipe.
Now I grant you, I may be a bit rusty on exactly how to structure this, but the above is pretty much is how a smart CFO would essentially hedge running a subsidiary in Venezuela.
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Thanks for the info. I’ve been wondering about that for some time.
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This is what in Big 4 lingo we call creative accounting. The will not reflect the Venezuelan operation in their books even though they (barely) keep the business open
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Par for the course….just another theft of something productive that will be turned into a decaying govt. holding. On second thought, perhaps it can be used as a distribution center for all the drugs being smuggled out of Vzla.
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And, speaking of accounting, is it not KPMG who is contracted to do the PDVSA books? One can just imagine all of the screwball numbers packed into that SEC required document. PDVSA’s international bond portfolio is held-up by those very same numbers presented in that 10-K report. Just imagine the day when those numbers are proved to be grossly exaggerated, and then that house of cards called PDVSA will come tumbling down. Remember Arthur Andersen and Enron? Both no longer exist.
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An acquaintance of mine (who will not be named) was an officer in the local KPMG branch in Caracas. He wisely retired about a year ago. He assured me that virtually all of the published and certified numbers for PDVSA are works of pure fiction.
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I was only a translator at Price Waterhouse Espiñeira Sheldon. It must be tough on the current ones as well now.
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Hoy he visto en el twitter de Henkel García una bombilla (lightbulb por si allí no se dice así) atada con una cadena y hace unos días una persona contaba que a otra le habían robado el detergente. Semejantes absurdos cuentan a su manera mucho más que cualquier estadística. En teoría todo este delirio solo puede durar algunos meses más pero nadie sabe cuantos.
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Las “bombillas” son EL tema ahorita en Venezuela
http://caracaschronicles.com/2015/07/04/thirteen-conversations-about-one-thing/
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Sí, ya había leído ese post y de hecho me acordé de él inmediatamente cuando vi esa foto. Se habla a veces de los cortes de luz pero no he visto que otras publicaciones o webs traten este otro tema en particular. Hay que dar a este blog entonces unos cuantos puntos por hacerlo.
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There’s another way to look at this debacle, when it’s not Medicine, Malaria, hospital tragedies:
The more inflation, the longer the colas, the more escasez, the faster people will finally comprehend that Chavismo is a lie and a disaster. You see, 60% of the people still love Chavez, close to 30% will still vote Maduro/Cabello. Perhaps they need a bit more “Patria” to wake up.
Las colas and la Escasez is what will bring Chavismo down. Not the wisdom of its people.
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Amazing that in the middle of the biggest shortage crises the country has seen, the government solution is to close the plants of the most efficient producers and distributors of the country…
My grandfather used to say “hay malo por malo, y hay malo por bruto”. These guys seem to fulfill both definitions.
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Your grandfather was a wise man. The sentiment of the second type was expressed by political theorist Hannah Arendt who introduced the phrase “the banality of evil”.
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Its a splendid phrase , although it was first used by Hannah Arend in her book on Eichmann , the original suggestion to use the phrase came from her husband Heirich Blucher ,it certainly struck a note for a kind of wickedness which any ordinary man is capable of commmitting .
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Todas estas compañías tienen salas situacionales.
Es el mejor diagnóstico de que el futuro, elecciones parlamentarias incluidas, e de carácter reservado.
Muy mal pronostico y punto adicional para el régimen que va a dar el mandarriazo en cualquier momento.
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I was once an in- house translator at Price-Waterhouse( Espiñeira Sheldon) in Caracas. I cannot IMAGINE what the position is like now! Gives me chills.
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There is a smal window of opportunity for people to take action about the lack of food, once malnutrition (the severe type) sets in a nation of physically incapacitated people can be subjugated for decades by the most tin-pot regime, welcom to Nprth-Korea–sur-le-Caribe
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About the P&G building for sale, most of it is now rented toother companies because of the headcount reduction in P&G Venezuela
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