By Anne Friberg
Companies’ rate choices in the post-deval environment will force regulators to issue firmer accounting guidance.
The impact of the January devaluation of the Venezuelan bolivar is beginning to be felt in the corporate community. The biggest question is what rate to use for financial statements. (See also, “Venezuela: A Survival Guide,” IT, February 2010.) In late February, members of The NeuGroup’s Latin American Treasury Managers’ Peer Group and both FX Managers’ Peer Groups convened a conference call to discuss the results of a recent survey of their own design, to which 15 companies responded. This afforded an opportunity to expand on a few points, e.g., which rate each company will use and why, what are the best parallel exchange rate sources, and to what extent members expect to use the parallel market as opposed to the official route via the Commission of Administration of Currencies (CADIVI).
Rate for Financial Statements
Eight companies have decided to use the 4.30 rate for translation. For some, it is because it is the official rate for their product categories (oil, telecom), while others (food and fast-moving consumer goods companies) chose it because they think it is the realistic rate at which they can extract dividends, even though some of their product categories qualify for the 2.60 rate. One company has chosen a hybrid rate, noting that it will use 2.60 when appropriate on inventory, AP and sales, and 4.30 for other accounts—including dividends; the official publication Gaceta Official put dividends in the 4.30 category. Another company with some products qualifying for the 2.60 rate will likely end up taking a similar route.
Three companies have already chosen the parallel rate, with the justification that it is the “prevailing rate” in the Venezuelan economy and the only realistic rate at which to extract either payables or dividends. One member referred to FAS 52, paragraphs 27A and B, which says that the appropriate rate is the one at which transactions can be settled.
Yet another company was looking to justify using the parallel rate and the member remarked in the call that, “We’d prefer it and we think it’s our reality, but we need to justify it from an accounting perspective.” However, “unless there is firm contrary guidance from the SEC and accounting firms, we will use the parallel rate for everything except accounts payable in the CADIVI queue.”
The problem with the dual official rate and the extensive use of the parallel market is that it has resulted in different rates used by different companies; this will make it difficult to compare financial statements accurately. One regional treasurer noted his surprise at the number of companies he had heard of moving to the parallel rate. This trend at some point will force the Securities and Exchange Commission to come up with a clear, standard rule, he thought.
Parallel Market Use and Liquidity
There was some optimism after the devaluation that companies would be able to depend less on parallel-market transactions to get cash out. So far, this has not turned out to be true. CADIVI is not churning out official dollars faster, and some even say slower because the bureaucrats have not yet settled into their new approvals routine. As a result, most peer group members said they expect to use the parallel market about as much as before, or at least they would like to; sometimes the liquidity in the market is not sufficient, and at least one regional treasurer noted that his brokers take longer to transact and get quotes—a signal that liquidity is lacking.
One factor in the lack of liquidity may be that the government has not seen the kind of results it wanted from its bond issues—meaning a reduction in the spread between the official and the parallel rate (the latter at 6.50-6.70 on February 26)—and is a less active issuer as a consequence (a large, planned auction was halted on February 25; the finance minister said that an issue will come “when convenient” instead, possibly during the second quarter, according to the blog Dólar Paralelo). Even for companies who don’t depend on the parallel market much, the importance of the bond is not to participate but to get the parallel rate down, closer to the official rate.