Avon 2011 Annual Report Download - page 39

As a result of the change in the official rate to 4.30 in conjunction with accounting for our operations in Venezuela under highly inflationary
accounting guidelines, during the first quarter of 2010, we recorded net charges of $46.1 in “Other expense, net” and $12.7 in “income
taxes”, for a total after-tax charge of $58.8, reflecting the write-down of monetary assets and liabilities and deferred tax benefits.
Additionally, certain nonmonetary assets must continue to be carried at U.S. historic dollar cost subsequent to the devaluation. Therefore,
the historic U.S. dollar costs impacted the income statement during 2010 at a disproportionate rate as they had not been devalued based on
the new exchange rates. As a result of using the U.S. historic dollar cost basis of nonmonetary assets, such as inventory, acquired prior to the
devaluation, operating profit during 2010 was negatively impacted by $79.5, for the difference between the historical cost at the previous
official exchange rate of 2.15 and the current official exchange rate of 4.30. As there were no further devaluations, there was an immaterial
impact on operating profit in 2011 from the 2010 Venezuelan currency devaluations.
Currency restrictions enacted by the Venezuelan government in 2003 have impacted the ability of Avon Venezuela to obtain foreign
currency at the official rate to pay for imported products. Since 2003, Avon Venezuela had been obtaining its foreign currency needs beyond
the amounts that could be obtained at official rates through non-government sources where the exchange rates were less favorable than
the official rate (“parallel market”). In late May 2010, the Venezuelan government took control over the previously freely-traded parallel
market. Trading in the parallel market was suspended for several weeks in May and June and reopened as a regulated (“SITME”) market in
early June 2010. The government has imposed volume restrictions on trading activity, limiting an entity’s activity to a maximum of $0.35 per
month. The current limit is below the monthly foreign exchange requirements of our Venezuelan operations and, unless these restrictions
are modified, may have a negative impact on Avon Venezuela’s future operations. There is no assurance that the Company will be able to
recover the higher cost of obtaining foreign currency in the SITME market as compared to the official rate through operating activities, such
as increased pricing or cost reductions in other areas.
At December 31, 2011, we had a net asset position of $183.4 associated with our operations in Venezuela, which included cash balances of
approximately $195.8 of which approximately $193.4 was denominated in Bolívares remeasured at the December 31, 2011 official
exchange rate and approximately $2.4 was denominated in U.S. dollars. Of the $183.4 net asset position, approximately $209.8 was
associated with bolívar-denominated monetary net assets and deferred income taxes. Additionally, during 2011 Avon Venezuela’s revenue
and operating profit represented approximately 4% of Avon’s consolidated revenue, 7% of Avon’s consolidated operating profit, and 5% of
Avon’s Non-GAAP operating profit.
During 2011, the exchange rate in the SITME market ranged within 5 to 6 Bolívares to the U.S. Dollar; however, as noted previously, access
to U.S. Dollars in the SITME market is limited. To illustrate our sensitivity to potential future changes in the official exchange rate in
Venezuela, if the official exchange rate was further devalued as of December 31, 2011, to a rate of 9.0 Bolívares to the U.S. dollar, or an
approximate 52% devaluation, our results would be negatively impacted as follows:
• As a result of the use of a further devalued exchange rate for the remeasurement of Avon Venezuela’s revenues and profits, Avon’s
annualized consolidated revenues would likely be negatively impacted by approximately 2% and annualized consolidated operating profit
would likely be negatively impacted by approximately 3% prospectively, assuming 2011’s consolidated operating profit (without the
Silpada impairment charge) and no operational improvements occurred to offset the negative impact of a further devaluation.
• Avon’s consolidated operating profit during the first twelve months following the devaluation, in this example, would likely be negatively
impacted by approximately 8%, assuming no offsetting operational improvements. The larger negative impact on operating profit during
the first twelve months as compared to the prospective impact is caused by costs of nonmonetary assets being carried at historic dollar
cost in accordance with the requirement to account for Venezuela as a highly inflationary economy while revenue would be remeasured
at the further devalued rate.
• We would likely incur an immediate charge of approximately $86.1 ($80.2 in “Other expenses, net” and $5.9 in “Income taxes”)
associated with the $209.8 of Bolívar-denominated monetary net assets and deferred income taxes.
During 2011, costs associated with acquiring goods that required settlement in U.S. dollars through the SITME markets in Venezuela
included within operating profit were approximately $17.0. The amounts reported for costs associated with acquiring goods that required
settlement in U.S. dollars through the parallel or SITME markets in Venezuela included within operating profit during 2010 were
approximately $56. Additionally, if the exchange rate in the SITME market is further devalued, or an alternative source of exchange becomes
available at an unfavorable rate beyond the SITME rate of 5.7 Bolívares to the U.S. Dollar, our results would be negatively impacted.
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