Baker Hughes 2014 Annual Report Download - page 81

Baker Hughes Incorporated
Notes to Consolidated Financial Statements
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becomes available, accruals are adjusted to reflect current cost estimates. Ongoing environmental compliance
costs, such as obtaining environmental permits, installation of pollution control equipment and waste disposal are
expensed as incurred. Where we have been identified as a potentially responsible party in a U.S. federal or state
Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) site, we accrue our share
of the estimated remediation costs of the site. This share is based on the ratio of the estimated volume of waste we
contributed to the site to the total volume of waste disposed at the site.
Foreign Currency
A number of our significant foreign subsidiaries have designated the local currency as their functional currency
and, as such, gains and losses resulting from balance sheet translation of foreign operations are included as a
separate component of accumulated other comprehensive loss within stockholders’ equity. Gains and losses from
foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-
functional currency, are included in marketing, general and administrative (“MG&A”) expenses in the consolidated
statements of income as incurred. For those foreign subsidiaries that have designated the U.S. Dollar ("USD") as
the functional currency, monetary assets and liabilities are remeasured at period-end exchange rates, and
nonmonetary items are remeasured at historical exchange rates. Gains and losses resulting from this balance
sheet remeasurement are also included in MG&A expenses as incurred.
In early 2014, the Venezuelan government established two new exchange mechanisms, SICAD 1 and SICAD 2,
where participation in the auction process of each mechanism is controlled by the Venezuelan government
depending on the economic sector within which a company operates. These mechanisms are in addition to the
existing official exchange rate. We have not been eligible to apply for exchange at the official rate nor have we
been allowed to participate in the SICAD 1 auctions. We have successfully participated in SICAD 2 auctions. As a
result, during the second quarter of 2014, we adopted the SICAD 2 exchange rate of approximately 50 Bolivars
Fuertes ("BsF") per USD for purposes of remeasuring BsF denominated assets and liabilities and revenue and
expenses. Prior to this change, we were using the official exchange rate of 6.3 BsF per USD. The impact of this
devaluation in the currency was a loss of $12 million resulting from an adjustment of our BsF denominated
monetary assets and liabilities. This loss was recorded in MG&A expenses in the second quarter of 2014.
In early 2013, Venezuela's currency was devalued from the prior exchange rate of 4.3 BsF per USD to 6.3 BsF
per USD. The impact of this devaluation was a loss of $23 million that was recorded in MG&A expenses in the first
quarter of 2013.
Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, short and
long-term debt, and derivative financial instruments. Except for long-term debt, the estimated fair value of our
financial instruments at December 31, 2014 and 2013 approximates their carrying value as reflected in our
consolidated balance sheets. For further information on the fair value of our debt, see Note 11. "Indebtedness."
We monitor our exposure to various business risks including commodity prices, foreign currency exchange
rates and interest rates and regularly use derivative financial instruments to manage these risks. Our policies do
not permit the use of derivative financial instruments for speculative purposes. At the inception of a new derivative,
we designate the derivative as a hedge or we determine the derivative to be undesignated as a hedging instrument
as the facts dictate. We document the relationships between the hedging instruments and the hedged items, as
well as our risk management objectives and strategy for undertaking various hedge transactions. We assess
whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows
of the hedged item at both the inception of the hedge and on an ongoing basis.
We have a program that utilizes foreign currency forward contracts to reduce the risks associated with the
effects of certain foreign currency exposures. Under this program, our strategy is to have gains or losses on the
foreign currency forward contracts mitigate the foreign currency transaction and translation gains or losses to the
extent practical. These foreign currency exposures typically arise from changes in the value of assets and liabilities
which are denominated in currencies other than the functional currency. Our foreign currency forward contracts
generally settle in less than 180 days. We record all derivatives as of the end of our reporting period in our