DuPont 2015 Annual Report Download - page 72

E. I. du Pont de Nemours and Company
Notes to the Consolidated Financial Statements (continued)
(Dollars in millions, except per share)
F-13
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this
approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities
are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change
in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the company's assets
and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for
income taxes on unremitted earnings of subsidiaries and affiliates, except for subsidiaries in which earnings are deemed to be
indefinitely invested. Investment tax credits or grants are accounted for in the period earned (the flow-through method). Interest
accrued related to unrecognized tax benefits is included in miscellaneous income and expenses, net, within other income, net.
Income tax related penalties are included in the provision for income taxes.
Foreign Currency Translation
The company's worldwide operations utilize the U.S. dollar (USD) or local currency as the functional currency, where applicable.
The company identifies its separate and distinct foreign entities and groups the foreign entities into two categories: 1) extension
of the parent (USD functional currency) and 2) self-contained (local functional currency). If a foreign entity does not align with
either category, factors are evaluated and a judgment is made to determine the functional currency.
For foreign entities where the USD is the functional currency, all foreign currency-denominated asset and liability amounts are
re-measured into USD at end-of-period exchange rates, except for inventories, prepaid expenses, property, plant and equipment,
goodwill and other intangible assets, which are re-measured at historical rates. Foreign currency income and expenses are re-
measured at average exchange rates in effect during the year, except for expenses related to balance sheet amounts re-measured
at historical exchange rates. Exchange gains and losses arising from re-measurement of foreign currency-denominated monetary
assets and liabilities are included in income in the period in which they occur.
For foreign entities where the local currency is the functional currency, assets and liabilities denominated in local currencies are
translated into USD at end-of-period exchange rates and the resultant translation adjustments are reported, net of their related tax
effects, as a component of accumulated other comprehensive income (loss) in equity. Assets and liabilities denominated in other
than the local currency are re-measured into the local currency prior to translation into USD and the resultant exchange gains or
losses are included in income in the period in which they occur. Income and expenses are translated into USD at average exchange
rates in effect during the period.
The company changes the functional currency of its separate and distinct foreign entities only when significant changes in economic
facts and circumstances indicate clearly that the functional currency has changed. As a result of the separation of its Performance
Chemicals segment, coupled with the company’s redesign initiative, the functional currency at certain of the company’s foreign
entities was re-evaluated which, in some cases, has resulted in a change in the foreign entities' functional currency during 2015.
Venezuelan Foreign Currency
Venezuela is considered a highly inflationary economy under GAAP and the USD is the functional currency for the company's
subsidiaries in Venezuela. The official exchange rate continues to be set through the National Center for Foreign Commerce
(CENCOEX, previously CADIVI). Based on its evaluation of the restrictions and limitations affecting the availability of specific
exchange rate mechanisms, management concluded in the second quarter of 2014 that the Alternative Currency Exchange System
(SICAD 2) auction process would be the most likely mechanism available. As a result, in the second quarter of 2014, the company
changed from the official exchange rate to the SICAD 2 exchange rate, which resulted in a pre-tax charge of $58. The charge is
recorded within other income, net in the company's Consolidated Income Statements for the year ended December 31, 2014.
During the first quarter of 2015, the Venezuelan government enacted additional changes to the country's foreign exchange systems
including the introduction of the Foreign Exchange Marginal System (SIMADI) auction process. Management has concluded
that the SIMADI auction process would be the most likely exchange mechanism available. As a result, effective in the first quarter
of 2015, the company changed from the SICAD 2 to the SIMADI exchange rate, to re-measure its Bolivar Fuertes (VEF)
denominated net monetary assets which resulted in a pre-tax charge of $3. The charge is recorded within other income, net in the
company's Consolidated Income Statements for the year ended December 31, 2015. The remaining net monetary assets and non-
monetary assets are immaterial at December 31, 2015.