Coca Cola 2010 Annual Report Download - page 49

Hyperinflationary Economies
Our Company conducts business in more than 200 countries, some of which have been deemed to be hyperinflationary
economies due to excessively high inflation rates in recent years. These economies create financial exposure to the
Company. Venezuela was deemed to be a hyperinflationary economy subsequent to December 31, 2009.
As of December 31, 2009, two main exchange rate mechanisms existed in Venezuela. The first exchange rate mechanism
is known as the official rate of exchange (‘‘official rate’’), which is set by the Venezuelan government. In order to utilize
the official rate, entities must seek approval from the government-operated Foreign Exchange Administration Board
(‘‘CADIVI’’). As of December 31, 2009, the official rate set by the Venezuelan government was 2.15 bolivars per
U.S. dollar. The second exchange rate mechanism was known as the parallel rate, which in some circumstances
provided entities with a more liquid exchange through the use of a series of transactions via a broker.
Subsequent to December 31, 2009, Venezuela was determined to be a hyperinflationary economy, and the Venezuelan
government devalued the bolivar by resetting the official rate to 2.6 bolivars per U.S. dollar for essential goods and
4.3 bolivars per U.S. dollar for nonessential goods. In accordance with hyperinflationary accounting under accounting
principles generally accepted in the United States, our local subsidiary was required to use the U.S. dollar as its
functional currency. As a result, we remeasured the net assets of our Venezuelan subsidiary using the official rate for
nonessential goods of 4.3 bolivars per U.S. dollar. During the first quarter of 2010, we recorded a loss of approximately
$103 million related to the remeasurement of our Venezuelan subsidiary’s net assets. The loss was recorded in the line
item other income (loss) — net in our consolidated statement of income. We classified the impact of the
remeasurement loss in the line item effect of exchange rate changes on cash and cash equivalents in our consolidated
statement of cash flows.
In early June 2010, the Venezuelan government introduced a newly regulated foreign currency exchange system known
as the Transaction System for Foreign Currency Denominated Securities (‘‘SITME’’). This new system, which is subject
to annual limits, replaced the parallel market whereby entities domiciled in Venezuela are able to exchange their bolivar
to U.S. dollars through authorized financial institutions (commercial banks, savings and lending institutions, etc.).
In December 2010, the Venezuelan government announced that it was eliminating the official rate of 2.6 bolivars per
U.S. dollar for essential goods. As a result, there are only two exchange rates available for remeasuring bolivar-
denominated transactions as of December 31, 2010, the official rate of 4.3 bolivars per U.S. dollar for nonessential
goods and the SITME rate. As discussed above, the Company has remeasured the net assets of our Venezuelan
subsidiary using the official rate for nonessential goods of 4.3 bolivars per U.S. dollar since January 1, 2010. Therefore,
the elimination of the official rate for essential goods had no impact on the remeasurement of the net assets of our
Venezuelan subsidiary. We continue to use the official exchange rate for nonessential goods to remeasure the financial
statements of our Venezuelan subsidiary. If the official exchange rate devalues further, it would result in our Company
recognizing additional foreign currency exchange losses in our consolidated financial statements. As of December 31,
2010, our Venezuelan subsidiary held monetary assets of approximately $200 million.
In addition to the foreign currency exchange exposure related to our Venezuelan subsidiary’s net assets, we also sell
concentrate to our bottling partner in Venezuela from outside the country. These sales are denominated in U.S. dollars.
Some of our concentrate sales were approved by the CADIVI to receive the official rate for essential goods of
2.6 bolivars per U.S. dollar prior to the elimination of the official rate for essential goods in December 2010. Prior to
the elimination of the official rate for essential goods, our bottling partner in Venezuela was able to convert bolivars to
U.S. dollars to settle our receivables related to sales approved by the CADIVI. Therefore, as of December 31, 2010,
our receivable balance related to concentrate sales that had been approved by the CADIVI was not significant. If we
are unable to utilize a government-approved exchange rate mechanism for future concentrate sales to our bottling
partner in Venezuela, the amount of receivables related to these sales will increase. In addition, we have certain
intangible assets associated with products sold in Venezuela. If we are unable to utilize a government-approved
exchange rate mechanism for concentrate sales, or if the bolivar further devalues, it could result in the impairment of
these intangible assets. As of December 31, 2010, the carrying value of our accounts receivable from our bottling
partner in Venezuela and intangible assets associated with products sold in Venezuela was approximately $135 million.
The revenues and cash flows associated with concentrate sales to our bottling partner in Venezuela in 2011 are not
anticipated to be significant to the Company’s consolidated financial statements.
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