Brazil’s state-run oil company Petrobras, announced a change to its accounting method in an effort to limit the impact of a weaker Brazilian currency on its large dollar-denominated debts.
Starting in May, Petrobras has set aside about 20 per cent of export proceeds in a special account for seven years, the company said in a securities filing. Rather than be accounted for as revenue, the values in the account accrue to shareholders’ equity.
This will allow Petrobras to protect about 70 per cent of its net debt from exchange-rate variations, the company said. The Brazilian real’s recent decline against the dollar has caused the local-currency value of the company’s foreign-currency liabilities and debt payments to rise sharply.
“This will help improve their second-quarter results because forex losses were expected to be high,” said Lucas Brendler, oil company analyst with Banco Geração Futuro in Porto Alegre, Brazil. “At the same time it’s going to distort their historical earnings.”
Normally a decline in the Brazilian real against the dollar would require Petrobras, or any other company with dollar-denominated debts, to record a non-cash, non-operational cost on its income statement, reducing net profit or increasing a net loss.
In the second quarter of 2012, a weaker real led Petrobras to post its first loss in 13 years. Since early May, as declines in the value of the real against the dollar accelerated, Petrobras preferred shares, the company’s most-traded class of stock, have lost more than a quarter of their value.
Petrobras preferred shares rose 1.54 per cent to 15.21 reais in São Paulo before the change was announced. Under Petrobras’ new accounting system, allowed under generally accepted Brazilian accounting rule CPC-38, the increase in the local currency value of debt liabilities will be offset by the creation of an export-related foreign currency asset, according to Brazil’s Committee of Accounting Pronouncements, which issued the rule.
“The use of hedge accounting will allow the gains or losses resulting from debt in US dollars caused by exchange-rate variations to affect the company only when the protected exports are realised,” the statement said. “The application of this practice permits that the company’s results are better aligned with economic and operational realities.”
Petrobras’ debt has been soaring as production falls from old fields, new fields are delayed, and the government forces the Rio de Janeiro-based company to subside domestic fuel prices. This has led to increased borrowing to finance a $237 billion, five-year investment plan, the world’s largest corporate spending programme.
