July 12, 2017 / 10:52 AM / in 2 years

Brazil reverses preliminary decision on Petrobras hedge accounting

SAO PAULO, July 12 (Reuters) - Brazil’s securities industry watchdog CVM has reversed a preliminary decision ordering state-controlled Petróleo Brasileiro SA (Petrobras) to restate financial statements in recent years to include the impact of currency protection on debt and other balance sheet items.

In a securities filing late on Tuesday, Petrobras said the watchdog’s board scrapped an earlier internal ruling asking for the restatement of results from the second and third quarters of 2013, and to the years of 2014, 2015 and 2016 to account for impairments related to certain hedging transactions.

Petrobras announced changes in the accounting of so-called currency hedging in July 2013 to limit the impact of a weakening Brazilian real on debt. Petrobras is the world’s most indebted major oil firm because of government-mandated investments that over-streched the company’s balance sheet.

The CVM’s technical analysis department had recommended a revamping of such accounting practices and the restatement of results on March 8. That same day, Petrobras Chief Financial Officer Ivan Monteiro vowed to appeal the decision and keep hedge accounting practices unaltered.

“The regulator’s board decision confirms our understanding that the practice of hedge accounting can therefore be applied,” the filing said.

The hedge mechanism forces Petrobras to set aside about 20 percent of export proceeds in a special account for seven years. Rather than accounting for them as revenue, the values in the account accrue to shareholders’ equity.

The system helps protect more than half Petrobras’s net debt from foreign exchange-rate variations. The real’s 35 percent decline against the dollar over the past four years led to a sharp rise in the company’s foreign liabilities and debt payments, when denominated in local currency terms.

Normally a decline in the currency against the dollar would require a company with dollar-denominated debts to record a non-cash, non-operational impairment on results, reducing net profit or increasing a net loss. (Reporting by Guillermo Parra-Bernal; Editing by Mark Potter)

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