Highly Inflationary Accounting for Venezuelan Operations

The cumulative inflation in Venezuela for the three years ended December 31, 2009 was more than 100 percent, based on the Consumer Price Index/National Consumer Price Index. As a result, effective January 1, 2010, our Venezuelan subsidiary (“K‑C Venezuela”) began accounting for its operations as highly inflationary. Under highly inflationary accounting, K-C Venezuela’s functional currency became the U.S. dollar, and its income statement and balance sheet are measured into U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on bolivar-denominated monetary assets and liabilities is reflected in earnings in Other (income) and expense, net.

As a result of the adoption of highly inflationary accounting, we recorded an after-tax charge of $96 million in first quarter 2010 to remeasure K-C Venezuela’s bolivar-denominated net monetary asset position into U.S. dollars at an exchange rate of approximately 6 bolivars per U.S. dollar. In the Consolidated Cash Flow Statement, this non-cash charge was included in Other in Cash Provided by Operations. This charge was recorded in the following Consolidated Income Statement line items:



	Year Ended December 31, 2010
	(Millions of dollars)
Cost of products sold	$	19
Other (income) and expense, net	79
Provision for income taxes	(2		)
Net charge	$	96

Prior to May 2010, we determined that, under highly inflationary accounting, the unregulated parallel market exchange rate was the appropriate exchange rate to measure K-C Venezuela’s bolivar-denominated transactions into U.S. dollars as this was the rate at which K-C Venezuela had substantially converted the bolivars it generated from its operations into U.S. dollars to pay for its significant imports of U.S. dollar-denominated finished goods, raw materials and services to support its operations.

In May 2010, the Venezuelan government enacted reforms to its currency exchange regulations to close the parallel market and replace it with a regulated currency exchange system (the “central bank system”). As a result of these currency exchange regulations, we determined that the central bank system rate of 5.4 bolivars per U.S. dollar was the appropriate exchange rate to measure K‑C Venezuela’s bolivar-denominated transactions into U.S. dollars during the period May 2010 through December 31, 2011.

At December 31, 2011, K-C Venezuela had a bolivar-denominated net monetary asset position of $130 million and our net investment in K-C Venezuela was $250 million, both valued at 5.4 bolivars per U.S. dollar. Net sales of K-C Venezuela represented only 1 percent of Consolidated Net Sales for the years ended December 31, 2011 and 2010, as compared to 3 percent in 2009. In 2011 and 2009, K-C Venezuela represented 4 percent and 1 percent, respectively, of Consolidated Operating Profit. In 2010, Operating Profit at our Venezuelan subsidiary was negative due to the charge recorded as a result of adopting highly inflationary accounting.