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  Selected Excerpts from Grupo Modelo’s Financial Accounts EXHIBIT 7-1 Grupo Modelo S

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	Selected Excerpts from Grupo Modelo’s Financial Accounts
EXHIBIT 7-1

Grupo Modelo S.A. de C.V. and Subsidiaries

Consolidated Income Statements

For the years ended December 31, 2007 and 2006

( Amounts expressed in thousands of pesos of December 31, 2007 purchasing power

2007        2006

Operating profit	MXP20,587,851	MXP16,860,640
Other (expenses), net Comprehensive financing income:	(466,444)	(605,676)
Interest earned, net	1,442,608	1,287,970
Exchange profit(loss), net	87,591	115,807
Loss on monetary position	(868,786)	(958,700)
	661,413	445,077
Profit before provisions Provisions for (Note 12) Income, asset and flat rate corporate tax 5,513,9814,962,626	20,782,820	16,700,041
Consolidated net income for the year	MXP15,268,8395	MXP11,737,415
Consolidated Balance Sheets As of December 31, 2007 and 2006 (Notes 1, 2, and 15) ( Amounts in thousands of pesos of December 31, 2007 purchasing power )
Assets  2007		2006

Current

Cash and marketable securities	MXP20,716,601	MXP22,923,116
Accounts and notes receivable (Note 3)	5,413,848	3,724,554
Inventories (Note 4)	9,504,555	6,961,732
Prepaid expenses and other current items	2,632,200	2,213,179
Total current assets	38,267,204	35,822,581
Long-term accounts and notes receivable (Note 3)	1,724,593	1,437,690
Investment in shares of associated companies (Note 5)	4,177,386	3,360,961
Property, plant and equipment (Note 6)	79,031,553	76,171,558
Accumulated depreciation	(26,721,013)	(25,126,654)
Other assets (Note 7)	3,244,524	2,491,059
Total assets	MXP99,724,247	MXP94,157,195
Total liabilities Stockholders’ equity	MXP17,712,993	MXP14,795,092
Common stock (Note 10)	16,377,411	16,377,411
Premium on share subscription Earned surplus (Notes 11 and 12):	1,090,698	1,090,698
Legal reserve	3,213,558	2,767,938
Reserve for acquisition of own shares	242,596	688,923

( continued )

Assets	2007	2006
Retained earnings	39,622,514	38,022,111
Net income	9,503,111	8,997,526
	52,581,779	50,476,498
Accumulated effect of deferred tax	(5,472,843)	(5,472,843)
Adjustment to capital for retirement obligations	(464,807)	(430,181)
Deficit in the restatement of stockholders’ equity	(1,051,534)	(1,044,944)
Total majority stockholders’ equity	MXP63,060,704	MXP60,966,640

 

 

Notes to the Consolidated Financial Statements

As of December 31, 2007 and 2006 ( Amounts in thousands of pesos of December 31,  2007 purchasing power)

2. Accounting policies—The Group accounting policies used in preparing these consolidated financial statements comply with the requirements for reasonable presentation set forth by Mexican Financial Information Standards (NIF) and are expressed in pesos of December 31, 2007 purchasing power through application of National Consumer Price Index (NCPI) factors. Those standards require that the Group’s Management make certain estimates and assumptions in determining the valuation of some items included in the consolidated financial statements.

Following is a summary of the most significant accounting policies, methods and criteria for recognizing the effects of inflation on the financial information:

d) Inventories and cost of sales—This item is originally recorded through the last-in first-out method and is subsequently restated to replacement cost. Values thus determined do not exceed market value.

f) Property, plant and equipment—These items are recorded at acquisition cost, restated by applying inflation factors derived from the NCPI according to the antiquity of the expenditure.

h) Depreciation—This item is calculated based on the restated values of property, plant and equipment, based on the probable useful life as determined by independent appraisers and the technical department of the group. Annual depreciation rates are shown in Note 6.

14. Stockholders’ equity—The capital stock, legal reserve, contributions for future capital increases, and retained earnings represent the value of those items in terms of December 31, 2007 purchasing power and are restated by applying NCPI factors to historical amounts.

Deficit in the restatement of stockholders’ equity—The balance of this account represents the sum of the items “Cumulative gain or loss from holding non-monetary assets” and “Cumulative monetary gain or loss,” described below:

Cumulative gains or loss from holding non-monetary assets—This item represents the cumulative change in the value of non-monetary assets due to causes other than inflation. It is determined only when the specific cost method is used, since those costs are compared to restatements determined using the NCPI. If the specific costs are higher than the indexes, there is a gain from holding non-monetary assets; otherwise, there is a loss.

Cumulative monetary gain or loss—This item is the net effect arising on the initial restatement of the financial statement figures.

• Gains or loss on monetary position—This account represents the effect of inflation on monetary assets and liabilities, even when they continue to have the same nominal value. When monetary assets exceed monetary liabilities, a monetary loss is generated, since assets maintain their nominal value, they lose purchasing power. When liabilities are greater, a profit arises, since they are settled with money of lower purchasing power. These effects are charged or credited to the income statement and form part of comprehensive financing income.

6 . Property, Plant, and Equipment—Net

a) The balance of this account is made up as follows:

2007        2006

 

Item

Net historical

cost

Net

restatement

Net total

value

Net total

value

 

Land Machinery and	MXP 1,620,065	MXP 3,236,266	MXP 4,856,331	MXP5,032,597
equipment Transportation	14,301,114	7,947,178	22,248,292	23,051,551
equipment Building and other	2,522,857	344,500	2,867,357	3,103,914
structures	6,875,008	6,730,890	13,605,898	14,543,722
Computer equipment Furniture and other	506,973	41,263	548,236	584,053
equipment Antipollution	1,646,293	91,438	1,737,731	476,486
equipment Construction in	538,773	317,032	855,805	902,937
progress	5,378,716	212,174	5,590,890	3,349,644

MXP33,389,799 MXP18,920,741 MXP52,310,540 MXP51,044,904

A quick scan of Modello’s income statement reveals an account labeled “Comprehensive Financing Income.” Two of its components should be familiar to you. The first relates to interest on the firm’s receivables and payables. The second, discussed in Chapter 6, is the translation gains or losses resulting from the currency translation process. The third component, “Loss from monetary position,” is probably new to you and stems from Modello’s attempts to reflect the effects of changing prices on its financial accounts. But what does this figure mean, and how is it derived?

Grupo Modello’s balance sheet also introduces financial statement items that are unfamiliar to most statement readers. The first relates to its fixed assets. Footnote 6 suggests that the 2007 balance of MXP52,310,540 for Property, Plant, and Equipment, net of accumulated depreciation, consists of two components: one labeled “Net historical cost,” the other, “Net restatement.” While the former may be a familiar term, the latter probably is not. Another novel balance sheet account appears in Stockholders’ Equity, labeled “Deficit in the Restatement of Stockholders’ Equity.”

Finally, the first paragraph of its accounting policy description states that all figures disclosed in Modello’s comparative statements, and the notes thereto, are expressed in December 2007  purchasing power. What does “December 2007 purchasing power” mean, and what is its rationale? And, more important, do statement readers actually impound the foregoing information in their security pricing and managerial decisions?

Subsequent sections of this chapter are devoted to answering these and related questions. The managerial implications of changing prices are covered in Chapter 10. To make informed decisions, financial analysts must understand the contents of financial accounts that have been adjusted for changing prices. This is especially germane for those interested in emerging markets. Informed analysts must also have some facility for adjusting accounts for changing prices in those instances where (1) companies choose not to account for inflation or

(2)  have recently stopped producing inflation-adjusted numbers so as to facilitate apple-to-apple comparisons over time and/or with companies that do. The International Accounting Standards Board’s IAS 29 currently mandates that companies inflation adjust their accounts when the cumulative rate of inflation for the preceding three years exceeds 100 percent. Accordingly, companies subscribing to IASB standards (see Chapter 8) will stop adjusting their accounts for inflation when the inflation rate is less than this threshold and resume inflation accounting when annual inlfation rates exceed this benchmark.

Depreciation for the year amounted to MXP3,120,777 (MXP2,897,764 in 2006).

CHANGING PRICES DEFINED

To understand what changing prices means, we must distinguish between general and specific price movements, both of which are embraced by the term. A general price level change occurs when, on average, the prices of all goods and services in an economy change. The monetary unit gains or loses purchasing power. An overall increase in prices is called inflation; a decrease, deflation. What causes inflation? Evidence suggests that aggressive monetary and fiscal policies designed to achieve high economic growth targets, excessive spending associated with national elections, and the international transmission of inflation are causal explanations.^[1] The issue, however, is complex.

Aspecific price change, on the other hand, refers to a change in the price of a specific good or service caused by changes in demand and supply. Thus, the annual rate of inflation in a country may average 5 percent, while the specific price of one-bedroom apartments may rise by 50 percent during the same period.