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Accounting considerations in view of Venezuela's state as a highly inflationary economy

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10 Apr 2014

Since 2010, Venezuela has been considered a highly inflationary economy. In November 2013 the International Practices Task Force (IPTF) of the AICPA's Centre for Audit Quality reported that the three-year cumulative inflation rate for Venezuela was 95% for 2012 and the three-year cumulative inflation rate at the end of 2013 was projected to be 124%. The Venezuelan government has instituted several mechanisms for establishing exchange rates between Venezuelan bolivar fuertes (BsF) and U.S. dollar (USD). This has led to accounting questions in an environment with multiple exchange rates.

The Venezuelan Commission for the Administration of Foreign Exchange (CADIVI) until recently controlled the sale and purchase of foreign currency in Venezuela and set an official exchange rate. In 2013, the Venezuelan government authorised certain companies that operate in designated industry sectors to exchange a limited volume of bolivars for dollars at a bid rate established via weekly auctions under the Complementary System of Foreign Currency Acquirement (SICAD 1). In February 2014, the Venezuelan government announced plans for another currency exchange mechanism (SICAD 2), which is intended to more closely resemble a market-driven exchange rate than the rates provided by Venezuela's other regulated exchange mechanisms. All mechanisms lead to strikingly different results, ranging from  the official exchange rate set at 6.3 BsF to 1 USD to the SICAD 2 rate of 50.86 BsF to 1 USD on 31 March 2014.

The accounting considerations arising in this context include:

  • Remeasurement in an environment with multiple exchange rates. Entities will be required to reevaluate the exchange rate previously used for remeasurement and determine the most appropriate exchange rate(s) for remeasurement. The ultimate selection of an exchange rate (or multiple rates) should be based on an entity's specific facts and circumstances and will require significant judgment. Accordingly, an entity should clearly document the facts and circumstances that it considered in its analysis of what exchange rate(s) to use for remeasurement.
  • Classified balance sheet considerations. Entities with classified balance sheets should consider whether classifying certain BsF-denominated monetary assets as current is still appropriate in light of the present economic environment.
  • Deconsolidation and impairment considerations. Volume restrictions on exchange activity in Venezuela (either explicit or in-substance), in conjunction with the uncertainties of obtaining approval for foreign exchange through the established exchange mechanisms, may indicate an other-than-temporary lack of exchangeability associated with its Venezuelan operations. Similarly, the operating and economic uncertainties in Venezuela may indicate an other-than-temporary impairment.
  • Disclosure. There is a need for robust disclosure in the notes to the financial statements as well as in the description of business, the risk factors, and the management discussion and analysis. Entities should also clearly document their accounting conclusions and the underlying rationale.

Deloitte (United States) has published a Financial Reporting Alert that discusses considerations related to accounting and disclosure under U.S. GAAP in connection with the foreign currency exchange environment in Venezuela. Although U.S. GAAP focused, the publication contains many considerations that equally apply to accounting under IAS 29 Financial Reporting in Hyperinflationary Economies that applies where an entity's functional currency is that of a hyperinflationary economy and requires the financial statements (and corresponding figures for previous periods) of an entity with a functional currency that is hyperinflationary to be restated for the changes in the general pricing power of the functional currency. Many considerations can also be transferred to situations in Belarus, the Islamic Republic of Iran, South Sudan, Sudan, the Democratic Republic of Congo, and Ethiopia, all of which are also regarded as hyperinflationary according to the IPTF.

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