Accounting considerations in view of Venezuela's foreign exchange controls

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13 Jan 2015

Since 2010, Venezuela has been considered a highly inflationary economy and the Venezuelan government has instituted several mechanisms for foreign exchange control, including multiple exchange rates and capital control. In a "pre-clearance" issue the staff of the US Securities and Exchange Commission (SEC) has now signalled that it does not object to a registrant's conclusion to deconsolidate its Venezuelan operations due to an other-than-temporary lack of currency exchangeability and the existence of several government limitations on the registrant's ability to control the operations. The considerations would also apply in similar form under IFRS.

The consolidation considerations arising in this context would need to be based at a minimum on the following factors:

  • Volume restrictions on currency exchange activity;
  • The ability to access available legal currency exchange mechanisms in volumes desired or needed by the entity;
  • Recent developments that might affect expectations about the future direction of restrictions; and
  • The extent and severity of restrictions imposed by the government on an entity's operations and whether those restrictions demonstrate an entity's inability to control them.

If an entity ultimately concludes that deconsolidation is appropriate, it must also determine the appropriate date for deconsolidation and the appropriate currency exchange rate to use for remeasuring its deconsolidated investment and any other outstanding monetary balances that are no longer eliminated in consolidation. It would also need to provide comprehensive and clear disclosure of the basis for its consolidation/deconsolidation conclusion.

Deloitte (United States) has published a Financial Reporting Alert that discusses considerations related to consolidation and disclosure under US GAAP in connection with the environment in Venezuela. Although US GAAP focused, the publication contains many considerations that equally apply to consolidation under IFRS. The factors discussed in connection with Venezuela should also be considered in connection with other jurisdictions where the government has installed foreign exchange controls.

Please click for Financial Reporting Alert 14-5 - Consolidation and Disclosure considerations related to Venezuelan operations. It complements the April 2014 Financial Reporting Alert 14-1 - Foreign currency exchange accounting implications of recent government actions in Venezuela.

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