With the release of Venezuela’s December 2009 National Consumer Price Index, the cumulative three-year inflation rate exceeded 100%. As such, under ASC 830-10-45-122 an entity with a year or quarter end of December 31, 2010 should consider Venezuela’s economy to be highly inflationary as of January 1, 2010. Several accounting issues arise from this status.
First, during a highly inflationary period the functional currency of the Venezuelan entity must be considered the reporting currency of the consolidated entity and the financial statements beginning value in (USD) reporting currency for January 1, 2010 must be calculated.
ASC 830-30-45-6 (FAS 52 27(b)) indicates that in “the absence of unusual circumstances, the [exchange] rate applicable to conversion of a currency for purposes of dividend remittances shall be used to translate foreign currency statements”. There are two exchange rates in Venezuela – the official rate and the parallel rate. Until recently most companies were using the official rate; however the official rate is now unavailable for dividend remittances in many industries. The SEC has indicated that there is no “one size fits all” approach for registrants, and that the decision of which rate to use should be based upon the facts and circumstances specific to a company.
A functional currency change can also impact hedge accounting treatment. ASC 815-20-25-30(b) requires the hedged item in a foreign currency hedge, be “denominated in a currency other than the hedging unit’s functional currency.” As such, hedge accounting of USD in Venezuela may no longer be appropriate after the functional currency change because the hedged risk no longer represents a risk that is eligible for hedge accounting. Existing hedges may need to be redesignated against changes in Venezuelan denominated revenues or expenses.
Finally, there are additional disclosures related to the highly inflationary transition, as well as to the exchange rate issues. According to recent PWC guidance, registrants should disclosure:
- The inflation index used to determine highly inflationary status,
- Exchange rates (official vs. parallel rate) used for re-measurement and translation purposes, and if such exchange rates may not reflect economic reality.
- sks and accounting effect of an exchange rate change on future operations, financial position, and cash flows.
- Disclosures to enable an investor to assess the effect of Venezuelan entities on the consolidated financial statements and any reasonably likely material future effects on consolidated results and cash flows.
- Any expected material accounting effect upon transition to highly inflationary status as of January 1, 2010 for their Venezuelan entities.
