Perspectives

Foreign currency exchange accounting implications of recent government actions in Venezuela

Financial Reporting Alert 15-1

This alert discusses considerations related to accounting and disclosures under U.S. GAAP in connection with recent changes to the foreign currency exchange environment in Venezuela.

Background

Until recently, an entity may have been able to convert Venezuelan bolivar fuertes (BsF) to U.S. dollars (USD) at one of three legal exchange rates:

  • CENCOEX (official rate) — The Venezuelan National Center for Foreign Commerce (CENCOEX) controlled the sale and purchase of foreign currency in Venezuela and set an official exchange rate of 6.3 BsF to 1 USD (the “official rate”) that would be available for purchases of certain essential items, such as medicines.
  • CENCOEX (latest published SICAD 1 rate) — The Venezuelan government authorized certain companies that operate in designated industry sectors to exchange a limited volume of bolivars for dollars at a bid rate established via periodic auctions under the Complementary System of Foreign Currency Acquirement (“SICAD 1”). The SICAD 1 rate has approximated 12 BsF to 1 USD throughout the year. Entities have been able to transact on the basis of approval by CENCOEX at the latest published SICAD 1 rate depending on their facts and circumstances.
  • SICAD 1 auction (SICAD 1 rate) — A second mechanism by which to obtain the SICAD 1 rate is directly via periodic auctions.
  • SICAD 2 auction (SICAD 2 rate) — The SICAD 2 exchange rate approximated 50 BsF to 1 USD during 2014 and was also established on the basis of an auction process.

The Marginal Currency System (Simadi) mechanism commenced operations on February 12, 2015, and was implemented as part of a law (Convenio No. 33), resulting in the elimination of the SICAD 2 rate. The Simadi rate is derived from daily private bidders and buyers exchanging offers through authorized agents and approved and published by the Venezuelan Central Bank. The Simadi exchange rate was quoted at 174 BsF to 1 USD on February 13, 2015; increased to approximately 188 BsF by mid-March; and closed at 193 BsF on March 31, 2015.

Accounting Considerations

In a recent, informal discussion, the SEC staff reaffirmed factors that registrants should consider in selecting the exchange rate(s) to use for remeasurement or in assessing whether deconsolidation of a Venezuelan subsidiary is warranted. The staff reiterated that:

  • A registrant must exercise judgment when determining the exchange rate(s) that should be used to remeasure its BsF-denominated balances. That judgment should be based on the registrant’s specific facts and circumstances.
  • In U.S. GAAP, there is no support for use of a rebuttable presumption under which registrants should remeasure foreign currency monetary assets/liabilities by using the least favorable legal exchange rate (i.e., Simadi rate) when multiple legal exchange rates exist.
  • A registrant that previously used the SICAD 2 rate to remeasure its BsF-denominated monetary assets/liabilities in prior periods should (1) consider all of the recent changes in the Venezuelan foreign exchange mechanisms and (2) consistently apply its rate selection approach (e.g., in the absence of any change in its specific facts or circumstances, if a registrant previously determined that it would be unable to use the official or SICAD 1 rates for remeasurement, it would generally be expected to reach the same conclusion in the new exchange environment, resulting in the use of the Simadi rate for remeasurement).
  • Depending on facts and circumstances, it may be appropriate for a registrant to use multiple exchange rates for remeasurement.
  • Registrants should continue to assess whether it is appropriate to continue consolidating their Venezuelan operations in accordance with ASC 810-10-15-10(a)(1)(iii) and ASC 830-20-30-2.1
  • Registrants with material Venezuelan operations should continue to provide transparent disclosures regarding the items described above.

Regardless of the rate selected, registrants should continue to maintain documentation of their rate selection analysis as well as the relevant facts and circumstances they considered in applying their judgment in selecting an appropriate exchange rate or rates.

Because of the ongoing complexity of accounting and disclosure issues related to the exchange rate environment in Venezuela, we encourage entities with material Venezuelan operations to continue to consult with their accounting advisers and legal counsel.

For a comprehensive discussion of the concepts related to accounting and disclosures under U.S. GAAP in connection with the foreign currency exchange environment in Venezuela, see Financial Reporting Alert 14-1. For a discussion of consolidation considerations related to Venezuelan operations, see Financial Reporting Alert 14-5. Such concepts are still applicable in the current Venezuelan foreign exchange environment.

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