Applying IFRS
New Venezuelan currency
regime - same accounting
and reporting considerations
June 2015
Contents
Overview .................................................................................... 2
1.
Background .......................................................................... 2
1.1 Looking back at 2014 ....................................................... 3
2.
Recent developments and outlook for 2015 ............................. 4
2.1 Cap on profits earned in Venezuela .................................... 6
3.
Foreign currency accounting considerations............................. 6
3.1 Functional currency ......................................................... 6
3.2 Foreign currency transactions ........................................... 7
3.3 Translation of a foreign operation...................................... 7
4.
Other accounting and financial reporting considerations ............ 8
5.
Disclosures ........................................................................... 9
What you need to know
• The new currency exchange system requires companies with operations in
Venezuela to reconsider again the exchange rate(s) they use to translate
Venezuelan foreign operations and to translate their Venezuelan
bolivar-denominated monetary assets and liabilities and related revenues
and expenses.
• Entities will need to consider their specific transactions and their ability to
transact through the various exchange mechanisms to determine which
exchange rate(s) to use.
• Economic conditions in Venezuela and changes in the currency exchange
mechanisms also raise a number of other financial reporting issues.
• Entities with significant operations in Venezuela should consider providing
additional disclosure about their exposure to Venezuela, including how
they are affected by recent developments.
1
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
Overview
Now that Venezuela has revamped its foreign currency exchange system,
companies with operations in Venezuela should reconsider the exchange rate(s)
they use to translate their bolivar-denominated monetary assets and liabilities
and related revenues and expenses. Entities should also consider supplementing
their disclosures to reflect their consideration of recent events.
In February 2015, the Venezuelan Government (the Government) announced
that it merged its two supplementary foreign currency exchange systems
(i.e., Sistema Complementario de Administración de Divisas, or SICAD 1, and
Sistema Cambiario Alternativo de Divisas, or SICAD 2) into a single mechanism
called SICAD. The Government also introduced the Sistema Marginal de Divisas
(Marginal Currency System, or SIMADI) to compete with the unofficial parallel
currency exchange market (the black market). As a result, companies will need
to consider whether to use the new SIMADI rate of approximately 198 bolivars
(Bs) per US dollar (USD) as of 4 June 2015, the new SICAD rate of Bs12 per US
dollar or the official rate of Bs6.3 per US dollar.
To determine which rate(s) to use to translate Venezuelan foreign operations
and to translate specific bolivar-denominated monetary assets and liabilities,
a company should consider: (1) its legal ability to convert currency or to settle
transactions using a specific rate and (2) its intent to use a particular
mechanism, including whether the rate available through that mechanism is
published or readily determinable. The second criterion is important because
entities can use different exchange mechanisms with different rates for many
transactions.
Determining the
appropriate exchange
rate(s) for financial
reporting purposes will
depend on an entity’s
individual facts and
circumstances.
Determining the appropriate exchange rate(s) for financial reporting purposes
will depend on a company’s individual facts and circumstances. Complicating
this determination is the increasing lack of exchangeability across all exchange
mechanisms. Many questions remain about whether Venezuela’s supply of
US dollars will be sufficient to meet demand and how exchanges will be handled
under the new currency exchange system.
This publication addresses the IFRS requirements for translating foreign
currency transactions and translation of foreign operations- and some of the
factors companies need to consider when determining the appropriate
exchange rate or rates to use. Other accounting and disclosure considerations
are also discussed.
1. Background
The Government has maintained currency controls and a fixed official
exchange rate since February 2003. Since 2010, the Venezuelan economy
has been considered highly inflationary under IAS 29 Financial Reporting
in Hyperinflationary Economies. For years, the Government has limited a
company’s ability to repatriate profits (i.e., pay dividends) and obtain
US dollars to pay for imported goods and services.
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
2
1.1 Looking back at 2014
In 2014, the Venezuelan Ministry of Finance reported that the National Foreign
Trade Center (CENCOEX) authorised total disbursements of USD20.4 billion
for imports, operations and other corporate and individual currency needs, the
lowest level of disbursements to the private sector since 2003. The amount
was 31% lower than in 2013 and 38% lower than in 2012. According to
Ecoanalítica, a Venezuelan financial advisory and economic research
organisation, approximately 31% of Venezuela’s domestic demand is met by
imports, and 76% of imports are used as inputs for goods produced in the
country.1 As a result, the private sector’s ability to obtain US dollars has a
significant effect on the Venezuelan economy, especially the supply of goods
and services in the domestic market.
The problem is that Venezuela’s supply of US dollars has shrunk as the price of
crude oil, the country’s main export and source of US dollars, has fallen.
Before the February 2015 announcement, Venezuela had three legal
mechanisms to exchange currency, but not all exchange mechanisms and rates
were available to all entities. The official rate2 has been reserved for “essential
goods”, while the SICAD 1 auction rate was used for specific authorised
transactions, industries and business activities. All companies incorporated
or domiciled in Venezuela were allowed to obtain US dollars through SICAD 23
and purportedly for any purpose.
We reviewed of the US GAAP financial statements that 82 companies with
Venezuelan operations or exposure to bolivar-denominated monetary assets
filed with the US Securities and Exchange Commission (SEC). Nearly half of the
companies used the SICAD 2 rate of Bs50 per US dollar for remeasurement as
of 31 December 2014. The breakdown of rates used by these companies
illustrates the diversity in practice that exists in the US.
Breakdown of rates used by companies as of 31 December 2014
Official
rate
SICAD 1
SICAD 2
Multiple
Total
FX rate expressed
as Bs per USD
6.3
12
50
*
NA
Number of
companies
19
15
38
10
82
Percentage
23
18
47
12
100
* These companies used more than one legally available exchange rate to remeasure their
bolivar-denominated monetary assets and liabilities and related revenues and expenses.
While entities reporting under IFRS need to make somewhat different
judgements compared to US GAAP reporting entities, we expect there is a
similar diversity of practice that exists under IFRS.
1
2
3
3
“The debacle of CENCOEX: Foreign currency is in few hands,” Ecoanalítica, Week III
March 2015 Weekly Report.
The official exchange rate of 6.3 Bs to the US dollar has remained unchanged since the
government formally devalued the currency in February 2013.
The SICAD 2 rate was intended to be the closest legal rate to a market-based rate, which was
obtained through registered financial institutions and exchange houses.
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
2. Recent developments and outlook for 2015
In February 2015, the Venezuelan Government said it merged its SICAD 1 and
SICAD 2 foreign currency exchange systems and issued Exchange Agreement
No. 33 establishing regulations for foreign exchange transactions conducted
through the new SIMADI system.
How we see it
An entity’s decision to use a particular exchange rate or rates should be
based on careful consideration of the various exchange mechanisms and
entity-specific facts and circumstances. Absent a change in facts and
circumstances, a company that previously concluded that it was not eligible
to transact at either the official rate or the SICAD 1 rate would generally be
expected to use the SIMADI rate, now that the SICAD 2 system no longer
exists.
SIMADI is intended to compete with the black market by establishing a legal
trading system based on supply and demand. It’s available to individuals and
both public and private companies, except for banks and other financial
institutions that are authorised to facilitate exchanges through SIMADI.
These financial institutions are prohibited from accessing SIMADI for their
own accounts.
The Government has said that both the official rate and the new SICAD rate
would be available to entities importing essential goods (e.g., certain food,
medicine, raw materials), with the majority of such imports being settled at the
most favourable rate of Bs6.3 per US dollar. However, the Government has not
published any new rules or regulations that clarify exactly which activities,
industries or transactions will be eligible to transact at these rates. Allowing
certain entities to transact at the two most favourable exchange rates, subject
to the country’s profit cap laws, is intended to make many necessities affordable
for Venezuelan citizens.
Since its inception, the SIMADI system reportedly has not been able to meet the
demand from the private sector due to a lack of supply of US dollars and
complex rules, among other reasons. As a result, the bolivar continues to be
devalued. For example, on the first day of operation, the SIMADI exchange rate
was approximately Bs172 per US dollar, compared with approximately Bs177
per US dollar on the black market. As of the date of this publication, the SIMADI
rate was approximately Bs198 per US dollar, compared with approximately
Bs4284 per USD on the black market.
The following exchange mechanisms and rates were legally available, depending
on facts and circumstances, as of 31 March 2015:
•
•
•
4
Through CENCOEX at the official rate of 6.3
Through CENCOEX at the new SICAD rate of 12
Through the SIMADI system at the negotiated rate of approximately 193
Dolartoday.com.
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
4
We understand that the new SICAD rate will be established through periodic
auctions regulated by the Government in a process similar to the one the
Government previously used to set the SICAD 1 rate. However, there have
been no public auctions since October 2014, which is why the SICAD rate has
remained unchanged at Bs12 per USD. Until auctions resume, any currency
exchanged at the SICAD rate will be through CENCOEX.
In January 2014, when use of the SICAD 1 exchange rate was significantly
expanded through Exchange Agreement No. 25, the Venezuelan government
announced that the published exchange rate resulting from the latest SICAD
auction would be used for the following transactions and activities:
It is unclear which types
of transactions and
activities will be subject
to the new SICAD rate.
•
Foreign investments and payments of royalties; use and exploitation of
patents, trademarks, licences and franchises; as well as contracts for
technology import and technical assistance
•
International public air transportation service for passengers, cargo and
mail duly authorised by the Government
•
•
Operations inherent in insurance activity
•
Cash for travelling abroad, including payment of purchases with credit
cards while travelling abroad and of electronic commerce transactions
with suppliers abroad
•
•
Remittances to relatives living abroad
Contracts for leasing and services; use and exploitation of patents,
trademarks, licences and franchises, as well as import of intangible
goods; payment of network rental agreements and installation; repair and
maintenance of imported machinery, equipment or software of the
telecommunications sector
Payments for operations inherent in national civil aviation
It is unclear whether the new SICAD rate will apply to these types of
transactions and activities. It is also unclear whether companies that interpreted
the term “foreign investments” in Exchange Agreement No. 25 to mean
that future dividend remittances would be transacted at the exchange rate
established through the SICAD auction process will be able to continue to make
that assertion. Entities may need to change the rate they use to translate their
net monetary assets, depending on what the Government says about how the
new SICAD rate can be used.
5
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
How we see it
With slumping crude oil prices and significant debt payments coming due
later this year, the Government has fewer US dollar reserves available to
meet the private sector’s demands this year. As a result, entities may have a
harder time obtaining US dollars this year than at any time since currency
controls were first implemented.
In its Week III March 2015 Weekly Report, Ecoanalítica said, “the drop in oil
prices implies a drop of 48.0% in the country’s foreign currency revenues
and a deficit of US$25.58 billion, which, given the lack of financing options,
will have to be offset by an adjustment in demand and, as always, private
sector imports are the first on the list when it comes to implementing cuts.”
If Ecoanalítica and other analysts are correct, entities doing business in
Venezuela may experience less exchangeability in 2015 unless oil prices
recover significantly and Venezuela changes its monetary policy. Currency
exchanges at either the official or SICAD rate to pay dividends remain
unlikely for the foreseeable future. Such capital outflows likely will occur only
through the new SIMADI system, assuming liquidity in that market improves
and other operational challenges are addressed. According to the
Venezuelan Central Bank, during the first six weeks of the new system’s
operation, only 1.4% of all authorised foreign exchange transactions
occurred through SIMADI compared with initial estimates of 5% to 7%.
2.1 Cap on profits earned in Venezuela
It is our understanding that an entity’s compliance with Venezuela’s profit cap
law,5 which was enacted in January 2014, will continue to be a prerequisite to
obtain US dollars through any of the exchange mechanisms controlled by the
Government.
The law limits profit margins by product and service and sets a cap of 30%
above the cost structure (as defined) of the good or service. The National
Superintendence for Defense of Socioeconomic Rights is in charge of its
enforcement and monitors compliance by importers, producers, suppliers and
retailers. Some entities have been required to demonstrate their compliance
with this law by furnishing performance certificates, which are subject to
government audit.
3. Foreign currency accounting considerations
3.1 Functional currency
IAS 21 The Effects of Changes in Foreign Exchange Rates defines the functional
currency of an entity as the currency of the primary economic environment in
which the entity operates. Whilst judgement may sometimes be required to
determine the functional currency, it is a matter of fact, not an accounting
policy choice.
5
Decree No. 600 with Rank, Value and Force of Master Law of Fair Prices in Official Gazette
No. 40,340.
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
6
As the Venezuelan economy is hyperinflationary, IAS 29 must first be applied.
IAS 29 requires a restatement approach, whereby financial information
recorded in the hyperinflationary currency is adjusted by applying a general
price index and expressed in the measuring unit (the hyperinflationary currency)
current at the end of the reporting period. The alternative approach whereby an
entity selects a stable currency as its unit of accounting is prohibited under IFRS
if that currency is not the entity's functional currency as defined under IAS 21.
3.2 Foreign currency transactions
IAS 21 requires each foreign currency transaction to be recorded in the
functional currency of the reporting entity at the date it is recognised, using
the spot exchange rate in effect at that date.
Under IAS 21, when several exchange rates are available, the rate used is that
at which the future cash flows represented by the transaction or balance could
have been settled, if those cash flows had occurred at the measurement date.
If more than one exchange mechanism is legally available, an entity should
generally base its decision on its intention to use a particular mechanism to
settle the specified transaction and whether the rate available through that
mechanism is published or readily determinable at the reporting date. The
probability of transacting through a particular mechanism should also be
considered (i.e., whether the volume and frequency of exchange activity
through a particular mechanism will support the entity’s currency needs). If
exchangeability is lacking across all exchange mechanisms, an entity should
use the published rate for the legally available exchange mechanism that most
faithfully reflects the economics of the company’s business activity. The
exchange rate an entity uses for translation may vary by transaction type,
based on the entity’s legal ability to convert currency or to settle transactions
using the specified rate. Determining which currency exchange mechanisms and
rates are legally available to a reporting entity in Venezuela requires careful
consideration of Exchange Agreements used. The assistance of legal counsel
or Venezuelan regulatory authorities (such as CENCOEX) may be required.
3.3 Translation of a foreign operation
Where the results and financial position of a foreign operation are translated
into the presentation currency of the reporting entity, IAS 21 requires that
the financial statements are first restated in accordance with IAS 29 for
hyperinflationary economies. Once restated, IAS 21 requires all current period
amounts to be translated at the closing rate at the reporting date.
When the presentation currency of the reporting entity is not USD, the entity
may also need to determine the USD to presentation currency exchange rate to
translate the financial statements of its Venezuelan operations. This is because
all three of the exchange rates legally available in Venezuela are based solely on
the Bolivar to US dollar conversion.
7
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
4. Other accounting and financial reporting
considerations
We do not believe that a
lack of exchangeability
in itself would result in
the deconsolidation of a
Venezuelan subsidiary.
The Government reported a contraction in gross domestic product (GDP) in
2014 and an inflation rate of 68.5%. Some analysts are projecting a further
contraction in GDP this year and an inflation rate of more than double the
2014 rate. Venezuela’s deteriorating economy and its currency exchange
controls and profit cap law raise a number of financial reporting issues
beyond the foreign currency matters discussed above. These accounting
and financial reporting considerations include:
•
Consolidation: IFRS 10 Consolidated Financial Statements requires an
investor to consolidate an investee that it controls. In determining whether
it has control, an entity considers (among other factors) whether it has
power over an investee, being existing rights that give it the current ability
to direct the relevant activities. In assessing its rights, the investor
considers whether those rights are substantive, including whether there
are regulatory or legal requirements that prevent the holder from exercising
its rights6 (e.g., where a foreign investor is prohibited from exercising
its rights). While entities should consider their individual facts and
circumstances in determining whether to deconsolidate a foreign entity,
generally, we do not believe that a lack of exchangeability in itself would
result in the deconsolidation of a Venezuelan subsidiary.
IFRS 12 Disclosure of Interests in Other Entities requires a company to
disclose significant restrictions on its ability to access or use the assets and
settle the liabilities of the group (e.g., those that restrict the ability of a
parent or its subsidiaries to transfer cash or other assets to (or from)
other entities within the group7).
•
Cash: IAS 7 Statement of Cash Flows requires an entity to disclose, together
with a management commentary, the amount of significant cash and cash
equivalent balances held that are not available for use by the group. IAS 7
states that examples include cash and cash equivalent balances held by a
subsidiary that operates in a country where exchange controls or other legal
restrictions apply when the balances are not available for general use by the
parent or other subsidiaries.8
How we see it
The nature of the restriction on the use of cash and cash equivalents must
also be assessed to determine if the balance is ineligible for inclusion in cash
equivalents because the restriction results in the investment ceasing to be
highly liquid or readily convertible.
•
6
7
8
Revenue: Pursuant to IAS 18 Revenue, revenue should be recognised
only when it is probable that the economic benefits associated with the
transaction will flow to the entity. Lack of exchangeability, devaluation of
the bolivar and deteriorating economic conditions in Venezuela all raise
questions about the collectability of an entity’s receivables from customers
located in Venezuela. Revenue should only be recognised once the
uncertainty about the collectability of the consideration is removed.
IFRS 10.B23(a)(vii)
IFRS 12.13(a)(i)
IAS 7.49
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New Venezuelan currency regime – same accounting and reporting considerations
8
•
Financial assets measured at amortised cost: Paragraph 58 of IAS 39
Financial Instruments: Recognition and Measurement, requires an entity to
assess, at each reporting period, whether there is any objective evidence
of impairment. Entities with amounts due (e.g., loans, trade receivables)
from customers in Venezuela (including the Government) should consider
whether there is evidence of impairment and, if so, determine the
impairment loss.
•
Investments in equity instruments: Paragraph 61 of IAS 39 explains that, in
the following circumstances, there is objective evidence of impairment of an
equity investment:
•
Information about significant changes with an adverse effect that have
taken place in the technological, market, economic or legal environment
in which the entity operates, and indicates that the cost of investment
may not be recovered; or
•
A significant or prolonged decline in the fair value of an investment in
such an instrument below its cost.
Equity investments in Venezuelan entities are likely to be at high risk of
impairment due to the economic conditions. Therefore, entities will need
to assess whether there is objective evidence of impairment.
•
Impairment of assets: IAS 36 prescribes the procedures that an entity
applies to ensure that its assets are carried at no more than their
recoverable amount. An asset is carried at more than its recoverable amount
if its carrying amount exceeds the amount to be recovered through use or
sale of the asset. Entities should consider how recent economic and political
developments in Venezuela may affect their capital and operating strategies
and whether changes to those strategies will affect the recoverability of their
assets. Indefinite-lived intangible assets and goodwill are subject to annual
impairment tests as well as interim impairment tests if impairment indicators
are present.
5. Disclosures
Entities with exposure to Venezuela should challenge the disclosures in their
financial statements. Where material, disclosures that entities should consider
include:
9
•
A discussion of an entity’s operations in Venezuela, including the nature and
extent of business activities in that country
•
A discussion that IAS 29 has been applied and the financial statements and
the corresponding figures for previous periods that have been restated for
changes in the general purchasing power of the functional currency
•
IAS 29 also requires disclosure of whether the financial statements are
based on a historical or current cost approach and the identity and level of
the price index at the end of the reporting period with disclosure of the
movement in the index during the current and previous reporting periods
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
•
A discussion of exchange rates used to translate bolivar-denominated
foreign currency transactions and translation of foreign operations,
including a discussion of the entity’s ability to actually transact at such rates:
•
Whether items were translated at a different rate than in the previous
period (e.g., items translated at the SIMADI rate in the current period
that were translated at the SICAD 2 rate in the previous period)
•
Whether multiple exchange rates are used and, if so: (1) the basis for
applying different rates; and (2) the limitations and uncertainties of each
selected rate (e.g., the amount of currency available at such rates, the
entitiy’s ability to transact through specified exchange mechanisms and
to realise the rates established through those mechanisms (both
historically and projected))
•
The amount of bolivars pending Government approval for settlement at
each rate and the length of time pending
•
The effect of exchange restrictions on the company’s cash flows available
to meet capital and short-term funding requirements, including: possible
changes in profitability that may result from any additional expected
currency devaluation; change in exchange rates to be used for translation
purposes; or the existing law capping profits that
can be earned in Venezuela
•
Recognised impairments and debt covenant violations attributed to changes
in exchange rates or other factors attributed to the entity’s operations in
Venezuela
In July 2014, the IFRS Interpretations Committee considered a request for
guidance on the translation and consolidation of the results and financial
position of foreign operations in Venezuela and the question which rate
should be used if there was a longer-term lack of exchangeability. The IFRS
Interpretations Committee published it’s agenda decision on the application of
IAS 21 to foreign operations in Venezuela in November 2014, noting that
several exisiting disclosure requirements in IFRS would apply when the impact
of foreign exchange controls is material:
•
Disclosure of significant accounting policies and significant judgements in
applying those policies (paragraphs 117–124 of IAS 1)
•
Disclosure of sources of estimation uncertainty that have a significant risk
of resulting in a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, which may include a sensitivity
analysis (paragraphs 125–133 of IAS 1)
•
Disclosure about the nature and extent of significant restrictions on an
entity’s ability to access or use assets and to settle the liabilities of the group,
or its joint ventures or associates (paragraphs 10, 13, 20 and 22 of IFRS 12)
Next steps
The Venezuelan Government may issue more regulations or take other steps
that may affect an entity’s decision on which exchange rate(s) to use for
financial reporting purposes. Entities should continue to closely monitor
developments in this area.
June 2015
New Venezuelan currency regime – same accounting and reporting considerations
10
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